MULTIPLE CHOICE QUESTIONS 1. The absolute version of PPP: a is based on the law of one price b. assumes that there are no market imperfections c. is used to derive the long-term equilibrium exchange rate d. relies on goods arbitrage for long-term equilibrium e. all of the above. 2. Deviations from absolute PPP can occur for extended periods of time because of a. capital market imperfects. b. inflation rate differences c. real interest rate deviations d. market imperfections such as quality standards e. all of the above 3. That the spot exchange rate should change in an equal but opposite direction to the difference in intast rates between two countries is called: a interest rate parity b. covered interest rate arbitrage c. the Fisher Effect in an open economy d. the Intenational Fisher Effect e. Relative Purchasing Power Parity 4. The theory that the interest rate differential is equal to the inflation differential between two countries is called: a interest rate parity b. covered interest rate arbitrage c. the Fisher Effect in an open economy d. the International Fisher Effect e. Relative Purchasing Power Parity 5. That the spot exchange rate should change in an equal but opposite direction to the difference in inlation rates between two countries is called: a. interest rate parity b. covered interest rate arbitrage c. the Fisher Effect in an open economy d. the Intemational Fisher Effect e. Relative Purchasing Power Parity 6. Forward rates as unbiased predictors of future spot rates implies: Section Break (Continuous) a. forward rates always predict future spot rates. b. forward rates and current spot rates will be the same c. assumes that investors are risk neutral with respect of country d. that actual spot rates in the future are centered on the forward rate e. assumes that real interest rates are the same between countries 6. Forward rates as unbiased predictors of future spot rates implies: Section Break (Continuous) a. forward rates always predict future spot rates. b. forward rates and current spot rates will be the same. c. assumes that investors are risk neutral with respect of country d. that actual spot rates in the future are centered on the forward rate e. assumes that real interest rates are the same between countries 7The most important limitation of the Intemational Fisher Effect is: a assumes that inflation rates are equal between countries ......b. .assumes that real interest rates are the.same between countries with respect of country c. assumes that investors are risk neutral d. assumes no market imperfections e assumes that capital markets are integrated 8. The most important limitation of the Fisher Effect in an open economy is a assumes that inflation rates are equal between countries b. assumes that real interest rates are the same between countries c. assumes that investors are risk neutral with respect of coun d. assumes that capital markets are integrated e. both b and d try 9. An important limitation of the relative PPP is: a. assumes that inflation rates are equal between countries b. assumes that real interest rates are the same between countries c. assumes that investors are risk neutral with respect of country d. assumes that consumption pattens between two countries are the same assumes that capital markets are integrated 10. An important limitation of the notion that forward rates as unbiased predictors of future spot rates is a. assumes that the foreign exchange market is efficient. b. assumes that inflation rates are equal between countries c. assumes that real interest rates are the same between countries d. assumes that investors are risk neutral with respect of country e. assumes that consumption pattens between two countries are the same