FIN 535 Week 11 Final Exam – Strayer New
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Chapters 8 Through 21
Chapter
8—Relationships among Inflation, Interest Rates, and Exchange Rates
1. Assume
a two-country world: Country A and Country B. Which of the following is correct
about purchasing power parity (PPP) as related to these two countries?
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a.
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If Country A's inflation rate exceeds Country B's
inflation rate, Country A's currency will weaken.
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b.
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If Country A's interest rate exceeds Country B's
inflation rate, Country A's currency will weaken.
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c.
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If Country A's interest rate exceeds Country B's
inflation rate, Country A's currency will strengthen.
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d.
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If Country B's inflation rate exceeds Country A's
inflation rate, Country A's currency will weaken.
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2. Given
a home country and a foreign country, purchasing power parity (PPP) suggests
that:
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a.
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a home currency will depreciate if the current
home inflation rate exceeds the current foreign interest rate.
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b.
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a home currency will appreciate if the current home
interest rate exceeds the current foreign interest rate.
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c.
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a home currency will appreciate if the current
home inflation rate exceeds the current foreign inflation rate.
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d.
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a home currency will depreciate if the current
home inflation rate exceeds the current foreign inflation rate.
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3. The
international Fisher effect (IFE) suggests that:
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a.
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a home currency will depreciate if the current
home interest rate exceeds the current foreign interest rate.
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b.
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a home currency will appreciate if the current
home interest rate exceeds the current foreign interest rate.
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c.
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a home currency will appreciate if the current
home inflation rate exceeds the current foreign inflation rate.
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d.
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a home currency will depreciate if the current
home inflation rate exceeds the current foreign inflation rate.
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4. Because
there are a variety of factors in addition to inflation that affect exchange
rates, this will:
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a.
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reduce the probability that PPP shall hold.
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b.
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increase the probability that PPP shall hold.
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c.
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increase the probability the IFE will hold.
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d.
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B and C
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5. Because
there are sometimes no substitutes for traded goods, this will:
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a.
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reduce the probability that PPP shall hold.
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b.
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increase the probability that PPP shall hold.
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c.
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increase the probability the IFE will hold.
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d.
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B and C
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6. According
to the IFE, if British interest rates exceed U.S. interest rates:
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a.
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the British pound's value will remain constant.
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b.
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the British pound will depreciate against the
dollar.
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c.
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the British inflation rate will decrease.
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d.
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the forward rate of the British pound will contain
a premium.
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e.
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today's forward rate of the British pound will
equal today's spot rate.
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7. Given
a home country and a foreign country, the international Fisher effect (IFE)
suggests that:
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a.
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the nominal interest rates of both countries are
the same.
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b.
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the inflation rates of both countries are the
same.
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c.
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the exchange rates of both countries will move in
a similar direction against other currencies.
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d.
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none of the above
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8. Given
a home country and a foreign country, purchasing power parity suggests that:
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a.
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the inflation rates of both countries will be the
same.
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b.
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the nominal interest rates of both countries will
be the same.
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c.
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A and B
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d.
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none of the above
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9. If
interest rates on the euro are consistently below U.S. interest rates, then for
the international Fisher effect (IFE) to hold:
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a.
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the value of the euro would often appreciate
against the dollar.
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b.
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the value of the euro would often depreciate
against the dollar.
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c.
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the value of the euro would remain constant most
of the time.
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d.
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the value of the euro would appreciate in some
periods and depreciate in other periods, but on average have a zero rate of
appreciation.
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10. If
the international Fisher effect (IFE) did not hold based on historical data,
then this suggests that:
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a.
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some corporations with excess cash can lock in a
guaranteed higher return on future foreign short-term investments.
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b.
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some corporations with excess cash could have
generated profits on average from covered interest arbitrage.
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c.
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some corporations with excess cash could have
generated higher profits on average from foreign short-term investments than
from domestic short-term investments.
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d.
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most corporations that consistently invest in
foreign short-term investments would have generated the same profits (on
average) as from domestic short-term investments.
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11. Under
purchasing power parity, the future spot exchange rate is a function of the
initial spot rate in equilibrium and:
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a.
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the income differential.
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b.
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the forward discount or premium.
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c.
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the inflation differential.
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d.
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none of the above
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12. According
to the international Fisher effect, if U.S. investors expect a 5% rate of
domestic inflation over one year, and a 2% rate of inflation in European
countries that use the euro, and require a 3% real return on investments over
one year, the nominal interest rate on one-year U.S. Treasury securities would
be:
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a.
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2%.
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b.
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3%.
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c.
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−2%.
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d.
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5%.
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e.
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8%.
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13. According
to the international Fisher effect, if investors in all countries require the
same real rate of return, the differential in nominal interest rates between
any two countries:
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a.
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follows their exchange rate movement.
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b.
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is due to their inflation differentials.
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