International Financial Management Study Set 9

Business

Quiz 8 :

Relationships Among Inflation, Interest Rates and Exchange Rates

Quiz 8 :

Relationships Among Inflation, Interest Rates and Exchange Rates

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Interest rate parity can only hold if purchasing power parity holds.
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False

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Assume that the inflation rate in Barbados is 3.20%, while the inflation rate in the UK is 3.00%. According to PPP, the Barbados dollar (BBD) should ____ by ____%.
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B

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According to the international Fisher effect, if investors in all countries require the same real rate of return, the differential in nominal interest rates between any two countries:
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B

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Assume that the UK inflation rate is higher than the New Zealand inflation rate. This will cause UK consumers to ____ their imports from New Zealand and New Zealand consumers to ____ their imports from the UK. According to purchasing power parity (PPP), this will results in a(n) ____ of the New Zealand dollar (NZ$).
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Because there are sometimes no substitutes for traded goods, this will:
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Assume that US and British investors require a real return of 2%. If the nominal US interest rate is 15%, and the nominal British rate is 13%, then according to the IFE, the British inflation rate is expected to be about ____ the US inflation rate, and the British pound is expected to ____.
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Nominal interest rates in India are 7%, while nominal interest rates in the UK are 5%. The spot rate for the Indian rupee (INR) is £0.120. According to the international Fisher effect (IFE), the rupee should adjust to a new level (to the nearest £0.001) of:
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According to the international Fisher effect (IFE), the exchange rate percentage change should be approximately equal to the differential in income levels between two countries.
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If interest rate parity holds, then the one-year forward rate of a currency will ____ the predicted spot rate of the currency in one year according to the international Fisher effect.
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According to the IFE, if British interest rates exceed US interest rates:
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Research indicates that deviations from purchasing power parity (PPP) are reduced over the long run.
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Under purchasing power parity, the future spot exchange rate is a function of the initial spot rate in equilibrium and:
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The relative form of purchasing power parity (PPP) accounts for the possibility of market imperfections such as transportation costs, tariffs, and quotas in establishing a relationship between inflation rates and exchange rate changes.
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Given a home country and a foreign country, purchasing power parity (PPP) suggests that:
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If the international Fisher effect (IFE) did not hold based on historical data, then this suggests that:
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The inflation rate in the euro area is 3%, while the inflation rate in Japan is 1.3%. The current exchange rate for the Japanese yen (¥) is 0.007 euros. After supply and demand for the Japanese yen has adjusted in the manner suggested by purchasing power parity, the new nearest exchange rate for the yen will be:
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Assume that the euro and Chile nominal interest rates are equal. Then, the euro nominal interest rate decreases while the Chilean nominal interest rate remains stable. According to the international Fisher effect, this implies expectations of ____ than before, and that the Chilean peso should ____ against the euro.
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If interest rate parity holds, and the international Fisher effect (IFE) holds, foreign currencies with relatively high interest rates should have forward discounts and those currencies would be expected to depreciate.
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Which of the following is indicated by research regarding purchasing power parity (PPP)?
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The IFE theory suggests that foreign currencies with relatively high interest rates will appreciate because the high nominal interest rates reflect expected inflation.
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