ECO 305 Week 8 Quiz – Strayer

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Quiz 7 Chapter 10 and 11

CHAPTER 10

THE BALANCE OF PAYMENTS

MULTIPLE CHOICE

1. On the balance-of-payments statements, merchandise imports are classified in the:a. Current accountb. Capital accountc. Unilateral transfer accountd. Official settlements account

2. The balance of international indebtedness is a record of a country's international:a. Investment position over a period of timeb. Investment position at a fixed point in timec. Trade position over a period of timed. Trade position at a fixed point in time

3. Which balance-of-payments item does not directly enter into the calculation of the U.S. gross domestic product?a. Merchandise importsb. Shipping and transportation receiptsc. Direct foreign investmentd. Service exports

4. Which of the following is considered a capital inflow?a. A sale of U.S. financial assets to a foreign buyerb. A loan from a U.S. bank to a foreign borrowerc. A purchase of foreign financial assets by a U.S. buyerd. A U.S. citizen's repayment of a loan from a foreign bank

5. Which of the following would call for inpayments to the United States?a. American imports of German steelb. Gold flowing out of the United Statesc. American unilateral transfers to less-developed countriesd. American firms selling insurance to British shipping companies

6. In a country's balance of payments, which of the following transactions are debits?a. Domestic bank balances owned by foreigners are decreasedb. Foreign bank balances owned by domestic residents are decreasedc. Assets owned by domestic residents are sold to nonresidentsd. Securities are sold by domestic residents to nonresidents

7. Which of the following is classified as a credit in the U.S. balance of payments?a. U.S. exportsb. U.S. gifts to other countriesc. A flow of gold out of the U.S.d. Foreign loans made by U.S. companies

Table 10.1 gives hypothetical figures for U.S. International Transactions.

Table 10.1. U.S. International Transactions

AmountTransaction (billions of dollars)

Merchandise imports 110Military transactions, net -5Remittances, pensions, transfers -20U.S. private assets abroad -50Merchandise exports 115Investment income, net 15U.S. government grants -5(excluding military)Foreign private assets in the U.S. 25Compensation of employees -5

Allocation of SDRs 5Travel and transportation receipts, net 20

8. Referring to Table 10.1, the goods and services balance equals:a. $5 billionb. $15 billionc. $20 billiond. $25 billion

9. Referring to Table 10.1, the current account balance equals:a. $5 billionb. $10 billionc. $15 billiond. $20 billion

10. Unlike the balance of payments, the balance of international indebtedness indicates the international:a. Investment position of a country at a given moment in timeb. Investment position of a country over a one-year periodc. Trade position of a country at a given moment in timed. Trade position of a country over a one-year period

11. Which of the following indicates the international investment position of a country at a given moment in time?a. The balance of paymentsb. The capital account of the balance of paymentsc. The current account of the balance of paymentsd. The balance of international indebtedness

12. Concerning the U.S. balance of payments, which account is defined in essentially the same way as the net export of goods and services, which comprises part of the country's gross domestic product?a. Merchandise trade accountb. Goods and services accountc. Current accountd. Capital account

13. If an American receives dividends from the shares of stock she or he owns in Toyota, Inc., a Japanese firm, the transaction would be recorded on the U.S. balance of payments as a:a. Capital account debitb. Capital account creditc. Current account debitd. Current account credit

14. If the United States government sells military hardware to Saudi Arabia, the transaction would be recorded on the U.S. balance of payments as a:a. Current account debitb. Current account creditc. Capital account debitd. Capital account credit

15. The U.S. balance of trade is determined by:a. Exchange ratesb. Growth of economies overseasc. Relative prices in world marketsd. All of the above

16. U.S. military aid granted to foreign countries is entered in the:a. Merchandise trade accountb. Capital accountc. Current accountd. Official settlements account

17. If the U.S. faces a balance-of-payments deficit on the current account, it must run a surplus on:a. The official settlements accountb. The capital accountc. Either the official settlements account or the capital accountd. Both the official settlements account and the capital account

18. The current account of the U.S. balance of payments does not include:a. Investment incomeb. Merchandise exports and importsc. The sale of securities to foreignersd. Unilateral transfers

19. The U.S. has a balance of trade deficit when its:a. Merchandise exports exceed its merchandise importsb. Merchandise imports exceed its merchandise exportsc. Goods and services exports exceed its goods and services importsd. Goods and services imports exceed its goods and services exports

20. The value to American residents of income earned from overseas investments shows up in which account in the U.S. balance of payments?a. Current accountb. Trade accountc. Unilateral transfers accountd. Capital account

Table 10.2. International Investment Position of the United States

U.S. assets abroad U.S. government assets $800 billion U.S. private assets $200 billion

Foreign assets in the U.S. Foreign official assets $600 billion Foreign private assets $300 billion

21. Consider Table 10.2. The U.S. balance of international indebtedness suggests that the United States is a net:a. Debtorb. Creditorc. Spenderd. Exporter

22. For the first time since World War I, in 1985 the United States became a net international:a. Exporterb. Importerc. Debtord. Creditor

23. A country that is a net international debtor initially experiences:a. An augmented savings pool available to finance domestic spendingb. A higher interest rate, which leads to lower domestic investmentc. A loss of funds to trading partners overseasd. A decrease in its services exports to other countries

