Midterm Exam

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Multiple Choice Questions (5 Points Each):

Q. 1Under the gold standard of currency exchange that existed from 1879 to 1914, an ounce of gold cost $20.67 in U.S. dollars and £4.2474 in British pounds. Therefore, the exchange rate of pounds per dollar under this fixed exchange regime was (a)£4.8665/$.

(b)£0.2055/$.
(c)always changing because the price of gold was always changing. (d)unknown because there is not enough information to answer this question.

Answer: B

Q. 2Which of the following investment strategies will allow me to make a profit if I anticipate that the value of the Euro, a currency that I do not own, is going to fall over the next 90 days and I am correct in my prediction? (a)Sell Euros short.

(b)Buy Euros short.
(c)Sell dollars short.
(d)Buy Euros long.

Answer: A

Q. 3In January 2002, the Argentine Peso changed in value from Peso1.00/$ to Peso1.40/$, thus, the Argentine Peso ___________ against the U.S. dollar. (a)strengthened
(b)weakened
(c)remained neutral
(d)All of the above

Answer: B

Q. 4Which of the following is NOT part of the Financial Account of the BOP? (a)Net foreign direct investment.
(b)Net imports/exports of services.
(c)Net portfolio investment.
(d)Other Financial items.

Answer: B

Q. 5The ___________ includes all international economic transactions with income or payment flows occurring within the year. (a)capital account
(b)current account
(c)financial account
(d)IMF account

Answer: B

Q. 6Anaconda Copper Inc. created a subsidiary in Chile last year to mine copper ore. The proportion of net income paid back to the parent company as a dividend would be recorded in the current account subcategory of _______________. (a)services trade

(b)income trade
(c)goods trade
(d)current transfers

Answer: B

Q. 7Which of the following would NOT be considered a direct investment either into or from the United States? (a)The purchase of U.S. Treasury (debt) securities.
(b)Ford Motor Company building an assembly plant in Mexico. (c)Honda of Japan building a manufacturing plant in Alabama. (d)Intel purchasing a chip manufacturing plant in Thailand.

Answer: A

Q. 8Under an international regime of fixed exchange rates, countries with a BOP ________ should consider ____________ their currency while countries with a BOP ____________ should consider ___________ their currency. (a)deficit, revaluing; surplus, revaluing

(b)deficit, devaluing; surplus, devaluing
(c)surplus, devaluing; deficit, revaluing
(d)surplus, revaluing; deficit, devaluing

Answer: D

Q. 9The _____________ is the difference between merchandise imports and exports and a measure of a country’s international trade in goods and services. (a)balance of payments
(b)current account
(c)capital account
(d)balance of trade

Answer: D

Q. 10Exchange rate pass-through may be defined as
(a)the bid/ask spread on currency exchange rate transactions. (b)the degree to which the prices of imported and exported goods change as a result of exchange rate changes. (c)the PPP of lesser-developed countries.

(d)the practice by Great Britain of maintaining the relative strength of the currencies of the Commonwealth countries under the current floating exchange rate regime.

Answer: B

Q. 11The relationship between the percentage change in the spot exchange rate over time and the differential between comparable interest rates in different national capital markets is known as ___________________. (a)absolute PPP

(b)the law of one price
(c)relative PPP
(d)the international Fisher Effect

Answer: D

Q. 12From the viewpoint of a U.S. investor or trader, the indirect quote for a...
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