Multiple Choice
Identify the
choice that best completes the statement or answers the question.
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1.
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Assume a two-country world: Country A and Country B. Which of the following is
correct about purchasing power parity (PPP) as related to these two countries?
a. | If Country A's inflation rate exceeds Country B's inflation rate, Country
A's currency will weaken. | b. | If Country A's interest rate exceeds
Country B's inflation rate, Country A's currency will weaken. | c. | If Country A's
interest rate exceeds Country B's inflation rate, Country A's currency will
strengthen. | d. | If Country B's inflation rate exceeds Country A's inflation rate, Country
A's currency will weaken. |
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2.
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The international Fisher effect (IFE) suggests that:
a. | a home currency will depreciate if the current home interest rate exceeds the current
foreign interest rate. | b. | a home currency will appreciate if the current
home interest rate exceeds the current foreign interest rate. | c. | a home currency will
appreciate if the current home inflation rate exceeds the current foreign inflation
rate. | d. | a home currency will depreciate if the current home inflation rate exceeds the
current foreign inflation rate. |
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3.
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According to the IFE, if British interest rates exceed U.S. interest
rates:
a. | the British pound's value will remain constant. | b. | the British pound
will depreciate against the dollar. | c. | the British inflation rate will
decrease. | d. | the forward rate of the British pound will contain a premium. | e. | today's forward
rate of the British pound will equal today's spot rate. |
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4.
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If interest rates on the euro are consistently below U.S. interest rates, then
for the international Fisher effect (IFE) to hold:
a. | the value of the euro would often appreciate against the dollar. | b. | the value of the
euro would often depreciate against the dollar. | c. | the value of the euro would remain constant
most of the time. | d. | the value of the euro would appreciate in some
periods and depreciate in other periods, but on average have a zero rate of
appreciation. |
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5.
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According to the international Fisher effect, if euro investors expect a 5% rate
of domestic inflation over one year, and a 2% rate of inflation in the US, and require a 3% real
return on investments over one year, the nominal interest rate on one-year euro Treasury securities
would be:
a. | 2%. | b. | 3%. | c. | -2%. | d. | 5%. | e. | 8%. |
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6.
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Assume UKand Swiss investors require a real rate of return of 3%. Assume the
nominal UK interest rate is 6% and the nominal Swiss rate is 4%. According to the international
Fisher effect, the franc will _______ by about _______.
a. | appreciate; 3% | b. | appreciate; 1% | c. | depreciate;
3% | d. | depreciate; 2% | e. | appreciate; 2% |
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7.
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If interest rate parity holds, then the one-year forward rate of a currency will
______ the predicted spot rate of the currency in one year according to the international Fisher
effect.
a. | greater than | b. | less than | c. | equal
to | d. | answer is dependent on whether the forward rate has a discount or
premium |
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8.
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Assume that the inflation rate in Barbados is 3.20%, while the inflation rate in
the UK is 3.00%. According to PPP, the Barbados dollar (BBD) should ___________ by _________%.
a. | appreciate; 0.1938% | c. | appreciate; 0.1942% | b. | depreciate; 0.1938% | d. | depreciate;
0.1942% |
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9.
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The following regression analysis was conducted for the inflation rate
information and exchange rate of the US dollar:
eBP = a0 + a1
Regression results indicate that
a0 = 0 and a1 = 2. Therefore:
a. | purchasing power parity holds. | b. | purchasing power parity overestimated the
exchange rate change during the period under examination. | c. | purchasing power
parity underestimated the exchange rate change during the period under
examination. | d. | purchasing power parity will overestimate the exchange rate change of the British
pound in the future. |
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10.
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If nominal British interest rates are 3% and nominal U.S. interest rates are 6%,
then the British pound (£) is expected to ____________ by about _________%, according to the
international Fisher effect (IFE).
a. | depreciate; 2.9 | b. | appreciate; 2.9 | c. | depreciate;
1.0 | d. | appreciate; 1.0 | e. | none of the
above |
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11.
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You have an opportunity to invest in Australia at an interest rate of 8%.
Moreover, you expect the Australian dollar (A$) to appreciate by 2%. Your effective return from this
investment is:
a. | 8.00%. | c. | 10.16%. | b. | 6.00%. | d. | 5.88%. |
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True/False
Indicate whether the
statement is true or false.
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12.
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Research indicates that deviations from purchasing power parity (PPP) are
reduced over the long run.
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