International Economics Practice Questions
Course Introduction
International Economics explores the principles and dynamics governing economic interactions between countries. The course covers key topics such as international trade theories, trade policy, the balance of payments, exchange rates, and the influence of international institutions on global economic relations. Students will analyze how nations benefit from trade, the impact of tariffs and quotas, the functioning of foreign exchange markets, and current issues like globalization, trade agreements, and economic integration. Emphasizing both theoretical frameworks and real-world case studies, the course equips students with the tools to understand and critically evaluate the complexities of the global economic environment.
Recommended Textbook
International Money and Finance 8th Edition by Michael Melvin
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13 Chapters
694 Verified Questions
694 Flashcards
Source URL: https://quizplus.com/study-set/3608
Page 2
Chapter 1: The Foreign Exchange Market
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71 Verified Questions
71 Flashcards
Source URL: https://quizplus.com/quiz/71637
Sample Questions
Q1) The goal of an arbitrage transaction between two currencies is to profit on difference in exchange rates in different markets by taking some risks of exchange rate movements.
A)True
B)False
Answer: False
Q2) In foreign exchange trading,arbitrage has ______ risk and speculation has ________ risk.
A) zero; zero
B) positive; positive
C) zero; positive
D) positive; zero
Answer: C
Q3) In foreign exchange trading,arbitrage activity could lead to ________.
A) risky trading transactions
B) either gain or loss on the trade.
C) only gain on the trade.
D) a and b are correct.
Answer: C
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Page 3
Chapter 2: International Monetary Arrangements
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52 Verified Questions
52 Flashcards
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Sample Questions
Q1) Destabilizing speculation is the process where
A) In a free floating exchange system, speculators cause wide fluctuations to the exchange rate.
B) In a fixed peg exchange system, speculators hold foreign reserves too long and destabilize the peg.
C) In a free floating exchange system, the International Monetary Fund is forced to issue Special Drawing Rights.
D) In a fixed peg exchange system, speculators sell all holdings of Special Drawing Rights.
Answer: A
Q2) The International Monetary Fund was created to assist countries with balance of payment difficulties and monitor an adjustable peg system with the U.S.dollar as the anchor currency.
A)True
B)False
Answer: True
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Chapter 3: The Balance of Payments
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51 Verified Questions
51 Flashcards
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Sample Questions
Q1) The current account shows international transactions that involve currently produced goods and services.
A)True
B)False
Q2) A U.S.resident receives $1,000 in interest from French bonds he owns causes a:
A) Credit to service
B) Debit to service
C) Credit to investment income
D) Debit to investment income
Q3) The net value of flows of goods,services,investment income,and unilateral transfers is called the:
A) Capital account balance
B) Current account balance
C) Merchandise account balance.
D) Official settlements balance.
Q4) In the balance of payments debits are recorded as negative entries and credits are recorded as positive entries.
A)True
B)False
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Chapter 4: Forward-Looking Market Instruments
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44 Verified Questions
44 Flashcards
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Sample Questions
Q1) Which of the following features describe the futures market for foreign exchange?
I.Tailored size contracts
II.Small amount contracts
III.Tailored maturities
IV.Large amount contracts
A) II only
B) IV only
C) I, II, and III
D) I, III, and IV
Q2) The forward exchange swap is a process involving the same amount of three currencies.
A)True
B)False
Q3) The market where commercial banks buy and sell foreign currencies to be delivered at a future date is called the projection currency market.
A)True
B)False
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6
Chapter 6: Exchange Rates, interest Rates, and Interest
Parity
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64 Verified Questions
64 Flashcards
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Sample Questions
Q1) Suppose that the one-year U.S.interest rate is 8% and the one-year Swiss interest rate is 10%.If the current spot rate is $1.50 per Swiss franc,what must the one-year forward rate $/SFr be according to the approximate covered interest parity?
A) $1.47
B) $1.50
C) $1.53
D) $4.50
Q2) When investors hedge themselves from risk using forward contracts,the international investment is considered:
A) Flat
B) Discounted
C) A bargain
D) Covered
Q3) Refer to Figure 6.1.At 3-month maturity,the U.S.dollar sells at a forward ______ and the Korean won sells at a forward _______.
A) discount; discount
B) discount; premium
C) premium; premium
D) premium; discount
7
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Chapter 7: Prices and Exchange Rates: Purchasing Power
Parity
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49 Verified Questions
49 Flashcards
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Sample Questions
Q1) Suppose Russia's inflation rate is 200% over one year but the inflation rate in Switzerland is only 2%.According to relative PPP,
A) the Russian ruble should depreciate against Swiss franc by 198 percent.
B) the Russian ruble should appreciate against Swiss franc by 198 percent.
C) the Russian ruble should depreciate against Swiss franc by 202 percent.
D) the Russian ruble should appreciate against Swiss franc by 202 percent.
Q2) If a currency has appreciated ________ the price differential between two countries as implied by PPP,then a currency is ________.
