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Multiple Choice Questions

Instructions: Choose only one of the answers provided. Each question is worth 4 points. If you circle more than one you will be given zero points.

Consider the following formula

where st/$ is the logarithm of the nominal exchange rate in period t defined t

as pounds per dollar; it$ is the short-term interest rate in the UK and it$ is the short-term interest rate in the US.

1) The formula above captures which theory?

a) Purchasing Power Parity

b) The International Trilemma

c) Uncovered Interest Rate Parity

d) The Theory of Comparative Advantage Consider augmenting the equation as follows:

2) What is pt?

a) The Fed Funds rate

b) The equity premium

c) The currency risk premium d) None of the above

3) If t is positive, a risk-neutral investor (an investor who doesnit care about risk) will

a) Borrow in the UK and invest in the US

b) Borrow in the US and invest in the UK

c) Insufficient information to answer the question

4) If t is negative, a risk-averse investor (investor who cares about risk) will a) Borrow in the UK and invest in the US

b) Borrow in the US and invest in the UK

c) Insufficient information to answer the question

5) If the exchange rate is pegged and the peg is credible (the UK adopts a currency board vis-a-vis the US) the following is true

a) t = 0

b) t > 0

c) t < 0

d) All of the above