Question 1

In the U.S balance-of-payments accounts, debit entries in the current or financial accounts _____

Accepted Answer

Debit entries in the current or financial accounts signify outflows of money from the domestic economy. This means that there is an increased demand for foreign currency to make these payments, hence increasing the demand for foreign exchange.

Question 2

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 will move towards equalizing the cost of an identical basket of internationally traded goods in each country. This means that the exchange rate will adjust so that the cost of goods in one country is the same as the cost of goods in the other country once converted to the same currency. Therefore, the best choice is A - equalizing; cost.

Question 3

A flexible exchange rate _____

Accepted Answer

A flexible exchange rate system allows the exchange rate to be determined by market forces, specifically the supply and demand for currencies. The exchange rate will adjust based on factors such as changes in trade, economic growth, and monetary policy. Central banks may intervene in the exchange rate market to influence its direction or stability, but they do not determine it. Flexible exchange rates are not fixed within a narrow range and can fluctuate significantly over time.

Question 4

One difference between arbitrageurs and speculators is that _____

Accepted Answer

Arbitrageurs seek to profit from price discrepancies between markets without taking on much risk, whereas speculators take on risk with the hope of profiting from future price movements.

Question 5

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

Accepted Answer

If interest rates fall in country A, investors will seek higher returns elsewhere, causing a decrease in demand for country A's currency and a depreciation of the currency. This is because lower interest rates make investments in country A less attractive compared to other countries with higher interest rates.

Question 6

The purchasing power parity theory is a good predictor of _____

Accepted Answer

The purchasing power parity theory suggests that the exchange rate between two countries should adjust over time to reflect differences in inflation rates. In the long run, this theory can be a good predictor of the relationship between changes in the price level and the exchange rate of two countries.

Question 7

If the purchasing power parity theory were literally true, _____

Accepted Answer

The purchasing power parity theory suggests that the price of a good or service in one country should be the same as the price of the same good or service in another country, once exchange rates are taken into consideration. Therefore, if this theory were literally true, the price of a traded good would be the same everywhere in the world. However, in reality, other factors such as taxes, transportation costs, and market competition can affect the price of goods and services, causing them to differ across countries, even after adjusting for exchange rates.

Question 8

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

Accepted Answer

The answer of Suppose a basket of internationally traded goods...

Question 9

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

According to the purchasing power parity theory, if a basket of goods is cheaper in one country than another, people would buy the goods where they are cheaper and sell them where they are more expensive until the prices equalize or the exchange rate adjusts. In this case, buying the goods in Britain for £200 and selling them in the US for $400, then exchanging the $400 for £400 (assuming the current exchange rate inaccurately reflects purchasing power), results in a profit, indicating the exchange rate should adjust to reflect this disparity.

Question 10

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 so that the same basket of goods and services costs the same amount in different countries. Therefore, if the same basket of goods costs $400 in the US and £200 in Britain, the exchange rate should approach $2 per pound, which would make the basket of goods cost the same in both countries after the exchange rate conversion.

Question 11

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 adjust so that the basket of goods has the same purchasing power in both countries. Therefore, the exchange rate should be equal to ($10,000 / €8,000) = $1.25 per euro.

Question 12

Which of the following statements is true of speculators?

Accepted Answer

Speculators hope to profit by buying a currency when it is undervalued and selling it later at a higher exchange rate. There is risk involved in their speculative activity as exchange rates can be unpredictable. They do not simultaneously buy and sell a currency in different markets like arbitrageurs. Their actions can affect exchange rates as they can create an excess demand or supply of a currency.

Question 13

Those who simultaneously buy and sell currency to take advantage of exchange rate differences are called _____

Accepted Answer

The term for buying and selling currency to take advantage of exchange rate differences is called arbitrage. Therefore, the correct choice would be D) arbitrageurs. The other choices do not accurately describe this strategy. Speculators may buy and sell currency based on predictions of future exchange rate movements, while hedgers may use currency transactions to hedge against risk. Entrepreneurs and underwriters are not directly related to currency trading.

Question 14

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

Accepted Answer

The given definition is of purchasing power parity theory.

Question 15

A speculator in foreign exchange is a person who _____

Accepted Answer

A speculator in foreign exchange buys foreign currency with the intention of selling it at a higher exchange rate at a later date, hoping to make a profit.

Question 16

The purchasing power parity theory _____

Accepted Answer

The purchasing power parity theory is more of a predictor of a long-run tendency than of the day-to-day relationship between changes in the price level and the exchange rate. While exchange rates do adjust in the short run to reflect differences in price levels between two countries, these adjustments may be slow and gradual, and other factors such as trade barriers and central bank intervention can influence the exchange rate. However, over the long run, the theory suggests that exchange rates will adjust so that the purchasing power of different currencies is equal, based on the relative price levels between two countries.

Question 17

According to the purchasing power parity theory, in the long run, _____

Accepted Answer

The purchasing power parity theory states that in the long run, the exchange rate between the currencies of two countries should reflect the differences in price levels in the two countries. This would lead to a situation where goods and services cost the same amount in different countries after adjusting for the exchange rate. Therefore, option E is the correct choice. Option A is incorrect because PPP theory does not suggest that exchange rates should be equal all over the world. Option B is incorrect because PPP theory does not suggest that the value of one currency should equal the value of another currency. Options C and D are incorrect because PPP theory does not address inflation or interest rates explicitly.

Question 18

Suppose the exchange rate is such that 1 U.S. dollar equals 1 euro in New York and 0.9 euros in Paris. An arbitrageur would sell euros _____

Accepted Answer

The arbitrageur would sell euros in Paris where the value of 1 U.S. dollar is lower (0.9 euros), and buy euros in New York where 1 U.S. dollar equals 1 euro, to profit from the difference in exchange rates.

Question 19

An arbitrageur in foreign exchange is a person who _____

Accepted Answer

An arbitrageur in foreign exchange is someone who simultaneously buys large amounts of a currency in one market and sells it in another market in order to take advantage of differences in exchange rates between the two markets. This is known as currency arbitrage and is a common strategy used by banks, hedge funds, and other financial institutions to earn profits in the foreign exchange market. Choices A, B, C, and E are not accurate descriptions of an arbitrageur in foreign exchange.

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

According to purchasing power parity, if the basket costs $400 in the US and £200 in Britain with an exchange rate of $1 per pound, the goods are equally priced in both countries. An increase in demand for pounds would increase its price, making it more expensive relative to the dollar.

Quiz 18: International Finance.