24. Credit (+) items in the balance of payments correspond to anything that:a. Involves receipts from foreignersb. Involves payments to foreignersc. Decreases the domestic money supplyd. Increases the demand for foreign exchange

25. Debt (-) items in the balance of payments correspond to anything that:a. Involves receipts from foreignersb. Involves payments to foreignersc. Increases the domestic money supplyd. Decreases the demand for foreign exchange

26. When all of the debit or credit items in the balance of payments are combined:a. Merchandise imports equal merchandise exportsb. Capital imports equal capital exportsc. Services exports equal services importsd. The total surplus or deficit equals zero

27. In the balance of payments, the statistical discrepancy is used to:

a. Ensure that the sum of all debits matches the sum of all creditsb. Ensure that trade imports equal the value of trade exportsc. Obtain an accurate account of a balance-of-payments deficitd. Obtain an accurate account of a balance-of-payments surplus

28. All of the following are credit items in the balance of payments, except:a. Investment inflowsb. Merchandise exportsc. Payments for American services to foreignersd. Private gifts to foreign residents

29. All of the following are debit items in the balance of payments, except:a. Capital outflowsb. Merchandise exportsc. Private gifts to foreignersd. Foreign aid granted to other nations

30. The role of ____ is to direct one nation's savings into another nation's investments:a. Merchandise trade flowsb. Services flowsc. Current account flowsd. Capital flows

31. When a country realizes a deficit on its current account:a. Its net foreign investment position becomes positiveb. It becomes a net demander of funds from other countriesc. It realizes an excess of imports over exports on goods and servicesd. It becomes a net supplier of funds to other countries

32. Reducing a current account deficit requires a country to:a. Increase private saving relative to investmentb. Increase private consumption relative to savingc. Increase private investment relative to consumption

d. Increase private investment relative to saving

33. Reducing a current account deficit requires a country to:a. Increase the government's deficit and increase private investment relative to savingb. Increase the government's deficit and decrease private investment relative to savingc. Decrease the government's deficit increase private investment relative to savingd. Decrease the government's deficit and decrease private investment relative to saving

34. Reducing a current account surplus requires a country to:a. Increase the government's deficit and increase private investment relative to savingb. Increase the government's deficit and decrease private investment relative to savingc. Decrease the government's deficit and increase private investment relative to savingd. Decrease the government's deficit and decrease private investment relative to saving

35. Concerning a country's business cycle, rapid growth of production and employment is commonly associated with:a. Large or growing trade deficits and current account deficitsb. Large or growing trade deficits and current account surplusesc. Small or shrinking trade deficits and current account deficitsd. Small or shrinking trade deficits and current account surpluses

36. The burden of a current account deficit would be the least if a nation uses what it borrows to finance:a. Unemployment compensation benefitsb. Social Security benefitsc. Expenditures on food and recreationd. Investment on plant and equipment

37. Concerning a country's business cycle, ____ is commonly associated with large or growing current account deficits:a. Rapid growth rates of production and employmentb. Slow growth rates of production and employmentc. Falling interest rates on government securitiesd. Falling interest rates on corporate securities

38. According to researchers at the Federal Reserve, the loss of jobs associated with a deficit in the current account tends to be:a. Offset by the increase of jobs associated with a surplus in the capital accountb. Reinforced by the decrease of jobs associated with a surplus in the capital accountc. A threat to the level of employment for the economy as a wholed. Of no long-run economic consequence for workers who lose their jobs

TRUE/FALSE

Table 10.3 shows hypothetical transactions, in billions of U.S. dollars, that took place during a year.

Table 10.3. International Transactions of the United States

Amount(billions of dollars)Transaction

Allocation of SDRs 10Changes in U.S. assets abroad 100Statistical discrepancy -15Merchandise imports -400Payments on foreign assets in U.S. -20Remittances, pensions, transfers -60Travel and transportation receipts, net 30Military transactions, net -10Investment income, net 100Merchandise exports 350U.S. government grants (excluding military) -20Changes in foreign assets in the U.S. 190Other services, net 80Receipts on U.S. investments abroad 30Compensation of employees -10

1. Refer to Table 10.3. The merchandise-trade balance registered a deficit of $50 billion.

2. Refer to Table 10.3. The services balance registered a surplus of $100 billion.

3. Refer to Table 10.3. The goods-and-services balance registered a surplus of $50 billion.

4. Refer to Table 10.3. The unilateral-transfers balance registered a deficit of $40 billion.

5. Refer to Table 10.3. The current-account balance registered a surplus of $30 billion.

6. Refer to Table 10.3. The "net exports" component of the U.S. gross domestic product registered $-110 billion.

7. Refer to Table 10.3. The payments data suggest that the United States was a "net demander" of $30 billion from the rest of the world.

8. The balance of payments refers to the stock of trade and investment transactions that exists at a particular point in time.

9. Referring to the balance-of-payments statement, an international transaction refers to the exchange of goods, services, and assets between residents of one country and those abroad.

10. The balance of payments includes international transactions of households and businesses, but not government.

11. Because the balance of payments utilizes double-entry accounting, merchandise exports will always be in balance with merchandise imports.

12. On the U.S. balance-of-payments statement, the following transactions are credits, leading to the receipt of dollars from foreigners: merchandise exports, transportation receipts, income received from investments abroad, and investments in the United States by foreign residents.

13. On the U.S. balance of payments, the following transactions are debits, leading to payments to foreigners: merchandise imports, travel expenditures, gifts to foreign residents, and overseas investments by U.S. residents.

