INTERNATIONAL FINANCE
QUIZ 1
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Q U E S T I O N 1
Composition of GNP: Y = C+I+G+IM-EX, true or false?
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True
False
Q U E S T I O N 2
Current Account = CA = EX – IM, true or false?
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Q U E S T I O N 3
If GNP = Y = 1000, Consumption = 300, Government Spending = 150, Investment = 250, Lump-sum tax = 50, we can calculate
that Private Saving = ? Public Saving = ? Total Saving =
? Current Account = ? Please fill a specific number for each blank.
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Q U E S T I O N 4
Which one is correct in the derivation of Private Saving?
Private Saving = I + CA + (G – T)
Private Saving = I + CA + (T – G)
Public Saving = I + CA + (T – G)
Public Saving = I + CA + (G – T)
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True
False
Q U E S T I O N 5
Any transaction resulting in a receipt from foreigners is entered as a credit (+), and in a payment to foreigners is entered as
a debit (-) in Balance of Payment. True or False?
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True
False
Q U E S T I O N 6
Every international transaction automatically enters the Balance of Payment twice, once as a credit and once as a debit. True
or False?
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Q U E S T I O N 7
An American buys a share of German stock, paying by writing a check on an account with a Swiss bank.
Hence, the purchase of the German stock is a ___(1) in the U.S. ___(2). There is a corresponding credit in the U.S. ___(3) when
the American pays with a check on his Swiss bank account because his claims on Switzerland fall by the amount of the check.
This is a case in which an American trades one foreign asset for another.
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1) Credit; 2) Current Account; 3) Current Account
1) Credit; 2) Financial Account; 3) Financial Account
1) Debit; 2) Current Account; 3) Current Account
1) Debit; 2) Financial Account; 3) Financial Account
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Q U E S T I O N 8
An American buys a share of German stock, paying the seller with a check on an American bank. Therefore, firstly we know
that there is a U.S. financial account debit as a result of the purchase of a German stock by an American. In terms of paying the
seller with a U.S. check:
If the German seller deposits the U.S. check in his/her German bank, and that bank lends the money to a German importer, the
corresponding credit in this case occurs in the U.S. ___(1);
If the German seller deposits the U.S. check in his/her German bank, and that bank lends the money to an individual or
corporation that purchases a U.S. asset, the corresponding credit in this case occurs in the U.S. ___(2).
1) Current Account; 2) Current Account
1) Financial Account; 2) Financial Account
1) Current Account; 2) Financial Account
1) Financial Account; 2) Current Account
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Q U E S T I O N 9
The Korean government carries out an official foreign exchange intervention in which it uses dollars held in an American bank
to buy Korean currency from its citizens.
The foreign exchange intervention by the Korean government involves the sale of a U.S. asset, the dollars it holds in the United
States, and thus represents a ___(1) item in the U.S. financial account. The Korean citizens who buy the dollars may use them
to buy American goods, which would be an American ____(2) credit.
1) Credit; 2) Financial Account
1) Credit; 2) Current Account
1) Debit; 2) Financial Account
1) Debit; 2) Current Account
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Q U E S T I O N 1 0
A California winemaker contributes a case of cabernet sauvignon for a London wine tasting.
What happens on BoP?
Debit item on U.S. financial account, and credit item on U.K. current account.
Debit item on U.S. current account, and credit item on U.K. financial account.
Debit item on U.S. current account, and credit item on U.K. current account.
There is no credit or debit in either the financial or the current account because there has been no market transaction.
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Q U E S T I O N 1 1
The nation of Pecunia had a current account deficit of $1 billion and a nonreserve financial account surplus of $500 million in
2014. The current account deficit is million, the balance of payments of Pecunia (official settlements
balance) was million. Please fill in specific number in each blank.
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A.
Q U E S T I O N 1 2
How many dollars would it cost to buy an Edinburgh Woolen Mill sweater costing 50 British pounds if the
exchange rate is 1.25 dollars per one British pound?
70 dollars
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50 dollars
60 dollars
62.5 dollars
40 British pounds
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Q U E S T I O N 1 3
What is the exchange rate between the dollar and the British pound if a pair of American jeans costs 50 dollars in
New York and 100 Pounds in London?
1.5 dollars per British pound
0.5 dollars per British pound
3.5 dollars per British pound
2.5 dollars per British pound
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Q U E S T I O N 1 4
When a country’s currency depreciates
foreigners find that its exports are more expensive, and domestic residents find that imports from abroad are
more expensive.
foreigners find that its exports are more expensive, and domestic residents find that imports from abroad are
cheaper.
foreigners are not affected, but domestic residents find that imports from abroad are more expensive.
foreigners find that its exports are cheaper and domestic residents find that imports from abroad are more
expensive.
foreigners find that its exports are cheaper; however, domestic residents are not affected.
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Q U E S T I O N 1 5
If the dollar interest rate is 10 percent, the euro interest rate is 12 percent, then
an investor should be indifferent between dollars and euros an investor should invest only in dollars if the
expected dollar appreciation against the euro is 4 percent.
an investor should invest only in euros if the expected dollar appreciation against the euro is 4 percent.
an investor should invest only in euros.
an investor should invest only in dollars if the expected dollar appreciation against the euro is 4 percent.
an investor should invest only in dollars.
