International Monetary Economics
Pre-Test Questions
Course Introduction
International Monetary Economics examines the workings of monetary systems and policies in an open economy context, focusing on exchange rates, balance of payments, international capital flows, and the role of major international financial institutions. The course analyzes how monetary and fiscal policies interact globally, the impact of currency regimes on trade and investment, and the factors influencing financial crises and international policy coordination. Students will develop an understanding of key theoretical frameworks and real-world policy challenges faced by countries in the international monetary system.
Recommended Textbook
International Money and Finance 8th Edition by Michael Melvin
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13 Chapters
694 Verified Questions
694 Flashcards
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Page 2
Chapter 1: The Foreign Exchange Market
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Sample Questions
Q1) Rising income in China triggers an increase demand for U.S.imported goods by Chinese households.This causes ________ Chinese yuan and yuan should_________ against the dollar.
A) an increase in the demand for; appreciate
B) an increase in the demand for; depreciate
C) an increase in the supply of; appreciate
D) an increase in the supply of; depreciate
Answer: D
Q2) If the French demand for American exports rises,then A) the euro should appreciate relative to the dollar.
B) the dollar should depreciate relative to the euro. C) the dollar should appreciate relative to the euro.
D) it is not clear whether the euro should appreciate or depreciate relative to the dollar.
Answer: C
Q3) If the Japanese yen was worth $.005 six months ago and is now worth $.007 today,the yen has appreciated by 40%.
A)True
B)False
Answer: True
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Page 3
Chapter 2: International Monetary Arrangements
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Sample Questions
Q1) Consider the following scenario.The Swiss franc is fixed to the U.S.dollar.Market pressures lead to a move away from the peg.Which of the following can be used to restore the previous peg?
A) The Swiss central bank can use a commodity such as gold to back the previous peg.
B) The Swiss government can lower domestic prices to offset import pressures.
C) Allow the exchange by the market and in the long run the peg will be restored.
D) The Swiss central bank can purchase or sell U.S. dollars.
Answer: D
Q2) What exchange rate system allows for periodic intervention without fixing to any other foreign currency?
A) Free floating
B) Horizontal band
C) Crawling peg
D) Dollarization
Answer: B
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Chapter 3: The Balance of Payments
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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) Which of the following is an example of an outflow in the U.S.capital account?
A) A foreign resident purchases a U.S. made car from a foreign dealer.
B) A U.S. firm gives 90 days for a $1,000,000 note to be paid off by a French importer of U.S. goods.
C) A U.S. firm pays salaries to employees based in Paris.
D) A foreign firm receives a payment for exports from a U.S. firm.
Q3) The difference between the balance on current account and the balance on capital account is:
A) the balance of payment
B) statistical discrepancy
C) the balance of trade
D) official settlements balance
Q4) A trade surplus occurs when the current account is greater than the capital account.
A)True
B)False
Page 5
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Chapter 4: Forward-Looking Market Instruments
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Sample Questions
Q1) The following are benefits of a currency swap except:
A) Swaps avoid dealing with any interest payments.
B) Swaps lower transaction costs of cross-currency cash management.
C) Swaps reduce foreign exchange risk for financing transactions.
D) Swaps allow firms to acquire financing for which it has a comparative advantage.
Q2) Foreign currency options contracts that give the buyer the right to sell are called:
A) Call options.
B) Selling rights.
C) Put options.
D) Strike rights.
Q3) A strike price is the price where:
A) A futures contract reaches maturity.
B) The owner of an options contract can transact.
C) The bank sets as an out-of-bounds in contract negotiations.
D) All currencies are brought to a standardized price.
Q4) Forward-looking market instruments are used to reduce traders' currency risk.
A)True
B)False
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Chapter 6: Exchange Rates, interest Rates, and Interest
Parity
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Sample Questions
Q1) Assume the following: the current spot rate S<sub>¥/$</sub> = 100.0 and the annual interest rates: i<sub>JAPAN</sub> = 2% and i<sub>US</sub> = 10%.According to covered interest parity,if an intern at Citibank sets the one-year forward rate: F<sup>360</sup><sub>¥/$</sub> = 91,then:
A) the intern has correctly set the forward rate.
B) both U.S. and Japan's investment returns are equal.
C) the Japan's investment return exceeds the U.S. investment return
D) the U.S. investment return exceed the Japan's investment return
Q2) Suppose that the one-year U.S.interest rate is 8% and the equivalent one-year U.K.interest rate is 10%.According to the covered interest rate parity,there is a ________ on the U.S dollar.
A) 2% forward discount
B) 2% forward premium
C) 18% forward discount
D) 18% forward premium
Q3) A forward discount occurs when:
A) The forward rate is greater than the spot rate.
B) The spot rate is greater than the forward rate.
C) The forward and spot rates are equal.
D) None of the above.
Page 7
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Chapter 7: Prices and Exchange Rates: Purchasing Power
Parity
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Sample Questions
Q1) A year ago the spot rate of U.S.dollars for Canadian dollars was $1/C$1.Since that time,the rate of inflation in the U.S.has been 4% greater than that in Canada.Based on the theory of Relative PPP,the current spot exchange rate of U.S.dollars for Canadian dollars should be approximately _________ per Canadian dollars.
A) $0.96
B) $1
C) $1.04
D) $4
Q2) Assume that the U.S.has an 8 percent inflation rate while Mexico has a 4 percent inflation rate.According to relative PPP,the dollar would be expected to:
A) Appreciate by 2 percent against the Mexican peso.
B) Depreciate by 2 percent against the Mexican peso.
C) Appreciate by 4 percent against the Mexican peso.
D) Depreciate by 4 percent against the Mexican peso.
Q3) If the inflation rates of two countries are both equal to the percentage change in the exchange rate,then absolute purchasing power parity holds.
