International Finance
Exam Practice Tests
Course Introduction
International Finance explores the financial dynamics and institutions that operate within the global economic environment. The course delves into topics such as foreign exchange markets, international monetary systems, cross-border investment flows, exchange rate determination, risk management, and international financial policy. Students gain an understanding of how multinational corporations, governments, and financial institutions navigate currency risks, manage international capital flows, and make financial decisions in an increasingly interconnected world. Through case studies and real-world applications, the course equips participants with tools to analyze and address the financial challenges and opportunities presented by globalization.
Recommended Textbook
The Economics of Money Banking and Financial Markets 6th Canadian Edition by Frederic S. Mishkin
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Chapter 1: Why Study Money, Banking, and Financial Markets
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Q1) Stock prices are ________.
A)relatively stable trending upward at a steady pace
B)relatively stable trending downward at a moderate rate
C)extremely volatile
D)unstable trending downward at a moderate rate
Answer: C
Q2) A budget ________ occurs when government expenditures exceed tax revenues for a particular time period.
A)deficit
B)surplus
C)surge
D)surfeit
Answer: A
Q3) The upward and downward movement of aggregate output produced in the economy is referred to as the ________.
A)roller coaster
B)see saw
C)business cycle
D)shock wave
Answer: C
Page 3
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Chapter 2: An Overview of the Financial System
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Q1) Adverse selection is a problem associated with equity and debt contracts arising from ________.
A)the lender's relative lack of information about the borrower's potential returns and risks of his investment activities
B)the lender's inability to legally require sufficient collateral to cover a 100 percent loss if the borrower defaults
C)the borrower's lack of incentive to seek a loan for highly risky investments
D)the borrower's lack of good options for obtaining funds
Answer: A
Q2) A liquid asset is ________.
A)an asset that can easily and quickly be sold to raise cash
B)a share of an ocean resort
C)difficult to resell
D)always sold in an over-the-counter market
Answer: A
Q3) How do regulators help to ensure the soundness of financial intermediaries?
Answer: Regulators restrict who can set up as a financial intermediary, conduct regular examinations, restrict assets, and provide insurance to help ensure the soundness of financial intermediaries.
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Chapter 3: What Is Money
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Q1) Which of the following sequences accurately describes the evolution of the payments system?
A)Barter, coins made of precious metals, paper currency, cheques, electronic funds transfers
B)Barter, coins made of precious metals, cheques, paper currency, electronic funds transfers
C)Barter, cheques, paper currency, coins made of precious metals, electronic funds transfers
D)Barter, cheques, paper currency, electronic funds transfers
Answer: A
Q2) Money is ________.
A)anything that is generally accepted in payment for goods and services or in the repayment of debt
B)a flow of earnings per unit of time
C)the total collection of pieces of property that are a store of value
D)always based on a precious metal like gold or silver
Answer: A
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Chapter 4: Understanding Interest Rates
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Sample Questions
Q1) An increase in the time to the promised future payment ________ the present value of the payment.
A)decreases
B)increases
C)has no effect on
D)is irrelevant to
Q2) A consol paying $20 annually when the interest rate is 5 percent has a price of
A)$100
B)$200
C)$400
D)$800
Q3) The concept of ________ is based on the common-sense notion that a dollar paid to you in the future is less valuable to you than a dollar today.
A)present value
B)future value
C)interest
D)deflation
Q4) Explain why the current bond prices and interest rates are negatively related.
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Chapter 5: The Behaviour of Interest Rates
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Q1) The riskiness of an asset that is unique to the particular asset is ________.
A)systematic risk
B)portfolio risk
C)investment risk
D)nonsystematic risk
Q2) In the Keynesian liquidity preference framework, an increase in the interest rate causes the demand curve for money to ________, everything else held constant.
A)shift right
B)shift left
C)stay where it is
D)invert
Q3) A return to the gold standard, that is, using gold for money will ________ the ________ for gold, ________ its price, everything else held constant.