14. The "goods and services" account of the balance of payments shows the monetary value of international flows associated with transactions in goods, services, and unilateral transfers.

15. An increase in import restrictions by the U.S. government tends to promote a merchandise-trade surplus.

16. Services transactions on Canada's balance-of-payments statement would include Canadian ships transporting lumber to Japan, foreign tourists spending money in Canada, and Canadian engineers designing bridges in China.

17. On the balance-of-payments statement, dividend and interest income are classified as capital-account transactions.

18. A surplus on Germany's goods-and-services balance indicates that Germany has sold more goods and services to foreigners than it has bought from them over a one-year period.

19. The merchandise-trade account on the balance-of-payments statement is defined the same way as "net exports" which constitutes part of the nation's gross domestic product.

20. A positive balance on the goods-and-services account of the balance of payments indicates an excess of exports over imports which must be added to the nation's gross domestic product.

21. For the United States, merchandise trade has generally constituted the largest portion of its goods-and-services account.

22. Unilateral transfers refer to two-sided transactions, reflecting the movement of goods and services in one direction with corresponding payments in the other direction.

23. Unilateral transfers consist of private-sector transfers, such as church contributions to alleviate starvation in Africa, as well as governmental transfers, such as foreign aid.

24. Current-account transactions include direct foreign investment, purchases of foreign government securities, and commercial bank loans made abroad.

25. On the U.S. balance-of-payments statement, a capital inflow would occur if a Swiss resident purchases the securities of the U.S. government.

26. If Toyota Inc. of Japan builds an automobile assembly plant in the United States, the Japanese capital account would register an outflow.

27. If Bank of America receives repayment for a loan it made to a Mexican firm, the U.S. capital account would register an inflow.

28. On the balance-of-payments statement, a capital inflow can be likened to the import of goods and services.

29. The capital account of the balance of payments includes private-sector transactions as well as official-settlements transactions of the home country's central bank.

30. If the current account of the balance of payments registers a deficit, the capital account registers a surplus, and vice versa.

31. Concerning the balance of payments, a current-account surplus means an excess of exports over imports of goods, services, investment income, and unilateral transfers.

32. If a country realizes a current-account deficit in its balance of payments, it becomes a net supplier of funds to the rest of the world.

33. Concerning the balance of payments, a current-account deficit results in a worsening of a country's net foreign investment position.

34. In the balance-of-payments statement, statistical discrepancy is treated as part of the merchandise trade account because merchandise transactions are generally the most frequent source of error.

35. Because a large number of international transactions fail to get recorded, statisticians insert a residual, known as statistical discrepancy, to ensure that total debits equal total credits.

36. Concerning the balance of payments, the goods-and-services balance is commonly referred to as the "trade balance" by the news media.

37. Since the 1970s, the merchandise trade account of the U.S. balance of payments has registered deficit.

38. Although the United States has realized merchandise trade deficits since the early 1970s, its goods-and-services balance has always registered surplus.

39. In the past two decades, the U.S. services balance has generally registered surplus.

40. The U.S. unilateral-transfers balance has consistently registered surplus in the past two decades.

41. Because the balance of payments is a record of the economic transactions of a country over a period of time, it is a "flow" concept.

42. The United States would be a "net creditor" if the value of U.S. assets abroad exceeded the value of foreign assets in the United States.

43. If a country consistently realizes a current-account surplus in its balance of payments, it likely will become a "net debtor" in its balance of international indebtedness.

44. By the mid-1980s, the United States had evolved from the status of a net-creditor nation to a net-debtor nation in its balance of international indebtedness.

45. The net-debtor status, that the United States achieved in its balance of international indebtedness by the mid-1980s, reflected the continuous current-account surplus that the United States attained in its balance of payments during the 1970s.

46. Although a net-debtor country may initially benefit from an inflow of savings from abroad, over the long run continued borrowing results in growing dividend payments to foreigners and a drain on the debtor-country's economic resources.

47. The official reserve assets of the United States consist of holdings of gold and foreign corporate securities.

48. That U.S. importers purchase bananas from Brazil constitutes a debit transaction on the U.S. balance of payments.

49. That German investors collect interest income on their holdings of U.S. Treasury bills constitutes a credit transaction on the U.S. balance of payments.

50. That U.S. charities donate funds to combat starvation in Africa constitutes a debit transaction on the U.S. balance of payments.

51. To reduce a current account deficit, a country should either decrease the budget deficit of its government or reduce investment spending relative to saving.

52. Most economists belief that in the 1980s, a massive outflow of capital caused a current account deficit for the United States.

53. A current account deficit for the United States necessarily reduces the standard of living for American households.

54. Rapid growth of production and employment is commonly associated with large or growing trade surpluses and current account surpluses.

55. Often, countries realizing rapid economic growth rates possess long-run current account deficits.

56. For the United States, a consequence of its current account deficit is a growing foreign ownership of the capital stock of the United States and a rising fraction of U.S. income that must be diverted abroad in the form of interest and dividends to foreigners.

57. Most economists contend that any reduction in the current account deficit is better achieved through increased national saving than through reduced domestic investment.

SHORT ANSWER

1. What are the components of the current account of the balance of payments?

2. Concerning the balance of international indebtedness, when is a country a net creditor or a net debtor?

ESSAY

1. How do we measure the international investment position of the United States at any point in time? How did the U.S. become a net debtor nation so rapidly?

