Question 1

Although a foreign exchange transaction can involve any two currencies,most transactions involve

Accepted Answer

The U.S. dollar is the most widely traded currency in the world, and many foreign exchange transactions involve trading U.S. dollars for another currency. As such, option C is the best choice. Options A, B, D, and E are less likely as they are not as commonly traded as the U.S. dollar.

Question 2

A(n)_______________ is a market in which few impediments to international trade and investment exist.

Accepted Answer

The answer of A(n)_______________ is a market in which few...

Question 3

The _____________ states that in competitive markets free of transportation costs and barriers to trade,identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency.

Accepted Answer

The statement is referring to the law of one price, which states that in a competitive market with no barriers to trade, the same product should have the same price.

Question 4

A less extreme version of the PPP theory state that given _____________ the price of a "basket of goods" should be roughly equivalent in each country.

Accepted Answer

The less extreme version of PPP theory assumes that the markets are relatively efficient, meaning that prices adjust quickly to changes in supply and demand factors. Therefore, the price of a basket of goods should be roughly equivalent in each country, taking into account the exchange rate.

Question 5

If the law of one price were true for all goods and services,the _____________ exchange rate could be found from any individual set of prices.

Accepted Answer

The term "law of one price" refers to the idea that identical goods and services should have the same price in different countries when expressed in a common currency. In other words, if the law of one price holds, the exchange rate between two currencies can be inferred from the prices of identical goods in each country. This concept is the basis of purchasing power parity (PPP), which is the idea that exchange rates should adjust so that a basket of goods and services has the same cost in different countries. Therefore, the correct choice is D) purchasing power parity.

Question 6

The text gives Bolivia as an example of the impact of ______________ on exchange rates.

Accepted Answer

The answer of The text gives Bolivia as an example...

Question 7

In essence,PPP theory predicts that

Accepted Answer

PPP theory predicts that changes in relative prices between two countries will result in a change in exchange rates. Specifically, if the relative price level of one country increases, its currency will depreciate to maintain parity with the other country's currency. Therefore, D is the correct choice. The other choices are either inaccurate or not supported by PPP theory.

Question 8

The three factors that have the most important impact on future exchange rate movement include the country's price inflation,its market philosophy,and its ______________.

Accepted Answer

The interest rate has a significant impact on a country's exchange rate movement as it affects the demand for that country's currency. Higher interest rates attract foreign investors and increase demand for the currency, leading to an appreciation in its value. Conversely, lower interest rates decrease demand and cause depreciation. Price inflation and market philosophy can also play a role in exchange rate movement, but they are not as directly linked as the interest rate.

Question 9

In essence,the _______________ theory predicts that changes in relative prices will result in a change in exchange rates.

Accepted Answer

The best choice is B, purchasing power parity (PPP) theory, which predicts that changes in relative prices between countries lead to changes in the exchange rate between their currencies. This theory suggests that the exchange rate should adjust to ensure that the same basket of goods can be purchased for the same price in different countries. If the price of a basket of goods is cheaper in one country relative to another, then the currency of that country should appreciate to reflect the difference in prices. In contrast, if the price of a basket of goods is more expensive in one country relative to another, then the currency of the cheaper country should appreciate to reflect the difference in prices.

Question 10

PPP theory stands for what?

Accepted Answer

PPP theory stands for "purchasing power parity theory," which is a theory that suggests that the exchange rate between two currencies will adjust over time in order to equalize the purchasing power of those currencies.

Question 11

The law of one price and purchasing power parity are two components of

Accepted Answer

The law of one price and purchasing power parity both relate to price and exchange rates. The law of one price states that identical goods should have the same price in different countries, considering exchange rates. Purchasing power parity, on the other hand, suggests that the exchange rate between two countries should adjust to equate the prices of goods and services in both countries. Therefore, these concepts are important in economic theory related to international trade and exchange rate determination.

Question 12

The _____________ theory tells us that a country with a high inflation rate will see deprecation in its currency exchange rate.

Accepted Answer

According to the theory of Purchasing Power Parity (PPP), the exchange rate between two countries is determined by the relative prices of goods and services in each country. If a country has a higher inflation rate than another country, its prices will rise faster, making its goods relatively more expensive compared to the other country. As a result, the demand for its currency will decrease, causing depreciation in its exchange rate.

Question 13

A(n)_______________ has no impediments to the free flow of goods and services.

Accepted Answer

The answer of A(n)_______________ has no impediments to the free...

Question 14

According to the ______________,identical products sold in different countries must sell for the same price when their price is expressed in the same currency in competitive markets free of transportation costs and barriers to trade.

Accepted Answer

The principle described in the question is known as the "law of one price." It states that identical products sold in different countries should have the same price when expressed in the same currency, assuming competitive markets free of barriers to trade and transportation costs.

Question 15

At the most basic level,exchange rates are determined by the demand and supply of one currency relative to the

Accepted Answer

Exchange rates are determined by the demand and supply of one currency relative to the demand and supply of another currency. Essentially, it's the interplay between the two currencies that determines the exchange rate. The other options (A, B, C, and E) are not accurate descriptions of how exchange rates are determined.

Question 16

The exchange rate between the British pound and the dollar is ≤	1 = $1.50 and a jacket that retails for $75 in New York sells for ≤	50 in London ($75/1.5 = ≤50). This reflects what?

Accepted Answer

The given scenario reflects the law of one price, which states that in a perfect market where there are no transportation costs or trade barriers, the price of identical goods should be the same everywhere. In this case, the price of the jacket is the same in both New York and London when converted to their respective currencies, reflecting the law of one price.

Question 17

Most economic theories suggest that three import factors have an important impact on future exchange rate movements in a country's currency.These factors are

Accepted Answer

The correct answer is A because the three factors mentioned in the question (price inflation, interest rate, and market philosophy) are all important factors that can impact future exchange rate movements in a country's currency.

Question 18

A less extreme version of the PPP theory states that given ______________,that is,markets in which few impediments to international trade and investment exist-the price of a "basket of goods" should be roughly equivalent in each country.

Accepted Answer

The less extreme version of the PPP theory assumes that there are relatively efficient markets with few impediments to international trade and investment. In such markets, the price of a "basket of goods" should be roughly equivalent in each country. Therefore, option A, which refers to relatively efficient markets, is the best choice. The other options are either inaccurate or incomplete.

Question 19

If the prices differed in London and New York and a dealer spent $1 million to purchase ×125 million,then sold that ×125 immediately for $1.046666 million,the trader would earn a profit of $46,666 on the transaction.This is accomplished through

Accepted Answer

This transaction is an example of arbitrage, which involves buying a product in one market where it is underpriced and selling it in another market where it is overpriced to make a profit on the price difference.

Question 20

The process of buying a currency low and selling it high at the same time is called

Accepted Answer

The process of buying a currency low and selling it high at the same time is called arbitrage. This involves taking advantage of price differences in different markets to make a profit. By buying a currency at a low price in one market and selling it at a higher price in another market, traders can make a profit without taking on any significant risk. Therefore, option D is the best choice as it defines the process accurately.

Quiz 9: The Foreign Exchange Market