Question 1

________ is the active buying and selling of the domestic currency against foreign currencies.
A) Indirect Intervention
B) Direct Intervention
C) Foreign Direct Investment
D) Federal Funding

Accepted Answer

Direct intervention involves the active buying and selling of the domestic currency against foreign currencies by central banks or governments to control the exchange rate. Indirect intervention includes policies such as changing interest rates or other economic indicators to influence currency values. Foreign direct investment refers to investments made by companies in foreign countries and federal funding is a form of financial support provided by the government.

Question 2

Describe the asset market approach to exchange rate determination. How is this consistent with economic theory of (say, security) prices in general?

Accepted Answer

The asset market approach to exchange rate determination looks at relative interest rates and prospects for economic growth and profitability. This is consistent with the pricing of equity securities in that the price of a share of stock should reflect expectations about the timing, magnitude, and risk of future cash flows. In other words, expectations about what is to come is more important to the price of an asset, including currency prices, than what has occurred in the past.

Question 3

The authors claim that theoretical and empirical studies appear to show that fundamentals do apply to the long-term for foreign exchange.

Accepted Answer

The authors state that theoretical and empirical studies support the idea that fundamentals do apply to the long-term for foreign exchange, implying that the statement is true.

Question 4

The ________ approach argues that equilibrium exchange rates are achieved when the net inflow of foreign exchange arising from current account activities is equal to the net outflow of foreign exchange arising from financial account activities.
A) balance of payments
B) monetary
C) asset market
D) law of one price

Accepted Answer

The balance of payments approach states that the equilibrium exchange rate is reached when there is a balance between the inflow and outflow of foreign exchange through current account activities (such as exports and imports) and financial account activities (such as investment and borrowing), resulting in a balance of payments equilibrium. The other options are not directly related to this concept.

Question 5

The balance of payments approach of exchange rate theory is largely dismissed by the academic community today, while the practitioner public still rely on different variations of the theory for their decision making.

Accepted Answer

While the academic community largely dismisses the balance of payments approach, practitioners still rely on it for their decision making.

Question 6

The ________ approach states that the exchange rate is determined by the supply and demand for national currency stocks, as well as the expected future levels and rates of growth of monetary stock.
A) balance of payments
B) monetary
C) asset market
D) law of one price

Accepted Answer

The answer of The ________ approach states that the exchange...

Question 7

It is safe to say that most determinants of the spot exchange rate are also affected by changes in the spot rate, i.e., they are linked AND mutually determined.

Accepted Answer

This is because changes in the spot exchange rate can affect factors such as interest rates, inflation rates, and economic growth which in turn can affect the exchange rate itself. Additionally, changes in these factors may also lead to changes in the demand for a currency and therefore affect the exchange rate. This interdependence between the determinants and the spot exchange rate is known as the exchange rate determination process.

Question 8

The ________ approach argues that exchange rates are determined by the supply and demand for a wide variety of financial assets
A) balance of payments
B) monetary
C) asset market
D) law of one price

Accepted Answer

The asset market approach suggests that exchange rates are determined by the supply and demand for a variety of financial assets such as stocks, bonds, and other securities. It takes into account factors such as interest rates, inflation rates, and economic performance of countries, which affect the demand for financial assets and, consequently, the exchange rates. The balance of payments approach focuses on a country's current account balance in determining exchange rates, while the monetary approach emphasizes the role of money supply and interest rates in exchange rate determination. The law of one price is the economic theory that states that in an efficient market, the same goods should have the same price in different countries when expressed in the same currency, which may affect exchange rates but is not an approach to determining them.

Question 9

The authors claim that random events, institutional frictions, and technical factors may cause currency values to deviate significantly from their long-term fundamental path.

Accepted Answer

The authors do claim that random events, institutional frictions, and technical factors may cause currency values to deviate significantly from their long-term fundamental path.

Question 10

The asset market approach to forecasting is not applicable to emerging markets.

Accepted Answer

The asset market approach to forecasting can be applied to emerging markets. However, it may be less reliable in these markets as they are often more volatile and have less-developed financial systems.

Question 11

The ________ approach to the determination of spot exchange rates hypothesizes that the most important factors are the relative real interest rate and a country's outlook for economic growth and profitability.
A) balance of payments
B) parity conditions
C) managed float
D) asset market

Accepted Answer

The asset market approach focuses on the factors affecting the supply and demand for financial assets denominated in different currencies, such as interest rates and expectations about economic growth and profitability. The balance of payments approach looks at the current and capital account balances between countries, while the parity conditions approach examines the relationship between spot and forward exchange rates and interest rates. The managed float approach refers to a flexible exchange rate system where governments intervene in the currency markets as necessary.

Question 12

Most theories of technical analysis differentiate fair value from market value.

Accepted Answer

Technical analysis theory typically defines fair value as a calculation of an asset's intrinsic value based on fundamental factors, while market value is the current price at which an asset is trading in the market.

Question 13

The asset market approach to forecasting assumes that whether foreigners are willing to hold claims in monetary form depends on an extensive set of investment considerations. These include all but which of the following choices?
A) relative real interest rates
B) capital market liquidity
C) political safety
D) All of the above are considered by investors in their decision process.

Accepted Answer

The asset market approach takes into account all of the investment considerations listed, including relative real interest rates, capital market liquidity, and political safety.

Question 14

The ________ provides a means to account for international cash flows in a standardized and systematic manner.
A) parity conditions
B) asset approach
C) balance of payments
D) International Fisher Effect

Accepted Answer

The balance of payments provides a systematic and standardized way of accounting for international cash flows. It records all economic transactions between residents of a country and the rest of the world, including goods, services, income, and capital transfers. The other options, parity conditions, asset approach, and International Fisher Effect, are all concepts related to exchange rates and currency markets, but do not specifically relate to accounting for international cash flows.

Question 15

An important thing to remember about foreign exchange rate determination is that parity conditions, asset approach, and balance of payments approaches are ________ theories rather than ________ theories.
A) competing; complementary
B) competing; contemporary
C) complementary; contiguous
D) complementary; competing

Accepted Answer

Parity conditions, asset approach, and balance of payments approaches are complementary theories because they each offer different perspectives and insights into the foreign exchange rate determination process, rather than competing with each other.

Question 16

Critics of the balance of payments approach to exchange rate determination point to the emphasis on ________ of currency and capital rather than ________ of money or financial assets.
A) flows; stocks
B) stocks; flows
C) import; export
D) export; import

Accepted Answer

Critics of the balance of payments approach argue that this approach puts too much emphasis on the flows of currency and capital, rather than the stocks of money or financial assets. Therefore, option A is the correct answer.

Question 17

Technical analysis of exchange rates developed in part due to the forecasting inadequacies of fundamental exchange rate theories.

Accepted Answer

Technical analysis of exchange rates focuses on historical price and volume data to forecast future price movements, whereas fundamental analysis looks at economic and political factors that affect exchange rates. Technical analysis became popular in part because traditional fundamental theories struggled to consistently predict exchange rate movements.

Question 18

Which of the following did NOT contribute to the exchange rate collapse in emerging markets in the 1990s?
A) infrastructure weaknesses
B) speculation on the part of market participants
C) the sharp reduction of cross-border foreign direct investment
D) All of the above contributed to the emerging markets exchange rate collapse of the 1990s.

Accepted Answer

The answer of Which of the following did NOT contribute...

Question 19

________ is defined as the spread of a crisis in one country to its neighboring countries and other countries with similar characteristics.
A) Speculation
B) Contagion
C) Capital market liquidity
D) Political science

Accepted Answer

Contagion refers to the spread of a crisis from one country to its neighboring countries and other countries with similar characteristics. This often occurs in the case of economic or financial crises, where disruptions in one country's economy can affect the economies of other countries that are closely connected through trade, investment, or other channels.

Question 20

Which of the following versions of PPP is thought to be the most relevant to possibly explaining what drives exchange rate values?
A) The Law of One Price
B) Absolute Purchasing Power Parity
C) Relative Purchasing Power Parity
D) The International Fisher Effect

Accepted Answer

Relative Purchasing Power Parity (PPP) is considered the most relevant to explaining what drives exchange rate values because it accounts for inflation differentials between countries, which can affect exchange rates over time. Absolute PPP, while foundational, is less practical due to its assumption of identical goods and services across countries. The Law of One Price and the International Fisher Effect focus on other aspects of financial theory that are less directly related to exchange rate movements.

Quiz 9: Foreign Exchange Rate Determination and Intervention

________ is the active buying and selling of the domestic currency against foreign currencies.

Describe the asset market approach to exchange rate determination. How is this consistent with economic theory of (say, security) prices in general?

The authors claim that theoretical and empirical studies appear to show that fundamentals do apply to the long-term for foreign exchange.

The ________ approach argues that equilibrium exchange rates are achieved when the net inflow of foreign exchange arising from current account activities is equal to the net outflow of foreign exchange arising from financial account activities.

The balance of payments approach of exchange rate theory is largely dismissed by the academic community today, while the practitioner public still rely on different variations of the theory for their decision making.

The ________ approach states that the exchange rate is determined by the supply and demand for national currency stocks, as well as the expected future levels and rates of growth of monetary stock.

It is safe to say that most determinants of the spot exchange rate are also affected by changes in the spot rate, i.e., they are linked AND mutually determined.

The ________ approach argues that exchange rates are determined by the supply and demand for a wide variety of financial assets

The authors claim that random events, institutional frictions, and technical factors may cause currency values to deviate significantly from their long-term fundamental path.

The asset market approach to forecasting is not applicable to emerging markets.

The ________ approach to the determination of spot exchange rates hypothesizes that the most important factors are the relative real interest rate and a country's outlook for economic growth and profitability.

Most theories of technical analysis differentiate fair value from market value.

The asset market approach to forecasting assumes that whether foreigners are willing to hold claims in monetary form depends on an extensive set of investment considerations. These include all but which of the following choices?

The ________ provides a means to account for international cash flows in a standardized and systematic manner.

An important thing to remember about foreign exchange rate determination is that parity conditions, asset approach, and balance of payments approaches are theories rather than theories.

Critics of the balance of payments approach to exchange rate determination point to the emphasis on of currency and capital rather than of money or financial assets.

Technical analysis of exchange rates developed in part due to the forecasting inadequacies of fundamental exchange rate theories.

Which of the following did NOT contribute to the exchange rate collapse in emerging markets in the 1990s?

________ is defined as the spread of a crisis in one country to its neighboring countries and other countries with similar characteristics.

Which of the following versions of PPP is thought to be the most relevant to possibly explaining what drives exchange rate values?