2. What does a current account deficit mean?

CHAPTER 11—FOREIGN EXCHANGE

MULTIPLE CHOICE

1. Assume you are an American exporter and expect to receive 50 pounds sterling at the end of 60 days. You can remove the risk of loss due to a devaluation of the pound sterling by:a. Selling sterling in the forward market for 60-day deliveryb. Buying sterling now and selling it at the end of 60 daysc. Selling the dollar equivalent in the forward market for 60-day deliveryd. Keeping the sterling in Britain after it is delivered to you

2. Which of the following tends to cause the U.S. dollar to appreciate in value?a. An increase in U.S. prices above foreign prices

b. Rapid economic growth in foreign countriesc. A fall in U.S. interest rates below foreign levelsd. An increase in the level of U.S. income

3. Concerning the covering of exchange market risks--assuming that a depreciation of the domestic currency is anticipated, one can say that there is an incentive for:a. Exporters to rush to cover their future needsb. Importers to rush to cover their future needsc. Both exporters and importers to rush to cover their future needsd. Neither exporters nor importers to rush to cover their future needs

4. When short-term interest rates become lower in Tokyo than in New York, interest arbitrage operations will most likely result in a:a. Increase in the spot price of the yenb. Increase in the forward price of the dollarc. Sale of dollars in the forward marketd. Purchase of yen in the spot market

5. An appreciation in the value of the U.S. dollar against the British pound would tend to:a. Discourage the British from buying American goodsb. Discourage Americans from buying British goodsc. Increase the number of dollars that could be bought with a poundd. Discourage U.S. tourists from traveling to Britain

6. Concerning the foreign exchange market, one can best say that:a. There is a spot market for virtually every currency in the worldb. The market is highly centralized like the stock exchangec. Most foreign exchange payments are made with bank notesd. The values of the forward and spot rates are always in agreement

7. Suppose researchers discover that Swiss beer causes cancer when given in large amounts to British mice. This finding would likely result in a (an):a. Increase in the demand for Swiss francs

b. Decrease in the demand for Swiss francsc. Increase in the supply of Swiss francsd. Decrease in the supply of Swiss francs

8. Suppose that real incomes increase more rapidly in the United States than in Mexico. In the United States, this situation would likely result in a (an):a. Increase in the demand for pesosb. Decrease in the demand for pesosc. Increase in the supply of pesosd. Decrease in the supply of pesos

9. A depreciation of the dollar refers to:a. A fall in the dollar price of foreign currencyb. An increase in the dollar price of foreign currencyc. A loss of foreign-exchange reserves for the U.S.d. An intervention in the international money market

10. If Canadian speculators believed the Swiss franc was going to appreciate against the U.S. dollar, they would:a. Purchase Canadian dollarsb. Purchase U.S. dollarsc. Purchase Swiss francsd. Sell Swiss francs

11. A major difference between the spot market and the forward market is that the spot market deals with:a. The immediate delivery of currenciesb. The merchandise trade accountc. Currencies traded for future deliveryd. Hedging of international currency risks

12. The exchange rate is kept the same in all parts of the market by:a. Forward coverb. Hedgingc. Exchange speculation

d. Exchange arbitrage

13. If you have a commitment to pay a friend in Britain 1,000 pounds in 30 days, you could remove the risk of loss due to the appreciation of the pound by:a. Buying dollars in the forward market for delivery in 30 daysb. Selling dollars in the forward market for delivery in 30 daysc. Buying the pounds in the forward market for delivery in 30 daysd. Selling the pounds in the forward market for delivery in 30 days

14. An increase in the dollar price of other currencies tends to cause:a. U.S. goods to be cheaper than foreign goodsb. U.S. goods to be more expensive than foreign goodsc. Foreign goods to be more expensive to residents of foreign nationsd. Foreign goods to be cheaper to residents of the United States

15. The balance on merchandise trade:a. Must be negativeb. Must be positivec. Must be zerod. May be negative, positive, or zero

16. Which of the following would not induce the U.S. demand curve for foreign exchange to shift backward to the left?a. Worsening American tastes for goods produced overseasb. Increasing interest rates in the U.S. compared to those overseasc. A fall in the level of U.S. incomed. A depreciation in the U.S. dollar against foreign currencies

17. A U.S. export company scheduled to receive 1 million pounds six months from today can hedge its foreign exchange risk by:a. Buying today 1 million pounds in the forward market for delivery in six monthsb. Buying 1 million pounds in the spot market for delivery in six monthsc. Selling 1 million pounds in the spot market for delivery in six months

d. Selling today 1 million pounds in the forward market for delivery in six months

18. Over time, a depreciation in the value of a nation's currency in the foreign exchange market will result in:a. Exports rising and imports fallingb. Imports rising and exports fallingc. Both imports and exports risingd. Both imports and exports falling

19. Grain shortages in countries that buy large amounts of grain from the United States would increase the demand for American grain and:a. Reduce the demand for dollarsb. Increase the demand for dollarsc. Reduce the supply of dollarsd. Increase the supply of dollars

20. Suppose the exchange rate between the Japanese yen and the U.S. dollar is 100 yen per dollar. A Japanese stereo with a price of 60,000 yen will cost:a. $60b. $600c. $6000d. None of the above