A)increase; demand; increasing
B)decrease; demand; decreasing
C)increase; supply; increasing
D)decrease; supply; increasing
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Chapter 6: The Risk and Term Structure of Interest Rates
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Q1) When the yield curve is flat or downward-sloping, it suggests that the economy is more likely to enter ________.
A)a recession
B)an expansion
C)a boom time
D)a period of increasing output
Q2) The ________ of the term structure of interest rates states that the interest rate on a long-term bond will equal the average of short-term interest rates that individuals expect to occur over the life of the long-term bond, and investors have no preference for short-term bonds relative to long-term bonds.
A)segmented markets theory
B)expectations theory
C)liquidity premium theory
D)separable markets theory
Q3) What is the shape of the yield curve when short rates are expected to fall in the medium term, and then increase? Demonstrate this graphically.
Q4) Explain the factors that determine the risk structure of interest rates. Explain how a change of each factor changes interest rates.
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Chapter 7: The Stock Market, the Theory of Rational
Expectations, and the Efficient
Market Hypothesis
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Q1) In the Gordon Growth Model, the growth rate is assumed to be ________ the required return on equity.
A)greater than
B)equal to C)less than D)proportional to
Q2) If the optimal forecast of the return on a security exceeds the equilibrium return, then
________.
A)the market is inefficient
B)no unexploited profit opportunities exist
C)the market is in equilibrium
D)the market is myopic
Q3) Dividends are paid from ________.
A)liabilities
B)debts
C)net earnings
D)interest
Q4) Explain the Gordon growth model of stock pricing. Explain how changes in each component affect the current stock price. On what assumptions is the model based?
9
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Chapter 8: An Economic Analysis of Financial Structure
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Q1) The free-rider problem occurs because ________.
A)people who pay for information use it freely
B)people who do not pay for information use it
C)information can never be sold at any price
D)it is never profitable to produce information
Q2) The presence of ________ in financial markets leads to adverse selection and moral hazard problems that interfere with the efficient functioning of financial markets.
A)noncollateralized risk
B)free-riding
C)asymmetric information
D)costly state verification
Q3) Explain the difference between net worth and collateral.
Q4) One reason China has been able to grow so rapidly even though its financial development is still in its early stages is ________.
A)the high savings rate of around 40 percent
B)the shift of labor to the agricultural sector
C)the stringent enforcement of financial contracts
D)the ease of obtaining high-quality information about creditors
Q5) Explain the principal-agent problem as it pertains to equity contracts.
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Chapter 9: Financial Crises
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Q1) Explain the reasoning behind the recommendation that capital requirements be pro-cyclical.
Q2) Which investment bank filed for bankruptcy on September 15, 2008 making it the largest bankruptcy filing in U.S. history?
A)Lehman Brothers
B)Merrill Lynch
C)Bear Stearns
D)Goldman Sachs
Q3) During the ABCP saga, The Bank of Canada ________.
A)shut down all non-bank sponsored conduits
B)refused to accept ABCPs as collateral for loans to banks
C)provided liquidity as a lender to the market
D)was bailed out by the CDIC
Q4) The too-big-to-fail problem is a ________ problem.
A)economic
B)regulatory
C)moral hazard
D)adverse selection
Q5) What triggered the 2007-2008 financial crises ?
Q6) Describe the rising phase of the leverage cycle.
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Chapter 10: Economic Analysis of Financial Regulation
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Sample Questions
Q1) To prevent bank runs and the consequent bank failures, the Canada established the ________ to provide deposit insurance.
A)CDIC
B)OSC
C)Bank of Canada
D)ATM
Q2) The chartering process is especially designed to deal with the ________ problem, and regular bank examinations help to reduce the ________ problem.
A)adverse selection; adverse selection
B)adverse selection; moral hazard
C)moral hazard; adverse selection
D)moral hazard; moral hazard
Q3) In the early stages of the 1980s banking crisis, financial institutions were especially harmed by ________.