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Q U E S T I O N 1 6
Which one of the following statements is the MOST accurate?
For a given euro interest rate and constant expected exchange rate, a rise in the interest rate offered by dollar
deposits causes the dollar to appreciate.
A rise in the interest rate offered by dollar deposits causes the dollar to depreciate.
A rise in the interest rate offered by the dollar causes the euro to appreciate.
A rise in the interest rate offered by dollar deposits causes the dollar to appreciate.
A rise in the interest rate offered by dollar deposits does not affect the U.S. dollar.
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Q U E S T I O N 1 7 10 i t
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Q U E S T I O N 1 7
Which one of the following statements is the MOST accurate?
For a given dollar interest rate and a constant expected exchange rate, a rise in the interest rate of the euro
causes the dollar to depreciate.
For a fixed interest rate, a rise in the expected future exchange rate causes a rise in the current exchange rate.
For a fixed interest rate, a fall in the expected future exchange rate causes a rise in the current exchange rate.
For a fixed interest rate, a rise in the expected future exchange rate causes a fall in the current exchange rate.
For a fixed interest rate, a rise in the expected future exchange rate does not cause a change in the current
exchange rate.
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Q U E S T I O N 1 8
The covered interest rate parity condition can be stated as follows: The interest rate on dollar deposits equals the
interest rate on euro deposits ________ the forward ________ on dollars against euros.
times; premium
plus; premium
minus; premium
plus; discount
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Q U E S T I O N 1 9
An increase in a country’s money supply causes:
no effect on the values of it currency in international markets.
its currency to appreciate in the foreign exchange market while a reduction in the money supply causes its
currency to depreciate.
its currency to depreciate in the foreign exchange market while a reduction in the money supply causes its
currency to appreciate.
its currency to depreciate in the foreign exchange market while a reduction in the money supply causes its
currency to further depreciate.
its currency to depreciate in the domestic market and appreciate in the foreign market.
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Q U E S T I O N 2 0
Which one of the following statements is the MOST accurate?
Given P and Y , when the money supply rises, the dollar interest rate declines and the dollar
appreciates against the euro.
US
US
Given P and Y , when the money supply rises, the dollar interest rate declines and the dollar
depreciates against the euro.
US US
Given P , when the money supply rises, the dollar interest rate declines and the dollar depreciates against
the euro.
US
Given P and Y , when the money supply decreases, the dollar interest rate declines and the dollar
depreciates against the euro.
US US
Given Y , when the money supply rises, the dollar interest rate declines and the dollar depreciates against
the euro.
US
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Q U E S T I O N 2 1
Given P and YUS US:
An increase in the European money supply causes the euro to appreciate against the dollar, but it does not
disturb the U.S. money market equilibrium.
An increase in the European money supply causes the euro to appreciate against the dollar, and it creates
excess demand for dollars in the U.S. money market.
An increase in the European money supply causes the euro to depreciate against the dollar, and disturbing
the U.S. money market equilibrium.
An increase in the European money supply causes the euro to depreciate against the dollar, but it does not
disturb the U.S. money market equilibrium.
An increase in the European money supply causes the euro to depreciate against the dollar, and it creates
excess demand for dollars in the U.S. money market.
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Q U E S T I O N 2 2
A permanent increase in a country’s money supply
causes a more than proportional increase in its price level.
leaves its price level constant in long-run equilibrium.
causes a proportional increase in its price level.
causes an inversely proportional fall in its price level.
causes a less than proportional increase in its price level.
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Q U E S T I O N 2 3
A change in the level of the supply of money
decreases the long-run values of the interest rate and real output.
increases the long-run values of the interest rate and real output.
has no effect on the long-run values of the interest rate, but may affect real output.
has no effect on the long-run values of real output, but may affect the interest rate.
has no effect on the long-run values of the interest rate and real output.
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Q U E S T I O N 2 4
Which one of the following statements is the MOST accurate?
A permanent increase in a country’s money supply causes a proportional long-run depreciation of its
currency against foreign currencies.
A temporary increase in a country’s money supply causes a proportional long-run depreciation of its
currency against foreign currencies.
A permanent increase in a country’s money supply causes a proportional short-run depreciation of its
currency against foreign currencies.
A permanent increase in a country’s money supply causes a proportional long-run appreciation of its
currency against foreign currencies.
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A.
Q U E S T I O N 2 5
After a permanent increase in the money supply
the exchange rate remains the same
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the exchange rate remains the same.
the exchange rate overshoots in the short run.
the exchange rate smoothly depreciates in the short run.
the exchange rate overshoots in the long run.
the exchange rate smoothly appreciates in the short run.
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Q U E S T I O N 2 6
Changes in the money supply growth rate
are neutral in the long run.
need not be neutral in the short run.
need not be neutral in the long run.
are neutral in the short run.
affect the real output of the economy.