21. The supply of foreign currency may be:a. Upward-slopingb. Backward-slopingc. Verticald. None of the above

22. Suppose that a Swiss watch that costs 400 francs in Switzerland costs $200 in the United States. The exchange rate between the franc and the dollar is:a. 2 francs per dollarb. 1 franc per dollarc. $2 per franc

d. $3 per franc

23. In the early 1980s, the Federal Reserve pursued a tight monetary policy. All else being equal, the impact of that policy was to ____ interest rates in the United States relative to those in Europe and cause the dollar to ____ against European currencies.a. Decrease, depreciateb. Decrease, appreciatec. Increase, depreciated. Increase, appreciate

24. Under a system of floating exchange rates, the Swiss franc would depreciate in value if which of the following occurs?a. Price inflation in Franceb. An increase in U.S. real incomec. A decrease in the Swiss money supplyd. Falling interest rates in Switzerland

25. A depreciation of the dollar will have its most pronounced impact on imports if the demand for imports is:a. Constantb. Inelasticc. Elasticd. Unitary elastic

26. During the era of dollar appreciation, from 1981 to 1985, a main reason why the dollar did not fall in value was:a. Flows of foreign investment into the United Statesb. Rising price inflation in the United Statesc. A substantial decrease in U.S. importsd. A substantial increase in U.S. exports

27. Which financial instrument provides a buyer the right to purchase or sell a fixed amount of currency at a prearranged price, within a few days to a couple of years?

a. Letter of creditb. Foreign currency optionc. Cable transferd. Bill of exchange

28. Given the foreign currency market for the Swiss franc, the supply of francs slopes upward, because as the dollar price of the franc rises:a. America's demand for Swiss merchandise risesb. America's demand for Swiss merchandise fallsc. Switzerland's demand for American merchandise risesd. Switzerland's demand for American merchandise falls

29. In a supply-and-demand diagram for Japanese yen, with the exchange rate in dollars per yen on the vertical axis, the demand schedule for yen is drawn sloping:a. Upwardb. Verticalc. Downwardd. Horizontal

30. Suppose there occurs an increase in the Canadian demand for Japanese computers. This results in:a. An increase in the demand for yenb. A decrease in the demand for yenc. An increase in the supply of yen to Canadad. A decrease in the supply of yen to Canada

Table 11.1 gives the exchange rate quotations for the U.S. dollar and the British pound.

Table 11.1. Foreign Exchange Quotations

U.S. Dollar Currency PerEquivalent U.S. Dollar

Tuesday Monday Tuesday Monday

Britain (Pound) 1.4270 1.4390 .7008 .6949

30-day Forward 1.4211 1.4333 .7037 .697760-day Forward 1.4090 1.4220 .7097 .7032180-day Forward 1.3930 1.4070 .7179 .7107

31. Consider Table 11.1. If one were to buy pounds for immediate delivery, on Tuesday the dollar cost of each pound would be:a. $0.7008b. $0.7037c. $1.4211d. $1.4270

32. Consider Table 11.1. If one were to sell dollars for immediate delivery, on Tuesday the pound cost of each dollar would be:a. .7008 pounds per dollarb. .7037 pounds per dollarc. 1.4270 pounds per dollard. 1.4211 pounds per dollar

33. Consider Table 11.1. Comparing Tuesday to the previous Monday, by Tuesday the dollar had:a. Depreciated against the poundb. Appreciated against the poundc. Not changed against the poundd. None of the above

34. Consider Table 11.1. Concerning the Tuesday quotations: compared to the cost of buying 100 pounds on the spot market, if 100 pounds were bought for future delivery in 180 days the dollar cost of the pounds would be:a. $3.40 higherb. $3.40 lowerc. $6.80 higherd. $6.80 lower

35. Which method of trading currencies involves the conversion of one currency into another at one point in time with an agreement to reconvert it back to the original currency at some point in the future?a. Forward transaction

b. Futures transactionc. Spot transactiond. Swap transaction

36. Most foreign exchange trading occurs between banks and:a. National governmentsb. Other banksc. Corporationsd. Household investors

37. The most important (in terms of dollar value) type of foreign exchange transaction by U.S. banks is the:a. Spot transactionb. Forward transactionc. Swap transactiond. Option transaction

38. In the interbank market for foreign exchange, the ____ refers to the price that a bank is willing to pay for a unit of foreign currency.a. Offer rateb. Bid ratec. Spread rated. Transaction rate

39. In the interbank market for foreign exchange, the ____ refers to the price for which a bank is willing to sell a unit of foreign currency.a. Offer rateb. Option ratec. Futures rated. Bid rate

40. In the interbank market for foreign exchange, the ____ refers to the difference between the offer rate and the bid rate.a. Cross rateb. Option

c. Arbitraged. Spread

41. A corporation dealing in foreign exchange may desire to obtain an exchange quote between the pound and franc, whose values are both expressed relative to the dollar. ____ are used to determine such a relationship.a. Spot exchange ratesb. Forward exchange ratesc. Cross exchange ratesd. Option exchange rates

42. Suppose the exchange value of the British pound is $2 per pound while the exchange value of the Swiss franc is 50 cents per pound. The cross exchange rate between the pound and the franc is:a. 1 franc per poundb. 2 francs per poundc. 3 francs per poundd. 4 francs per pound

Exhibit 11.1

Assume the following: (1) the interest rate on 6-month treasury bills is 8 percent per annum in the United Kingdom and 4 percent per annum in the United States; (2) today's spot price of the pound is $1.50 while the 6-month forward price of the pound is $1.485.

