International Political Economy
Final Exam Questions
Course Introduction
International Political Economy (IPE) explores the dynamic interplay between politics and economics on a global scale. This course examines how states, markets, and international institutions interact to shape global financial systems, trade relations, development policies, and the distribution of wealth and power. Topics include the evolution of the international monetary system, trade theories and agreements, globalization, economic crises, and the impact of global actors such as multinational corporations, international organizations, and non-governmental institutions. Through a multidisciplinary lens, students learn to analyze contemporary issues like economic inequality, regional integration, and responses to global challenges, gaining insights into the complexities of today's interconnected world.
Recommended Textbook
International Money and Finance 8th Edition by Michael Melvin
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Page 2
Chapter 1: The Foreign Exchange Market
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Sample Questions
Q1) Suppose that you are an arbitrageur that starts with $100 in New York.Which of the following paths is correct in order to make arbitrage profit?
A) Buy pound in New York sell pound for SFr in New York sell SFr for dollar in New York.
B) Buy SFr in New York sell SFr for pound in New York sell pound for dollar in New York.
C) Buy SFr in New York sell SFr for pound in Geneva sell pound for dollar in New York.
D) Buy pound in New York sell pound for SFr in London sell SFr for dollar in New York.
Answer: D
Q2) 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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3
Chapter 2: International Monetary Arrangements
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Sample Questions
Q1) Perfect mobility of factors of production is a requirement for A) Spatially concentrated trade zones
B) Optimal currency areas
C) Commodity money standards
D) Free floating exchange rates
Answer: B
Q2) Which of the following statement is correct?
A) Since 1974, the major industrial countries have operated under a system of fixed exchange rates based on the gold standard.
B) Many developing nations with low inflation rates have pegged their currencies to the U.S. dollar as a way of allowing modest increases in domestic inflation rates.
C) Large industrial nations with diversified economies and small trade sectors have generally pegged their currencies to one of the world's key currencies.
D) Today, fixed exchange rates are used primarily by small, developing countries that tie their currencies to a key currency such as the U.S. dollar.
Answer: D
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Chapter 3: The Balance of Payments
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Sample Questions
Q1) A U.S.resident increasing her holdings of a foreign financial asset causes a:
A) Credit in the U.S. current account
B) Debit in the U.S. current account
C) Credit in the U.S. capital account
D) Debit in the U.S. capital account
Q2) Which of the following is considered as a capital inflow to the U.S.?
A) A sale of U.S. financial assets to a foreign buyer.
B) A loan from U.S. bank to a foreign borrower.
C) A purchase of foreign financial assets by a U.S. buyer.
D) A U.S. company deposits $1 million in a bank account in Switzerland.
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
Page 5
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Chapter 4: Forward-Looking Market Instruments
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Sample Questions
Q1) Foreign currency options contracts that give the buyer the right to buy are called:
A) Call options.
B) Purchase rights.
C) Put options.
D) Strike rights.
Q2) An option contract requires an up-front premium payment.
A)True
B)False
Q3) ________ refers to buying and selling currencies to be delivered at a future date.
A) The currency swap market
B) The forward market
C) The default swap market
D) The options market
Q4) In what market are currency prices sometimes referred to as a strike price?
A) Forward market
B) Swap market
C) Futures market
D) Options market
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Chapter 6: Exchange Rates, interest Rates, and Interest
Parity
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Sample Questions
Q1) Suppose that the covered interest parity holds.If real interest rates are equal in two countries,then:
A) the interest rate differential will equal to expected inflation rate differential.
B) the interest rate differential will equal to the forward premium or discount between two currencies.
C) the expected inflation rate differential will equal to the forward premium or discount between two currencies.
D) All of the above are correct.
Q2) Suppose that the one-year U.S.interest rate is 5% and the equivalent one-year Swiss interest rate is 4%.According to the covered interest rate parity,there is a forward discount on the Swiss franc.
A)True
B)False
Q3) The real interest rate is equal to the nominal interest rate minus the expected rate of inflation.
A)True
B)False
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Page 7
Chapter 7: Prices and Exchange Rates: Purchasing Power
Parity
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Sample Questions
Q1) 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
Q2) ________ tends to hold better.
A) Absolute PPP
B) Relative PPP
C) Covered Interest Rate Parity
D) Big Mac Index
Q3) Which of the following are reasons by the absolute PPP would not hold?
I.Consumer preferences
II.Transaction costs
III.Local taxes
IV.Company discounts
A) II only
B) IV only
C) I, II, and IV
D) I, II, and III
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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 expected premium on the peso is:
A) -2.5%
B) 12.5%
C) 15%
D) 22.75%
Q2) 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
Q3) If the foreign exchange market is efficient,the forward exchange rate would differ from the expected future spot exchange rate only by a risk premium.