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Q U E S T I O N 2 7
Which of the following statements is the MOST accurate? The law of one price states
identical goods sold in different countries must sell for the same price when their prices are expressed in
terms of the same currency.
in competitive markets free of transportation costs and official barriers to trade, identical goods sold in
different countries must sell for the same price when their prices are expressed in terms of the same
currency.
in competitive markets free of transportation costs and official barrier to trade, identical goods sold in the
same country must sell for the same price when their prices are expressed in terms of the same currency.
in competitive markets free of official barrier to trade, identical goods are sold at the same price regardless
of transportation costs.
in competitive markets free of transportation costs and official barrier to trade, identical goods sold in
different countries must sell for the same price.
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Q U E S T I O N 2 8
Under Purchasing Power Parity between USA and Euro Zone:
E = P /P .$/E US E
E = P /P .$/P US E
E = P + P .$/E US E
E = P /P .$/E E ES
E = P – P .$/E US E
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Q U E S T I O N 2 9
Which of the following statements is the MOST accurate?
The law of one price applies to individual commodities while PPP applies to both the general price level and
to individual commodities.
The law of one price applies only to the general price level.
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The law of one price applies to the general price level while PPP applies to individual commodities.
The law of one price applies to individual commodities while PPP applies to the general price level.
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Q U E S T I O N 3 0
Which of the following statements is the MOST accurate?
Relative PPP may be valid even when absolute PPP is not, provided the factors causing deviations from
absolute PPP are more or less stable over time.
Relative PPP is not valid when absolute PPP is not.
Relative PPP is only valid when absolute PPP is valid, providing the factors causing deviations from relative
PPP are more or less stable over time.
Absolute PPP may be valid even when relative PPP is not, provided the factors causing deviations from
relative PPP are more or less stable over time.
Relative PPP may be valid even when absolute PPP is not, provided the factors causing deviations from
absolute PPP are more or less stable over different commodities space.
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Q U E S T I O N 3 1
If people expect relative PPP to hold
the difference between the interest rates offered by dollar and euro deposits will equal the difference between
the inflation rates expected in Europe and the United States, respectively.
the difference between the interest rates offered by dollar and euro deposits will equal the difference between
the inflation rates expected, in the United States and Europe, respectively, over the relevant horizon.
the difference between the interest rates offered by dollar and euro deposits will equal the difference between
the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively, in the
short run.
the difference between the interest rates offered by dollar and euro deposits will be above the difference
between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively.
the difference between the interest rates offered by dollar and euro deposits will be below the difference
between the inflation rates expected, over the relevant horizon, in the United States and Europe, respectively.
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Q U E S T I O N 3 2
Under PPP (and by the Fisher Effect), all else equal
a fall in a country’s expected inflation rate will eventually cause an equal rise in the interest rate that deposits
of its currency offer.
a rise in a country’s expected inflation rate will eventually cause a less than proportional rise in the interest
rate that deposits of its currency offer to accommodate the rise in expected inflation.
a rise in a country’s expected inflation rate will eventually cause an equal rise in the interest rate that deposits
of its currency offer.
a rise in a country’s expected inflation rate will eventually cause a more-than proportional rise in the interest
rate that deposits of its currency offer in order to accommodate for the higher inflation.
a fall in a country’s expected inflation rate will eventually cause an inversely proportional rise in the interest
rate that deposits of its currency offer to accommodate the rise in expected inflation.
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Q U E S T I O N 3 3
Under a flexible-price monetary approach to the exchange rate
when the domestic money supply falls, the price level would fall right away, keeping the interest rate
constant.
when the domestic money supply falls, the price level would eventually fall, keeping the interest rate
constant.
when the domestic money supply falls, the price level would fall right away, causing a reduction in the
interest rate.
when the domestic money supply falls, the price level would eventually fall, increasing the interest rate.
when the domestic money supply falls, the price level would fall right away, causing an increase in the
interest rate.
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Q U E S T I O N 3 4
Under the monetary approach to the exchange rate
an interest rate decrease is associated with higher expected inflation and a currency that will be weaker on all
future dates.
an interest rate increase is associated with higher expected deflation and a currency that will be weaker on all
future dates.
an interest rate increase is associated with higher expected inflation and a currency that will be strengthened on
all future dates.
an interest rate increase is associated with higher expected deflation and a currency that will be strengthened
on all future dates.
an interest rate increase is associated with higher expected inflation and a currency that will be weaker on all
future dates.
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Q U E S T I O N 3 5
Which of the following statements is MOST accurate?
In the money market, an increase in European money supply level leads to a proportional increase in the
long-run nominal dollar/euro exchange rate.
In the money market, an increase in U.S. money supply level leads to a proportional increase in the long-run
nominal dollar/euro exchange rate.
In the money market, an increase in European money supply growth leads to an increase in the long-run
nominal dollar/euro exchange rate.
In the money market, an increase in U.S. money supply growth rate leads to a decrease in the long-run
nominal dollar/euro exchange rate.
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Q U E S T I O N 3 6
If nominal exchange rate = 1.5 USD/EUR, price level in US = 100/US basket, price level in Europe = 200/EUR basket, then we
can calculate the real exchange rate = x US basket / EUR basket, how much is x?
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