43. Refer to Exhibit 11.1. By investing in U.K. treasury bills rather than U.S. treasury bills, and not covering exchange rate risk, U.S. investors earn an extra return of:a. 4 percent per year, 1 percent for the 6 monthsb. 4 percent per year, 2 percent for the 6 monthsc. 2 percent per year, 0.5 percent for the 6 monthsd. 2 percent per year, 1 percent for the 6 months

44. Refer to Exhibit 11.1. If U.S. investors cover their exchange rate risk, the extra return for the 6 months on the U.K. treasury bills is:a. 1.0 percentb. 1.5 percent

c. 2.0 percentd. 2.5 percent

45. Refer to Exhibit 11.1. If the price of the 6-month forward pound were to ____, U.S. investors would no longer earn an extra return by shifting funds to the United Kingdom.a. Rise to $1.52b. Rise to $1.53c. Fall to $1.48d. Fall to $1.47

46. Assume that you are the Chase Manhattan Bank of the United States, and you have 1 million Swiss francs in your vault that you will need to use in 30 days. Moreover, you need 500,000 British pounds for the next 30 days. You arrange to loan your francs to Barclays Bank of London for 30 days in exchange for 500,000 pounds today, and reverse the transaction at the end of 30 days. You have just arranged a:a. Forward contractb. Futures contractc. Spot contractd. Currency swap

Figure 11.1 illustrates the supply and demand schedules for the Swiss franc. Assume that exchange rates are flexible.

Figure 11.1. Supply and Demand Schedules of Francs

47. Refer to Figure 11.1. At the equilibrium exchange rate of ____ per franc, ____ francs will be purchased at a total dollar cost of ____.a. $.50, 5 million, $2.5 millionb. $.50, 5 million, $1.5 millionc. $.70, 3 million, $2.1 milliond. $.70, 7 million, $4.9 million

48. Refer to Figure 11.1. Suppose the exchange rate is $.70 per franc. At this exchange rate there is an ____ of francs which leads to a ____ in the dollar price

of the franc, a (an) ____ in the quantity of francs supplied, and a (an) ____ in the quantity of francs demanded.a. Excess demand, rise, increase, decreaseb. Excess demand, rise, decrease, increasec. Excess supply, fall, decrease, increased. Excess supply, fall, increase, decrease

49. Refer to Figure 11.1. Suppose the exchange rate is $.30 per franc. At this exchange rate there is an ____ of francs which leads to a ____ in the dollar price of the franc, a (an) ____ in the quantity of francs supplied, and a (an) ____ in the quantity of francs demanded.a. Excess demand, rise, increase, decreaseb. Excess demand, rise, decrease, increasec. Excess supply, fall, decrease, increased. Excess supply, fall, increase, decrease

50. Refer to Figure 11.1. Suppose the exchange rate is $.70 per franc. Free-market forces would lead to a (an) ____ of the dollar against the franc and a (an) ____ in U.S. international competitiveness.a. Depreciation, improvementb. Depreciation, worseningc. Appreciation, improvementd. Appreciation, worsening

51. Refer to Figure 11.1. Suppose the exchange rate is $.30 per franc. Free-market forces would lead to a (an) ____ of the dollar against the franc and a (an) ____ in U.S. international competitiveness:a. Depreciation, improvementb. Depreciation, worseningc. Appreciation, improvementd. Appreciation, worsening

The figure below illustrates the market for Swiss francs in a world of market-determined exchange rates. Assume the equilibrium exchange rate is $0.5 per franc, given by the intersection of schedules S0 and D0.

Figure 11.2. Market for Francs

52. Refer to Figure 11.2. A shift in the demand for francs from D0 to D1 or a shift in the supply of francs from S0 to S2, would result in a (an):a. Depreciation in the dollar against the francb. Appreciation in the dollar against the francc. Unchanged dollar/franc exchange rated. None of the above

53. Refer to Figure 11.2. A shift in the demand for francs from D0 to D2, or a shift in the supply of francs from S0 to S1, would result in a (an):a. Depreciation in the dollar against the francb. Appreciation in the dollar against the francc. No change in the dollar/franc exchange rated. None of the above

54. A (An) ____ is an arrangement by which two parties exchange one currency for another and agree that the exchange will be reversed at a stipulated date in the future:a. Arbitrageb. Swapc. Optiond. Hedge

Table 11.2. Supply and Demand of British Pounds

Quantity DollarsQuantityof Pounds per of PoundsSupplied Pound Demanded

1,000 2.00 200 800 1.80 400 600 1.60 600 400 1.40 800 200 1.20 1,000

55. Refer to Table 11.2. The equilibrium exchange rate equals:a. $1.20 per poundb. $1.40 per poundc. $1.60 per pound

d. $1.80 per pound

56. Refer to Table 11.2. At the exchange rate of $1.40 per pound, there is an ____ for pounds. This imbalance causes ____ in the price of the pound, which leads to ____ in the quantity of pounds supplied and ____ in the quantity of pounds demanded.a. Excess supply, a decrease, an increase, a decreaseb. Excess supply, an increase, a decrease, an increasec. Excess demand, an increase, an increase, a decreased. Excess demand, an increase, a decrease, an increase