A)declining interest rates from late 1979 until 1981
B)the severe recession in 1981-82
C)the disinflation from mid 1980 to early 1983
D)the increase in energy prices in the early '80s
Q4) What are the three pillars that Basel 2 is based on?
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Chapter 11: Banking Industry: Structure and Competition
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Q1) The business term for economies of scope is ________.
A)economies of scale
B)diversification
C)cooperation
D)synergies
Q2) During the 1970s and early 1980s, most of the sovereign lending was ________ leading to ________ consequences.
A)unregulated; near disastrous
B)regulated; near disastrous
C)illegal; serious legal
D)regulated; serious legal
Q3) A debit card differs from a credit card in that ________.
A)a debit card is a loan while for a credit card purchase, payment is made immediately
B)a debit card is a long-term loan while a credit card is a short-term loan
C)a credit card is a loan while for a debit card purchase, payment is made immediately
D)a credit card is a long-term loan while a debit card is a short-term loan
Q4) What are the adjustable-rate mortgages?
Q5) Explain how the dual banking system arose in the United States.
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Chapter 12: Banking and the Management of Financial Institutions
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Q1) Assuming that the average duration of its assets is four years, while the average duration of its liabilities is three years, then a 5 percentage point increase in interest rates will cause the net worth of First National to ________ by ________ of the total original asset value.
A)decline; 5 percent
B)decline; 10 percent
C)decline; 15 percent
D)increase; 20 percent
Q2) A bank will want to hold more excess reserves (everything else equal)when
A)it expects to have deposit inflows in the near future
B)brokerage commissions on selling bonds increase
C)the cost of selling loans falls
D)the discount rate decreases
Q3) Which of the following statements is true?
A)Chequable deposits are payable on demand.
B)Chequable deposits do not include notice deposits.
C)Chequable deposits are the primary source of bank funds.
D)Chequable deposits are chequable deposits that pay interest.
Q4) What is a loan sale and how does it work?
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Chapter 13: Risk Management With Financial Derivatives
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Q1) What are options? What are their differences from futures contracts?
Q2) If you buy in April a stock index future contract on the S&P 500 index at the price of 800 points that matures on June 30 of the same year and on the maturity date the S&P 500 Index is at 795, you have a ________ of $________.
A)loss; 1250
B)loss; 5
C)profit; 1250
D)profit; 5
Q3) ________ derivatives offer payoffs on previously issued securities, but ones that bear credit risk.
A)Credit
B)Bond
C)Note
D)Stock
Q4) Intermediaries are active in the swap markets because ________.
A)they increase liquidity
B)they increase default risk
C)they increase search cost
D)they do not need counterparties
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Chapter 14: Central Banks and the Bank of Canada
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Q1) The theory of bureaucratic behavior suggests that a consumer's behaviour is motivated by the ________.
A)maximization of personal welfare
B)maximization social welfare
C)minimization of government intervention
D)minimization political pressure
Q2) Treasury bills are a responsibility of ________.
A)the Bank of Canada
B)Canada Investment and Savings
C)Ministry of the Treasury
D)the federal government
Q3) The Bank of Canada enjoys ________.
A)instrument independence
B)political dependence
C)goal independence
D)A and C only.
Q4) Describe the structure of the Bank of Canada.
Q5) Describe the function and structure of the board of governors of the federal reserve system.
Q6) What are the main functions of the Bank of Canada? Describe them briefly.
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Chapter 15: The Money Supply Process
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Q1) The two most important categories of assets on the Bank's balance sheet are ________ and ________ because they earn interest.
A)advances to banks; coins
B)securities; advances to banks
C)gold; coins
D)cash items in the process of collection; SDR certificate accounts
Q2) Explain two reasons why the Bank of Canada does not have complete control over the level of bank deposits and loans. Explain how a change in either factor affects the deposit expansion process.
Q3) When the monetary base is equal to $200 billion, the desired reserve ratio is 0.10 and the currency ratio is equal to 0.20, the money supply is equal to ________.
