1.Suppose in London /$ = 0.5 while in New York /SF = 0.2.The corresponding cross rate (SF/$) is (a)

a)2.5.

b)0.1.

c)3.0.

d)0.3.

2.FINPRINT needs to pay 9,000 yen per printer to its suppliers in a month. Which of the following is an example of FINPRINT hedging its foreign currency risk:

a)FINPRINT makes a forward-exchange deal to buy yen.

b)FINPRINT makes a forward-exchange deal to sell yen.

c)FINPRINT buys yen at a spot-exchange 1 month from now.

d)FINPRINT sells yen at a spot-exchange 1 month from now.

3.The law of one price should hold well for

a)differentiated products.

b)any individual goods traded internationally.

c)homogeneous goods.

d)All of the above.

4.If the exchange rate is equal to the ratio of the domestic and foreign price indexes, (b)

a)relative PPP holds.

b)absolute PPP holds.

c)one currency is said to be overvalued.

d)one currency is said to be undervalued.

5.The price of a Big Mac in the U.S. is $3.73 and the price in Mexico is Peso 32.0.What is the implied PPP of the peso per dollar? (c)

a)Peso 11.76/$1

b)Peso 10.8/$1

c)Peso 8.58/$1

d)None of the above

6.Suppose that in the free market, where the supply of the foreign currency is equal to demand for that currency, the peso-dollar exchange rate is 4 pesos = $1.Assume the central bank sets an official exchange rate at 3 pesos = $1, we can say that in the official market the dollar is (b)

a)overvalued.

b)undervalued.

c)appreciated.

d)None of the above.

7.Which one of the following statements is the most accurate?

a)Purchasing power will increase in countries where the prices of non-tradable goods rise.

b)Purchasing power will fall in countries where the prices of non-tradable goods fall.

c)Purchasing power will fall in countries where the prices of non-tradable goods rise.

d)Purchasing power will remain constant in countries where the prices of non-tradable goods rise.

e)Purchasing power will fall in countries where the prices of non-tradable goods remain constant.

8.Today's exchange rate is $1.12 per euro, the expected exchange rate next year is $1.166 per euro, the dollar interest rate is 10%, and the euro interest rate is 5%. What is the expected dollar rate of return on euro deposits?

a)10%

b)-1%

c)0%

d)9%

e)11%

9.An appreciation of a country's currency, (d)

a)decreases the relative price of its exports and lowers the relative price of its imports.

b)raises the relative price of its exports and raises the relative price of its imports.

c)lowers the relative price of its exports and raises the relative price of its imports.

d)raises the relative price of its exports and lowers the relative price of its imports.

e)raises the relative price of its exports and does not affect the relative price of its imports.

10. Suppose that the 12-month interest rates for the United States and the United Kingdom are 8% and 6% respectively, and E = 2.10 $/.Given this information, what is the expected exchange rate change over the year?

a)1%

b)4.2%

c)2.1%

d)2.0%

11. The effective return from a foreign investment is

a)the domestic interest rate plus the forward premium (discount).

b)the foreign interest rate plus the forward premium (discount).

c)the nominal interest rate minus inflation.

d)the real interest rate.

12. Suppose that the one-year forward price of euros in terms of dollars is equal to $1.113 per euro. Further, assume that the spot exchange rate is $1.05 per euro, and the interest rate on dollar deposits is 10 percent and on euro it is 4 percent. Under these assumptions,

a)interest parity does not hold.

b)interest parity does hold.

c)it is hard to tell whether interest parity does or does not hold.

d)not enough information is given to answer the question.

e)interest parity fluctuates.

13. Which one of the following statements is the most accurate?

a)A decrease in the money supply lowers the interest rate while an increase in the money supply raises the interest rate, given the price level and output.

b)An increase in the money supply does not usually affect the interest rate.

c)An increase in the money supply lowers the interest rate while a fall in the money supply raises the interest rate, given the price level.

d)An increase in the money supply lowers the interest rate while a fall in the money supply raises the interest rate, given the price level and output.

14. According to the Dornbusch model, after a permanent increase in the money supply the exchange rate

a)smoothly depreciates in the short run.

b)smoothly appreciates in the short run.

c)overshoots in the short run.

d)overshoots in the long run.

e)remains the same.

15. Monetary models of exchange rate determination assume that the prices of goods are ________, which implies that a country's currency will ________, when nominal interest rates ________ because of ________ expected future inflation.

a)perfectly flexible; depreciate; increase; higher

b)perfectly flexible; appreciate; increase; higher

c)unchangeable; depreciate; increase; higher

d)unchangeable; appreciate; decrease; higher

e)inflexible; depreciate; decrease; higher