A) The same as, undervalued
B) The same as, overvalued
C) Less than, overvalued
D) Less than, undervalued
Q3) The equivalence of the percentage change in the exchange rate to the inflation differential between countries is referred to as the:
A) Absolute PPP
B) Relative PPP
C) Interest rate parity
D) None of the above
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Chapter 8: Foreign Exchange Risk and Forecasting
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52 Verified Questions
52 Flashcards
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Sample Questions
Q1) If the foreign exchange market is efficient,the forward exchange rate would differ from the expected future spot exchange rate only by an ________.
A) Strike price
B) Exposure risk
C) Future spot exchange rate
D) Risk premium
Q2) Suppose that the 1-year forward rate of dollar per pound is $1.32,the current spot rate $/pound is $1.20,and the expected future spot rate $/pound is $1.40.The risk premium on the pound is:
A) -6.7%
B) 5.7%
C) 10%
D) 16.7%
Q3) Suppose for two currencies the forward premium is 4% and the expected premium is 8%.Then the risk premium is:
A) -4%
B) -2%
C) 2%
D) 4%
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Page 9
Chapter 9: Financial Management of the Multinational Firm
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50 Verified Questions
50 Flashcards
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Sample Questions
Q1) The sum of the project's initial investment cost,the present values of cash flows,and all financial effects related to the investment is called the adjusted present value.
A)True
B)False
Q2) Because cash earns no interest,firms engage in multinational cash management to use this liquid resource as efficiently as possible.
A)True
B)False
Q3) Multinational cash management is used by the firm to move cash to keep overall cash needs low.
A)True
B)False
Q4) The firm's management style determines whether to decentralize or centralize its financial management between the parent and the foreign subsidiaries.
A)True
B)False
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10
Chapter 10: International Portfolio Investment
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56 Verified Questions
56 Flashcards
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Sample Questions
Q1) Investors often hold ________ to reduce risk associated with investments.
A) Domestic currency contracts
B) Letters of credit
C) Diversified portfolios
D) Forward contracts only
Q2) Portfolio diversification explains the two-way flow of capital between countries.
A)True
B)False
Q3) The surprisingly low level of international assets in investment portfolios reflect investors' decisions to hold undiversified portfolios is known as the home-bias puzzle.
A)True
B)False
Q4) A certificate that represents shares of a foreign stock issued by a U.S.bank is called an:
A) Letter of credit
B) American depository receipt
C) Foreign credit
D) Exchange contract
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Chapter 12: Determinants of the Balance of Trade
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50 Verified Questions
50 Flashcards
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Sample Questions
Q1) If the domestic currency is devalued and both export and import contracts are written in the domestic currency,then the trade balance will:
A) Increase
B) Decrease
C) Stay the same
D) Uncertain
Q2) Assume that foreign demand for U.S.exports is perfectly inelastic.If the dollar is devalued then the total export value in dollars will:
A) Increase
B) Decrease
C) Stay the same
D) Uncertain
Q3) When a country ________,it supplies foreign exchange as payment.
A) Imports
B) Exports
C) Borrows
D) Lends
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Chapter 13: The Is-Lm-Bp Approach
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54 Verified Questions
54 Flashcards
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Sample Questions
Q1) Typically,the IS curve is:
A) Horizontal
B) Vertical
C) Downward-sloping
D) Upward-sloping
Q2) The factor that shifts the BP curve is a change in perception of asset substitutability.
A)True
B)False
Q3) Typically,the LM curve is:
A) Horizontal
B) Vertical
C) Downward-sloping
D) Upward-sloping
Q4) The LM curve represents all the points where money supplied is equal to money demanded.
A)True
B)False
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13
Chapter 14: The Monetary Approach
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53 Verified Questions
53 Flashcards
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Sample Questions
Q1) Assume that China and the U.S.are in a managed floating exchange rate agreement.Suppose that the Fed decreases the money supply by 50%.China's central bank lets the exchange rate partly adjust and also intervenes in foreign exchange market.What would happen to the foreign reserve position for the U.S.and the exchange rate $/yuan?
A) Foreign reserves decrease and exchange rate decreases.
B) Foreign reserves increases and exchange rate increases.
C) Foreign reserves decrease and exchange rate increases.
D) Foreign reserves increase and exchange rate decreases.
Q2) Under the flexible exchange rate regime,which of the following variables in the monetary approach becomes zero and is dropped out of the equation?
A) Percentage change in domestic credit
B) Percentage change in spot exchange rate
C) Percentage change in foreign reserves
D) Percentage change in money demand
Q3) Inflation from one country can be transmitted to another if a floating exchange rate is being used.
A)True
B)False
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Page 14
Chapter 15: Extensions to the Monetary Approach of Exchange Rate Determination
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48 Flashcards
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Sample Questions
Q1) The following example supports which extension to the Monetary Approach to Exchange rates: The chairman of a central bank announces a new monetary policy.Immediately,there is a change in the exchange rate.
A) News approach
B) Trade balance approach
C) Equilibrium approach
D) Overshooting approach
Q2) The Theory of Exchange Rate Overshooting explains high exchange rate volatility by assuming that CIRP does not hold in the short run,but PPP does.
A)True
B)False
Q3) "News approach describes how the equilibrium exchange rate can be achieved when government controls news about market fundamentals,profitability,and riskiness of investments."
A)True
B)False
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