A)True
B)False
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Chapter 9: Financial Management of the Multinational Firm
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Sample Questions
Q1) A letter of credit LOC is a contract written by a bank to guarantee that the exporter will pay the importer the amount of money owed.
A)True
B)False
Q2) Refer to Table 9.2.The net present value NPV of this project in U.S.dollar is estimated at:
A) - $0.11million
B) - $1.27 million
C) $2.33 million
D) $1.14 million
Q3) To reduce transfer pricing distortion,multinational firms are supposed to charge prices to their foreign subsidiaries that are __________.
A) Average variable costs
B) Total costs
C) Marginal costs
D) Arm's-length prices
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Chapter 10: International Portfolio Investment
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Sample Questions
Q1) The risk present in all investment opportunities is known as systematic risk.
A)True
B)False
Q2) Capital market segmentation is a financial market imperfection caused mainly by:
A) Government regulations
B) High transactions costs
C) Political risk
D) All of the above contribute to the imperfection in financial markets.
Q3) Rather than directly issuing stock in the U.S.to obtain equity funds,foreign corporations can issue ___________,which are certificates representing underlying bundles of stock.
A) American Depositary Receipts
B) Special Drawing Rights
C) Mortgage backed securities
D) Put option
Q4) Investors often hold ________ to reduce risk associated with investments.
A) Domestic currency contracts
B) Letters of credit
C) Diversified portfolios
D) Forward contracts only
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Chapter 12: Determinants of the Balance of Trade
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Sample Questions
Q1) How must currency contracts be structured for a currency devaluation to have an improvement on the balance of trade?
A) Export contracts in domestic currency and import contracts in foreign currency
B) Export contracts in foreign currency and import contracts in domestic currency
C) Both contracts in domestic currency
D) Both contracts in foreign currency
Q2) Elasticity refers to
A) The ability of the demand curve to shift in and out
B) The degree by which the demand curve includes other markets
C) The responsiveness of quantity to changes in price
D) The rate that quality increases as prices increase
Q3) One way absorption theory can be seen in practice is:
A) The J-Curve
B) Currency contracts
C) Black markets
D) IMF conditionality
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Chapter 13: The Is-Lm-Bp Approach
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Sample Questions
Q1) "An expansionary monetary policy shifts the LM curve to the right and causes the domestic interest rate to rise."
A)True
B)False
Q2) Suppose the central bank increases the money supply.Then:
A) The IS curve shifts right
B) The IS curve shifts left
C) The LM curve shifts right
D) The LM curve shifts left
Q3) When the leakages are ________ the injections,then the value of income received from producing goods and services will equal to total spending.
A) Greater than
B) Less than C) Equal to
D) The sum of
Q4) The internal and external equilibrium occurs when the IS curve crosses the LM curve above the BP curve.
A)True B)False
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Chapter 14: The Monetary Approach
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Sample Questions
Q1) Base money equals to:
A) domestic credit plus domestic bonds
B) domestic credit plus international reserves
C) domestic credit minus international reserves
D) domestic bonds plus foreign bonds
Q2) According to Hume's Specie Flow Mechanism,during the Gold Standard,if the domestic inflation rises sharply,the domestic country will experience ___________ and the foreign trading partner will experience __________.
A) trade deficit; higher prices.
B) trade deficit; lower prices.
C) trade surplus; higher prices.
D) trade surplus; lower prices.
Q3) Suppose that the Fed increases the U.S.money supply and the Bretton Woods system of fixed exchange rates is still in place.Then to maintain the fixed exchange rate,foreign central banks intervene by:
A) Raising the interest rate on dollars.
B) Buying dollars and selling its currency.
C) Raising the interest rate on its currency.
D) Selling dollars and buying its currency.
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Page 14
Chapter 15: Extensions to the Monetary Approach of Exchange Rate Determination
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Sample Questions
Q1) When a high degree of currency substitution exists,to prevent currencies from becoming too variable,countries need international coordination of monetary policy.
A)True
B)False
Q2) According to the ________,the current exchange rate is affected by changes in expectation about future trade flow.
A) Overshooting approach
B) News approach
C) Portfolio-balance approach
D) Trade balance approach
Q3) Assume that in a free country,people in the country can choose to hold assets in any currency.As the domestic inflation rise,the opportunity cost of holding the domestic currency _________ and people will switch to hold assets in _________ currency.
A) increases; foreign
B) increases; domestic
C) decreases; foreign
D) decreases; domestic
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