Question

1. Exchange rates are equalized in different locations due to:

a. arbitrage.

b. government intervention in foreign exchange markets.

c. free trade in goods and services.

d. the actions of importers and exporters.

2. How can one profit through arbitrage if the dollar per euro exchange rate in London is $2 per pound while in New York is $1.95 per pound?

a. Buy dollars in New York and sell them in London

b. Buy pounds in London and sell them in New York

c. Buy pounds in New York and sell them in London

d. Buy dollars in London and sell pounds in New York

3. Under a floating exchange rate system, an increase in the international demand for electronic appliances manufactured in Japan will result in:

a. Deflation in the Japanese economy.

b. An increase in Japan’s trade deficit with other countries.

c. An appreciation of the yen vis-à-vis other currencies.

d. A depletion of international reserves held by the central bank of Japan.

4. If the expected future spot exchange rate value of the foreign currency decreases, with the interest rate differential unchanged, the current spot exchange rate value of the domestic currency:

a. increases.

b. decreases.

c. remains unchanged.

d.overshoots.

5. Which of the following statements is true?

a. If the domestic interest rate rises, there will be international financial repositioning toward domestic-currency assets, thereby causing the domestic currency to appreciate.

b. If the expected future spot exchange rate value of the foreign currency decreases, there will be international financial repositioning toward foreign-currency assets, thereby causing the domestic currency to depreciate.

c. If foreign interest rates increase, the domestic interest rate remaining unchanged, there will be international financial repositioning toward domestic-currency assets and the domestic currency will appreciate.

d. If the expected future spot dollar per euro exchange rate increases, there will be international financial repositioning toward the dollar-denominated assets thereby causing the euro to depreciate.

6. Everything else remaining unchanged, an increase in interest rates in the United States is most likely to result in:

a. depreciation of the dollar.

b. outflows of capital from the United States.

c. capital inflows into the United States.

d. a decrease in the demand for dollar-denominated financial assets.

Answer 1

Ans:

1) Option A

arbitrage

Arbitrage means exploiting profit opportunities arising from difference in prices.It means asset is purchased at low price and sold at high price.Due to arbitration exchange rates are equalized in different locations.

2) Option C

Buy pounds in New York and sell them in London

Arbitrage means exploiting profit opportunities arising from difference in prices.

Price of pound in New York = $1.95

Price of pound in London = $2

Profit from Buying a pound in New York and selling in London = $2 - $1.95

= $0.05