A)True
B)False
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Chapter 8: Foreign Exchange Risk and Forecasting
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Sample Questions
Q1) Suppose that the 1-year forward rate of dollar per peso is $11.25,the current spot rate $/peso is $10.00,and the expected future spot rate $/peso is $11.50.The risk premium on the peso is:
A) -2.5%
B) 12.5%
C) 15%
D) 22.75%
Q2) A U.S.firm has a 1 million payment due to a Dutch firm in 90 days.The current spot rate is $1.00 per euro,and the 90-day forward rate is $1.11.Ben forecasts that the spot rate in 90 days will be $0.99.Jerry forecasts that the spot rate will be $1.12 in 90 days.The actual spot rate in 90 days turns out to be $1.10.If the U.S.firm follows Ben's forecast,it would:
A) buy euro in the forward market at$1.11.
B) wait and buy euro 90 days later at $1.10.
C) buy euro now at $1.12 and let it sit in the company's safe.
D) wait and buy euro in the forward market 90 days later at $1.11.
Q3) Information exposure is a type of foreign exchange risk.
A)True
B)False
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Page 9
Chapter 9: Financial Management of the Multinational Firm
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Sample Questions
Q1) Multinational cash management is used by the firm to move cash to keep overall cash needs low.
A)True
B)False
Q2) Transfer pricing has been used by multinational corporation to:
A) Minimize tax payments in foreign countries
B) Minimize import tariffs
C) Minimize foreign exchange controls
D) All of the above are correct.
Q3) A detailed list of the content that is shipped,and can be used to identify missing or damaged items is called an:
A) Adjusted payment
B) Import contract
C) Contract guarantee
D) Bill of lading
Q4) Refer to Table 9.2.Based on the net present value,
A) the project can be accepted because the net present value is positive.
B) the project should be rejected because the net present value is negative.
C) the project can be accepted because the net present value is negative.
D) the project should be rejected because the net present value is positive.
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Chapter 10: International Portfolio Investment
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Sample Questions
Q1) According to the theory of capital flows,there should exist one-way capital flow which will stop when interest rates are:
A) Greater then international average in one country.
B) Low in country receiving capital, but high in the other.
C) Below the international average of interest rates.
D) Exactly the same.
Q2) When an investor prefers a portfolio that is diverse,has a smaller return than an alternative,and has a much smaller variance then the investor must be:
A) Risk seeking
B) Risk loving
C) Risk neutral
D) Risk averse
Q3) When the ________ of two assets is _______,then the two variables move in opposite directions: when one rises the other falls.
A) Covariance, negative
B) Covariance, positive
C) Variability, negative
D) Variability, positive
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Chapter 12: Determinants of the Balance of Trade
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Sample Questions
Q1) Assume that U.S.imports are contracted in foreign currency and the U.S.exports are Contracted in domestic currency.If the dollar is devalued,then the balance of trade will:
A) Become more negative
B) Become more positive
C) Stay the same
D) Not possible to answer with the given information
Q2) Domestic currency devaluation always improves the balance of trade in the short run.
A)True
B)False
Q3) Under the absorption approach,if the economy is below full employment,then it is best to improve the trade balance by:
A) Cutting government spending by eliminating programs
B) Cutting household spending by raising taxes on goods
C) Cutting household income by raising taxes on income
D) Increasing domestic production through devaluation
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Chapter 13: The Is-Lm-Bp Approach
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Sample Questions
Q1) A change in the monetary policy shifts the:
A) IS curve
B) LM curve
C) BP curve
D) None of the above
Q2) With floating exchange rates,a country can use _______ to alter domestic income.
A) Fiscal policy
B) Monetary policy
C) Currency devaluations
D) Currency appreciation
Q3) Under fixed exchange rates,when a central bank increases money supply,it first shifts the LM curve to the ______ and later shifts ______.
A) left; the LM curve to the right.
B) left; the IS curve to the right.
C) right; the LM curve to the left.
D) right; the IS curve to the right.
Q4) The LM curve represents all the points where money supplied is equal to money demanded.
A)True
B)False
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Chapter 14: The Monetary Approach
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Sample Questions
Q1) According to the monetary approach to the balance of payments,which of the following economic events would help a country to resolve its balance of trade deficit?
A) An increase in money supply
B) A decrease in money supply
C) A fall of foreign price level
D) A fall of domestic income
Q2) Assume there is a reduction in U.S.output.Then under MAER there will be an:
A) Increase in domestic money supply
B) Decrease in domestic money supply
C) Increase in the exchange rate dollar/foreign currency
D) Decrease in the exchange rate dollar/foreign currency
Q3) Assume floating exchange rates.Suppose there are a 5% growth in U.S output and the Fed increases in U.S.money supply by 5%.Then,which of the following will offset these changes?
A) 10% increase in exchange rate.
B) 10% decrease in exchange rate.
C) 10% increase in the foreign inflation.
D) The two changes offset each other.
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Chapter 15: Extensions to the Monetary Approach of Exchange Rate Determination
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Sample Questions
Q1) "In the trade balance approach,if people anticipate a country to experience trade deficit in the near future,the expectations will cause the country's currency to appreciate now."
A)True
B)False
Q2) The following example supports which extension to the Monetary Approach to Exchange rates: The announcement of a new trade deal between South Korea and Japan,lead investors to predict that Japan may be a path to a trade deficit.Thus,the Japanese yen saw an immediate decline in value.
A) Portfolio balance approach
B) Trade balance approach
C) News approach
D) Currency substitution approach
Q3) According to the ________,if the cost of holding one currency rises relative to the cost of holding another,then demand will shift to the lower relative cost currency.
A) Overshooting approach
B) Currency substitution approach
C) Portfolio-balance approach
D) Trade balance approach
15
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