II. TRUE/FALSE (10*1=10') 1. The principal function of the foreign exchange market is the transfer of funds, thus purchasing power, from one nation and currency to another. 2. If it takes 116.57 yen to buy one dollar, it takes $.0085785 to buy one yen. 3. Purchasing-power parity theory postulates that the change in the exchange rate between two currencies is proportional to the change in the ratio in the two countries' general price levels. 4. The price-specie-flow adjustment mechanism operates by the deficit nation losing gold and experiencing a reduction in its money supply. 5. Monetary policy is very effective under a fixed exchange rate policy. 6. A clean float system has no government intervention at all in foreign exchange markets. 7. The theory of absolute advantage was how David Ricardo explained basis for trade between nations. 8. Increasing returns to scale refer to the production situation where inputs or factors of production grow proportionately more than output. 9. Non-tariff barriers are also known as "new protectionism" 10. The formation of a customs union generates static effects for members, but not dynamic effects