57. Refer to Table 11.2. At the exchange rate of $1.80 per pound, there is an ____ for pounds. This imbalance causes ____ in the price of the pound, which leads to ____ in the quantity of pounds supplied and ____ in the quantity of pounds demanded.a. Excess supply, a decrease, a decrease, an increaseb. Excess supply, an increase, a decrease, an increasec. Excess demand, an increase, an increase, a decreased. Excess demand, an increase, a decrease, an increase

Table 11.3. Key Currency Cross Rates

Dollar Euro Pound Swiss Franc

Canada 1.5326 1.4400 2.2362 0.9790Japan 124.48 116.96 181.63 79.515Mexico 9.7410 9.1526 14.213 6.2223Switzerland 1.5655 1.4709 2.2842 ..........U.K. .68540 .6440 .......... .4378Euro 1.06430 .......... 1.5529 .67984U.S. .......... .9396 1.4591 .63877

58. Referring to Table 11.3, the cross exchange rate between the euro and Swiss franc is approximately:a. .68 euros per francb. .68 francs per euroc. .64 euros per francd. .64 francs per euro

59. Referring to Table 11.3, the yen cost of purchasing 100 British pounds is roughly:a. 18,000 yenb. 19,000 yenc. 20,000 yend. 21,000 yen

Table 11.4. Forward Exchange Rates

U.S. Dollar Equivalent

Wednesday Tuesday

Switzerland (Franc) .6598 .6590 30-day Forward .6592 .6585 90-day Forward .6585 .6578 180-day Forward .6577 .6572

60. Refer to Table 11.4. On Wednesday, the 30-day forward franc was selling at a:a. 1 percent premium per annum against the dollarb. 2 percent premium per annum against the dollarc. 1 percent discount per annum against the dollard. 2 percent discount per annum against the dollar

61. Refer to Table 11.4. On Wednesday, the 90-day forward franc was selling at a:a. 0.8 percent premium per annum against the dollarb. 1.6 percent premium per annum against the dollarc. 0.8 percent discount per annum against the dollard. 1.6 percent discount per annum against the dollar

62. Refer to Table 11.4. On Wednesday, the 180-day forward franc was selling at a:a. 0.6 percent premium per annum against the dollarb. 1.6 percent premium per annum against the dollarc. 0.6 percent discount per annum against the dollard. 1.6 percent discount per annum against the dollar

63. Refer to Table 11.4. Comparing the franc's forward rates against the franc's spot rate, the exchange market's consensus is that over the period of a forward contract, the franc's spot rate will:a. Depreciate against the dollarb. Appreciate against the dollarc. Remain constant against the dollard. None of the above

64. The offer ratea. Is the price at which the bank is willing to sell a unit of foreign currencyb. Is the price that the bank is willing to pay for a unit of foreign currencyc. Is synonymous with the spread rated. None of the above

65. When the dollar depreciatesa. U.S. exporters tend to sell more goods in foreign marketsb. U.S. consumers travel abroad more cheaplyc. More foreign tourists can afford to visit the United Statesd. both a and c

66. When the dollar gets strongera. U.S. firms become more competitive in international marketb. Foreign tourists travel in the U.S. at a higher costc. U.S. inflation increasesd. U.S. consumers face higher prices on foreign goods

TRUE/FALSE

1. Similar to stock and commodity exchanges, the foreign exchange market is an organized structure with a central meeting place and formal licensing requirements.

2. Most foreign exchange transactions are conducted between commercial banks and household customers.

3. Foreign-exchange brokers help commercial banks carry out foreign exchange trading and maintain desired balances of foreign exchange.

4. A person needing foreign exchange immediately would purchase it on the spot market.

5. Most foreign exchange trading is carried out in the forward market.

6. Swap transactions among commercial banks involve the conversion of one currency to another at one point with an agreement to reconvert it back into the original currency at some point in the future.

7. The bid rate refers to the price at which a bank is willing to sell a unit of foreign currency; the offer rate is the price at which a bank is willing to buy a unit of foreign currency.

8. A commercial bank profits from foreign-exchange trading when its bid rate exceeds its offer rate.

9. The "spread" is a bank's profit margin on foreign exchange trading and equals the difference between the bid rate and the offer rate.

10. If Citibank quoted bid and offer rates for the Swiss franc at $.4850/$.4854, the bank would be prepared to buy, say, 1 million francs for $485,000 and sell them for $485,400.

11. If Chase Manhattan Bank quotes bid and offer rates for the Swiss franc at $.5250/$.5260, the bank would realize profits of $1,000 on the purchase and sale of 1 million francs.

12. If a Citibank dealer expects the Swiss franc to appreciate against the U.S. dollar, she will attempt to lower both bid and offer rates for the franc, attempting to persuade other dealers to buy francs from Citibank and dissuade other dealers from selling francs to Citibank.

13. If a Citibank dealer expects the Swiss franc to depreciate in the future, he will lower bid and offer rates for the franc in order to discourage other dealers from selling francs to Citibank and persuade other dealers to buy francs from Citibank.

14. If it takes $0.18544 to purchase 1 French franc, it takes 5.3926 francs to purchase $1.

15. If it takes 113.28 yen to buy $1, it takes $.009624 to buy 1 yen.

16. If it takes $1.5515 to buy 1 pound and $0.6845 to buy 1 franc, it takes 2.27 francs to buy 1 pound.

17. "Futures" currency contracts are issued by commercial banks and are tailored in size to the needs of the exporter or importer, while "forward" currency contracts are issued by the International Monetary Market in standardized round lots.