A)$800 billion
B)$600 billion
C)$500 billion
D)$300 billion
Q4) Explain what happens to the money multiplier and the money supply when depositor behaviour causes c to increase with all other variables remaining the same.
Q5) How changes in the nonborrowed monetary base affect the money supply?
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Chapter 16: Tools of Monetary Policy
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Q1) The interest rate on loans of reserves from one bank to another is ________.
A)the bank rate
B)the fed funds rate
C)the discount rate
D)the overnight rate
Q2) Sale and Repurchase Agreements ________.
A)relieve undesired upward pressure on the overnight interest rate
B)alleviate undesired downward pressure on the overnight financing rate
C)relieve undesired downward pressure on the overnight interest rate
D)alleviate undesired volatility in the overnight financing rate
Q3) If the Bank of Canada wants to temporarily inject reserves in the banking system, it will engage in ________.
A)a repurchase agreement
B)a "swap" transaction
C)a reverse repurchase agreement
D)None of the above.
Q4) What is the function of the ACSS?
Q5) What are the advantages of SPRAs and SRAs?
Q6) What are the advantages and disadvantages of the Bank's lending policy?
Q7) Explain why the bank rate is an upper limit for the overnight rate.
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Chapter 17: The Conduct of Monetary Policy: Strategy and Tactics
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Q1) Inflation targeting has the potential to reduce the likelihood that the central bank will fall into the time-inconsistency trap of trying to ________ output and employment in the short run by pursuing overly ________ monetary policy.
A)lower; tight B)expand; expansionary C)lower; expansionary D)expand; tight
Q2) Price stability is often the primary goal of central banks. Describe the five other goals of monetary policy
Q3) According to the Taylor rule, the overnight interest rate should be set at ________.
A) + i - 0.5( - *) - 0.5(y - y)
B) - i - 0.5( - *) - 0.5(y - y)
C)r +
D)r -
E)none of the above
Q4) What are some of the costs of cleaning up after a financial crisis?
Q5) Explain and demonstrate graphically how targeting the overnight rate can result in fluctuations in nonborrowed reserves.
Page 19
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Chapter 18: The Foreign Exchange Market
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Q1) The ________ states that exchange rates between any two currencies will adjust to reflect changes in the price levels of the two countries.
A)theory of purchasing power parity
B)law of one price
C)theory of money neutrality
D)quantity theory of money
Q2) If the dollar depreciates relative to the Swiss franc, ________.
A)Swiss chocolate will become cheaper in Canada
B)American computers will become more expensive in Switzerland
C)Swiss chocolate will become more expensive in Canada
D)Swiss computers will become cheaper in Canada
Q3) Everything else held constant, when a country's currency depreciates, its goods abroad become ________ expensive while foreign goods in that country become ________ expensive.
A)more; less
B)more; more
C)less; less
D)less; more
Q4) Explain how productivity affects exchange rates in the long-run
Q5) Explain how trade barriers affect the exchange rates in the long-run.
Page 20
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Chapter 19: The International Financial System
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Q1) Under the Bretton Woods system, the IMF could encourage ________ countries to pursue ________ monetary policies that would strengthen their currency or eliminate their balance of payment deficits.
A)surplus; expansionary
B)surplus; contractionary
C)deficit; expansionary
D)deficit; contractionary
Q2) Under the Bretton Woods system, a country running a balance of payments surplus ________ international reserves, and had to implement ________ monetary policy to weaken its currency.
A)lost; expansionary
B)lost; contractionary
C)gained; expansionary
D)gained; contractionary
Q3) How would the Bank of Canada operate in a fixed exchange rate regime when the dollar is overvalued and undervalued? What are the effects on international reserves?
Q4) Explain what is the unsterilized foreign exchange intervention.
Q5) Explain what is the sterilized foreign exchange intervention. Give an example.
Q6) What is the gold standard? What are the pros and cons of this system?
