国际金融Finance_Test_Bank_8

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?

a. If Country A's inflation rate exceeds Country B's inflation rate, Country A's currency will

weaken.

b. If Country A's interest rate exceeds Country B's inflation rate, Country A's currency will

weaken.

c. If Country A's interest rate exceeds Country B's inflation rate, Country A's currency will

strengthen.

d. If Country B's inflation rate exceeds Country A's inflation rate, Country A's currency will

weaken.

ANS: A PTS: 1

2. Given a home country and a foreign country, purchasing power parity (PPP) suggests that:

a. a home currency will depreciate if the current home inflation rate exceeds the current

foreign interest rate.

b. a home currency will appreciate if the current home interest rate exceeds the current

foreign interest rate.

c. a home currency will appreciate if the current home inflation rate exceeds the current

foreign inflation rate.

d. a home currency will depreciate if the current home inflation rate exceeds the current

foreign inflation rate.

ANS: D PTS: 1

3. The international Fisher effect (IFE) suggests that:

a. a home currency will depreciate if the current home interest rate exceeds the current

foreign interest rate.

b. a home currency will appreciate if the current home interest rate exceeds the current

foreign interest rate.

c. a home currency will appreciate if the current home inflation rate exceeds the current

foreign inflation rate.

d. a home currency will depreciate if the current home inflation rate exceeds the current

foreign inflation rate.

ANS: A PTS: 1

4. Because there are a variety of factors in addition to inflation that affect exchange rates, this will:

a. reduce the probability that PPP shall hold.

b. increase the probability that PPP shall hold.

c. increase the probability the IFE will hol

d.

d. B and C

ANS: A PTS: 1

5. Because there are sometimes no substitutes for traded goods, this will:

a. reduce the probability that PPP shall hold.

b. increase the probability that PPP shall hold.

c. increase the probability the IFE will hol

d.

d. B and C

ANS: A PTS: 1

6. According to the IFE, if British interest rates exceed U.S. interest rates:

a. the British pound's value will remain constant.

b. the British pound will depreciate against the dollar.

c. the British inflation rate will decrease.

d. the forward rate of the British pound will contain a premium.

e. today's forward rate of the British pound will equal today's spot rate.

ANS: B PTS: 1

7. Given a home country and a foreign country, the international Fisher effect (IFE) suggests that:

a. the nominal interest rates of both countries are the same.

b. the inflation rates of both countries are the same.

c. the exchange rates of both countries will move in a similar direction against other

currencies.

d. none of the above

ANS: D PTS: 1

8. