Question 1

A floating exchange rate:

Accepted Answer

A floating exchange rate is determined by market forces, meaning the supply and demand for a currency in the foreign exchange market. It is not fixed by national governments or central banks, and therefore can fluctuate widely over time, often in response to economic conditions and political events.

Question 2

The purchasing power parity theory is a good predictor of:

Accepted Answer

The purchasing power parity theory suggests that in the long-run, changes in the price level of two countries should lead to changes in their exchange rate. Therefore, it is a good predictor of the long-run relationship between changes in the price level and the exchange rate of two countries.

Question 3

Prior to World War I,the international financial system had operated on:

Accepted Answer

Prior to World War I, the international financial system operated on the gold standard, where Currencies were pegged to gold and could be freely converted at a fixed exchange rate.

Question 4

Under the gold standard,_____.

Accepted Answer

Under the gold standard, a nation's currency was traded for gold at a fixed rate, meaning that the value of a country's currency was directly linked to the amount of gold held by the central bank. This limited the ability of central banks to control the money supply and the value of the currency.

Question 5

When the international financial system operated under the gold standard,_____.

Accepted Answer

Under the gold standard, most countries' currencies were convertible into gold, meaning that individuals could exchange paper money for a fixed amount of gold. This helped to stabilize exchange rates and was seen as a way to control inflation.

Question 6

If the purchasing power parity theory were literally true:

Accepted Answer

If the purchasing power parity theory were literally true, the price of a traded good (such as a Big Mac) should be the same everywhere in the world, reflecting the exchange rate of currencies. However, in reality, other factors such as transportation costs and tariffs can affect pricing. Therefore, choice B is the best answer. The other choices are not necessarily true if the theory were literally true.

Question 7

One feature of the gold standard was that:

Accepted Answer

Under the gold standard, the value of a country's currency was pegged to a specific amount of gold. If the production of gold slowed down, it led to deflation as the money supply decreased.

Question 8

The theory of _____ states that changes in the exchange rate reflect only changes in the price levels of two countries.

Accepted Answer

The theory of purchasing power parity states that changes in the exchange rate reflect only changes in the price levels of two countries. This means that if the price level in one country increases relative to another, its currency should depreciate to restore the balance of trade. If the price level becomes lower relative to another country, then its currency should appreciate.

Question 9

The main goal of the Bretton Woods meeting was to:

Accepted Answer

The Bretton Woods meeting was convened in 1944 with the goal of setting up a new international monetary system that would stabilize exchange rates and facilitate global trade. The system established the US dollar as the world's reserve currency and pegged it to gold at a fixed rate. Other currencies were then pegged to the dollar. This system was intended to create stability in international monetary relations and prevent the competitive devaluations that contributed to the Great Depression.

Question 10

The Bretton Woods agreement was reached:

Accepted Answer

The Bretton Woods agreement was reached towards the end of World War II in 1944.

Question 11

If the same basket of goods costs $400 in the United States and £200 in Britain,then according to the purchasing power parity theory,the:

Accepted Answer

According to the purchasing power parity theory, the exchange rate should adjust in such a way that the same basket of goods would cost the same amount in different countries when the prices are converted into a common currency. In this case, the basket of goods costs $400 in the US and £200 in Britain. Since 1 pound is worth more than 1 dollar, the exchange rate should be higher than 1 to 1. The exchange rate can be calculated as $400/£200 = $2/£1, which means that the exchange rate should approach $2 per pound. Therefore, choice B is the correct answer.

Question 12

If interest rates fall in country A,other things constant,which of the following statements is true?

Accepted Answer

When interest rates fall in a country, the return on investment in that country decreases. This leads to a decrease in demand for that country's currency as investors seek higher returns elsewhere. The decrease in demand for the currency results in depreciation.

Question 13

A fixed exchange rate is enforced by:

Accepted Answer

A fixed exchange rate is maintained by central banks through buying and selling appropriate currencies to maintain a fixed value of their currency relative to another currency or a basket of currencies. National governments may also be involved in this process, but it is ultimately the responsibility of the central bank. The other options listed do not accurately describe how a fixed exchange rate is enforced.

Question 14

The International Monetary Fund was founded in _____.

Accepted Answer

The International Monetary Fund (IMF) was founded on July 22, 1944, at the United Nations Monetary and Financial Conference, held at Bretton Woods, New Hampshire, United States.

Question 15

The gold standard:

Accepted Answer

The gold standard was in operation for about 35 years before World War I. It was abandoned during World War I and replaced by fiat currency systems.

Question 16

Devaluation of a domestic currency:

Accepted Answer

The answer of Devaluation of a domestic currency:
...

Question 17

Suppose a basket of goods that costs $400 in the United States costs only £200 in Britain and the current exchange rate is $1 per pound.According to the purchasing power parity theory,which of the following statements explains the reason behind a higher equilibrium exchange rate than $1 per pound?

Accepted Answer

Purchasing power parity (PPP) suggests that in the absence of transaction costs and barriers to trade, the exchange rate should adjust so that the same basket of goods in two different countries has the same price when expressed in a common currency. In this scenario, arbitrage opportunities (buying in Britain for £200 and selling in the US for $400) would lead to demand for pounds and supply of dollars until the exchange rate adjusts to eliminate such opportunities.

Question 18

Suppose a basket of internationally traded goods that sells for $10,000 in the United States sells for €8,000 in the euro zone.According to the purchasing power parity theory,the equilibrium exchange rate should be equal to _____.

Accepted Answer

According to the purchasing power parity theory, the exchange rate should equalize the prices of the same basket of goods between different countries. In this case, the basket of goods costs $10,000 in the US and €8,000 in the euro zone. To find the equilibrium exchange rate, we need to convert €8,000 into dollars using the current exchange rate: 
€8,000 x 1.25 (current exchange rate) = $10,000 
Thus, the equilibrium exchange rate should be $1.25 per euro.

Question 19

The purchasing power parity (PPP)theory says that in the long run,the exchange rate between two currencies should move toward _____ the _____ in each country of an identical basket of internationally traded goods.

Accepted Answer

The PPP theory suggests that in the long run, the exchange rate between two currencies should equalize the cost of an identical basket of internationally traded goods in each country. Therefore, choice A (equalizing cost) is the correct answer.

Question 20

Suppose a basket of goods costs $400 in the United States and £200 in Britain.If the exchange rate is $1 per pound,which of the following statements is true according to the purchasing power parity theory?

Accepted Answer

The answer of Suppose a basket of goods costs $400...

Quiz 18: International Finance

A floating exchange rate:

The purchasing power parity theory is a good predictor of:

Prior to World War I,the international financial system had operated on:

Under the gold standard,_____.

When the international financial system operated under the gold standard,_____.

If the purchasing power parity theory were literally true:

One feature of the gold standard was that:

The theory of _____ states that changes in the exchange rate reflect only changes in the price levels of two countries.

The main goal of the Bretton Woods meeting was to:

The Bretton Woods agreement was reached:

If the same basket of goods costs $400 in the United States and £200 in Britain,then according to the purchasing power parity theory,the:

If interest rates fall in country A,other things constant,which of the following statements is true?

A fixed exchange rate is enforced by:

The International Monetary Fund was founded in _____.

The gold standard:

Devaluation of a domestic currency:

Suppose a basket of goods that costs $400 in the United States costs only £200 in Britain and the current exchange rate is $1 per pound.According to the purchasing power parity theory,which of the following statements explains the reason behind a higher equilibrium exchange rate than $1 per pound?

Suppose a basket of internationally traded goods that sells for $10,000 in the United States sells for €8,000 in the euro zone.According to the purchasing power parity theory,the equilibrium exchange rate should be equal to _____.

The purchasing power parity (PPP) theory says that in the long run,the exchange rate between two currencies should move toward _ the _ in each country of an identical basket of internationally traded goods.

Suppose a basket of goods costs $400 in the United States and £200 in Britain.If the exchange rate is $1 per pound,which of the following statements is true according to the purchasing power parity theory?

Quiz 18: International Finance

A floating exchange rate:

The purchasing power parity theory is a good predictor of:

Prior to World War I,the international financial system had operated on:

Under the gold standard,_____.

When the international financial system operated under the gold standard,_____.

If the purchasing power parity theory were literally true:

One feature of the gold standard was that:

The theory of _____ states that changes in the exchange rate reflect only changes in the price levels of two countries.

The main goal of the Bretton Woods meeting was to:

The Bretton Woods agreement was reached:

If the same basket of goods costs $400 in the United States and £200 in Britain,then according to the purchasing power parity theory,the:

If interest rates fall in country A,other things constant,which of the following statements is true?

A fixed exchange rate is enforced by:

The International Monetary Fund was founded in _____.

The gold standard:

Devaluation of a domestic currency:

Suppose a basket of goods that costs $400 in the United States costs only £200 in Britain and the current exchange rate is $1 per pound.According to the purchasing power parity theory,which of the following statements explains the reason behind a higher equilibrium exchange rate than $1 per pound?

Suppose a basket of internationally traded goods that sells for $10,000 in the United States sells for €8,000 in the euro zone.According to the purchasing power parity theory,the equilibrium exchange rate should be equal to _____.

The purchasing power parity (PPP) theory says that in the long run,the exchange rate between two currencies should move toward _____ the _____ in each country of an identical basket of internationally traded goods.

Suppose a basket of goods costs $400 in the United States and £200 in Britain.If the exchange rate is $1 per pound,which of the following statements is true according to the purchasing power parity theory?

The purchasing power parity (PPP) theory says that in the long run,the exchange rate between two currencies should move toward _ the _ in each country of an identical basket of internationally traded goods.