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Chapter 20: Quantity Theory, Inflation, and the Demand for Money
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Q1) The quantity theory of money is a theory of how ________.
A)the money supply is determined
B)interest rates are determined
C)the nominal value of aggregate income is determined
D)the real value of aggregate income is determined
Q2) In the liquidity trap, monetary policy ________.
A)has a large impact on interest rates
B)has a small impact on interest rates
C)has no impact on interest rates
D)has a proportionate impact on interest rates
Q3) The speculative motive for holding money is closely tied to what function of money?
A)Store of wealth
B)Unit of account
C)Medium of exchange
D)Standard of deferred payment
Q4) Explain the transactions motive for holding money in Keynes's liquidity preference theory.
Q5) Explain the precautionary motive for holding money in Keynes's liquidity preference theory.
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Chapter 21: The Is Curve
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Q1) A decrease in investment spending because companies become more pessimistic about investment profitability causes the aggregate demand function to shift ________, the equilibrium level of aggregate output to fall, and the IS curve to shift to the ________, everything else held constant.
A)up; left
B)up; right
C)down; left
D)down; right
Q2) Using the information in situation 20-2, if government spending increases by $100, then the equilibrium aggregate output will change by ________.
A)-$1000
B)-$100
C)$100
D)$1000
Q3) Define the IS curve.
Q4) What types of investment exist according to Keynes's theory of the determination of aggregate output? what is a major difference between the two according to Keynes?
Q5) What do economists mean by the word "investment"?
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Chapter 22: The Monetary Policy and Aggregate Demand
Curves
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Q1) In the money market, a condition of excess supply of money can be eliminated by a ________ in aggregate output or a ________ in the interest rate, everything else held constant.
A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall
Q2) A rise in autonomous planned investment spending causes the equilibrium level of aggregate output to ________ and shifts the ________ curve to the ________, everything else held constant.
A)rise; MP; right
B)rise; IS; right
C)fall; IS; left
D)fall; MP; left
Q3) Tightening monetary policy refers to ________.
A)higher real interest rates
B)higher nominal interest rates
C)lower real interest rates
D)lower nominal interest rates
Q4) Describe how the Bank of Canada would apply the Taylor principle.
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Chapter 23: Aggregate Demand and Supply Analysis
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Q1) Everything else held constant, when actual output exceeds the natural rate of output ________ aggregate supply ________.
A)short-run; decreases
B)short-run; increases
C)long-run; increases
D)long-run; decreases
Q2) Suppose the Canadian economy is producing at the natural rate of output. A depreciation of the Canadian dollar will cause ________ in real GDP in the short run and ________ in the inflation rate in the long run, everything else held constant. (Assume the depreciation causes no effects in the supply side of the economy.)
A)an increase; an increase
B)a decrease; a decrease
C)no change; an increase
D)no change; a decrease
Q3) Everything else held constant, aggregate demand increases when ________.
A)net exports decrease
B)taxes increase
C)planned investment spending increases
D)the money supply decreases
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Chapter 24: Monetary Policy Theory
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Q1) In the new classical model, an anticipated policy of a continually increasing money supply causes ________.
A)the aggregate demand curve to shift right along a stationary aggregate supply curve, leading to continually increasing aggregate output and prices
B)the aggregate supply curve to shift left along a stationary aggregate demand curve, leading to continually contracting aggregate output and prices
C)the aggregate demand curve to shift continually to the right while simultaneously the aggregate supply curve shifts continually inward, leading to higher and higher price levels
D)the aggregate demand curve to shift continually to the left while simultaneously the aggregate supply curve shifts continually outward, leading to higher and higher price levels
Q2) Demonstrate graphically and explain the short-run and long-run effects of an unanticipated monetary expansion in the new classical model.
Q3) Demonstrate graphically and explain the short-run and long-run effects of an anticipated monetary expansion in the new classical model.
Q4) What three forms does non-conventional monetary policy take?