18. A foreign currency option is an agreement between a holder (corporation) and a writer (commercial bank) giving the holder the right to buy or sell a certain amount of foreign currency at any time through some specified date.

19. A "call" option gives General Motors the right to sell pounds at a specified price, while a put option gives General Motors the right to buy pounds at a specified price.

20. The demand for foreign exchange is derived from credit transactions on the balance of payments.

21. The U.S. demand for pounds is derived from U.S. exports to the United Kingdom, U.K. investments in the United States, and U.K. tourist expenditures in the United States.

22. As the dollar's exchange value appreciates against the pound, U.S. residents tend to import more British goods and thus demand more pounds.

23. As the dollar depreciates against the peso, U.S. residents tend to import more Mexican goods and thus demand more pesos.

24. The supply of francs is derived from the desire of the Swiss to purchase German goods, make investments in Germany, repay debts to German lenders, and extend transfer payments to German residents.

25. The demand schedule for Swiss francs is always downsloping while the supply schedule of francs is always upsloping.

26. The supply schedule of yen has a positive-sloping region which corresponds to the inelastic region on the Japanese demand schedule for foreign currency.

27. The supply schedule of pesos has a negative-sloping region corresponding to the inelastic region on the Mexican demand schedule for foreign currency.

28. If the Swiss demand for dollars is elastic, a depreciation of the dollar against the franc will lead to a greater quantity of francs being supplied to the foreign exchange market to obtain dollars.

29. If the Swiss demand for dollars is inelastic, an appreciation of the dollar against the franc will lead to a greater quantity of francs being supplied to the foreign exchange market to obtain dollars.

30. If the Swiss demand for dollars is elastic, an appreciation of the dollar against the franc will lead to a greater quantity of francs being supplied to the foreign exchange market to obtain dollars.

31. If the Swiss demand for dollars is inelastic, a depreciation of the dollar against the franc will lead to a greater quantity of francs being supplied to the foreign exchange market to obtain dollars.

32. Movements along the demand schedule for pounds are caused by changes in the pound's exchange rate.

33. Given an upward-sloping supply schedule of pounds and a downward-sloping demand schedule for pounds, an increase in the demand schedule causes an appreciation of the dollar against the pound.

34. Given an upward-sloping supply schedule of pounds and a downward-sloping demand schedule for pounds, a decrease in the demand schedule causes an appreciation of the dollar against the pound.

35. Given an upward-sloping supply schedule of pounds and a downward-sloping demand schedule for pounds, an increase in the supply schedule causes an appreciation of the dollar against the pound.

36. Given an upward-sloping supply schedule of pounds and a downward-sloping demand schedule for pounds, a decrease in the supply schedule causes an appreciation of the dollar against the pound.

37. The trade-weighted dollar is the weighted average of the exchange rates between the dollar and the most important industrial-country trading partners of the United States.

38. If the trade-weighted dollar moves from an index value to 100 to 110, the dollar depreciates by 10 percent against the trade-weighted averages of the exchange rates of the major trading partners of the United States.

39. An increase in the trade-weighted value of the dollar indicates a dollar appreciation relative to the currencies of its major trading partners and a worsening of U.S. international competitiveness.

40. With arbitrage, a trader attempts to purchase a foreign currency at a low price and, at a later date, resell the currency at a higher price in order to make a profit.

41. Arbitrage results in a riskless profit since a trader purchases a currency at a low price and simultaneously resells it at a higher price.

42. If the exchange rate is $0.01 per yen in New York and $0.015 per yen in Tokyo, an arbitrager could profit by buying yen in Tokyo and simultaneously sell them in New York.

43. Currency arbitrage tends to result in identical yen/dollar exchange rates in New York and in Tokyo.

44. In the forward market, the exchange rate is agreed on at the time of the currency contract, but payment is not made until the future delivery of the currency actually takes place.

45. If the spot price of the Swiss franc is $0.4020 and the 90-day forward franc sells for $0.4026, the franc is at a 90-day forward discount of $0.0006, or at a 0.2 percent forward discount per annum against the dollar.

46. Suppose that Sears owes 1 million yen to a Japanese electronics manufacturer in 3 months. It could hedge against the risk of a depreciation of the dollar against the yen by contracting to purchase 1 million yen in the forward market, at today's forward rate, for delivery in 3 months.

47. Assume that Boeing anticipates receiving 20 million yen in 3 months from exports of jumbo jets to a Japanese airline. The firm could hedge against the risk of a depreciation of the dollar against the yen by contracting to sell its expected yen proceeds for dollars in the forward market at today's forward rate.

48. A U.S. investor's extra rate of return on an investment in France, as compared to the United States, equals the interest-rate differential adjusted for any change in the dollar/franc exchange rate.

49. A currency speculator's goal is to buy a currency at a low price and immediately resell it at a higher price, thus realizing a riskless profit.

50. Stabilizing speculation reinforces market forces by intensifying an appreciation or a depreciation in a currency's exchange value.

SHORT ANSWER

1. What foreign exchange transactions do banks typically engage in?

2. How is the equilibrium rate of exchange determined?

ESSAY

1. Is it possible to trade foreign exchange in the futures market? How does such trading differ from the forward market?

2. Where are foreign currency options traded?