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Chapter 25: The Role of Expectations in Monetary Policy
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Q1) When expectations of inflation are formed rationally, an anti-inflationary policy will be more successful if it is ________.
A)credible
B)a surprise
C)unanticipated
D)announced
Q2) A negative aggregate demand shock will only impact ________.
A)the equilibrium interest rate
B)the equilibrium inflation rate
C)the short run aggregate supply curve
D)none of the above
Q3) A positive aggregate demand shock will only impact ________.
A)the equilibrium output
B)the equilibrium inflation rate
C)the short run aggregate supply curve
D)none of the above
Q4) Explain the difference in how the Canadian economy responding during the three oil shocks and the role monetary policy credibility played.
Q5) Describe how a nominal anchor can help a central bank achieve credibility.
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Chapter 26: Transmission Mechanisms of Monetary Policy
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Q1) By the standard of low-grade bonds, interest rates were ________ and monetary policy was ________ during the Great Depression.
A)low; tight
B)low; easy
C)high; tight
D)high; easy
Q2) What do you know about the reduced-form evidence in describing the transmission mechanism of monetary policy? provide a brief description.
Q3) The early Keynesians of the 1950s and early 1960s believed that ________.
A)monetary policy does not matter at all
B)fiscal policy matters
C)monetary policy does matter
D)A and B only
Q4) What is the statistical evidence of early monetarists on the importance of money?
Q5) Explain what we call structural model evidence in describing the transmission mechanism of monetary policy.
Q6) What structural evidence lead early Keynesians to believe that monetary policy does not matter?
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Chapter 27: Financial Crises in Emerging Markets
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Q1) The key factor leading to the financial crises in Mexico and the East Asian countries was ________.
A)severe fiscal imbalances
B)a deterioration in banks' balance sheets because of increasing loan losses
C)a sharp increase in the stock market
D)a sharp decline in interest rates
Q2) Factors that led to worsening conditions in Mexico's 1994-1995 financial markets included ________.
A)fall in interest rates abroad
B)a large increase in lending
C)decreases in the price level
D)strong supervision by bank regulators
Q3) Factors that led to worsening conditions in Mexico's 1994-1995 financial markets, but did not lead to worsening financial market conditions in East Asia in 1997-1998 include
A)rise in interest rates abroad
B)bankers' lack of expertise in screening and monitoring borrowers
C)deterioration of banks' balance sheets because of increasing loan losses
D)stock market decline
Q4) What is a currency mismatch and why does it create risks?
Page 29
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Chapter 28: The ISLM Model
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Sample Questions
Q1) Aggregate output and the interest rate are ________ related to government spending and are ________ related to taxes.
A)positively; positively
B)positively; negatively
C)negatively; positively
D)negatively; negatively
Q2) If the economy is on the IS curve, but is to the left of the LM curve, aggregate output will ________ and the interest rate will ________.
A)rise; rise
B)rise; fall
C)fall; rise
D)fall; fall
Q3) If the economy is characterized by a stable IS curve and an unstable LM curve, then ________ target produces ________ fluctuations in aggregate output.
A)an interest rate; larger
B)a money supply; smaller
C)a money supply; larger
D)an exchange rate; smaller
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Chapter 29: Non-Bank Finance
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Sample Questions
Q1) An insurance management tool to discourage policyholders from engaging in risky activities that make an insurance claim more likely is known as a/an ________.
A)screening
B)restrictive provision
C)deductible
D)coinsurance
Q2) The financial intermediation process of ________ can be described by saying that they borrow in large amounts but often lend in small amounts.
A)pension funds
B)investment banks
C)finance companies
D)credit unions
Q3) Which of the following is an example of temporary life insurance?
A)The policy holder can borrow against the cash value.
B)It provides an annuity until death.
C)The premium is constant through the life of the policy.
D)The premium is matched every year to the amount needed to match against death.
Q4) Discuss what RRSPs are and how they help to provide income at retirement.
Q5) How do sovereign wealth funds raise national security issues?
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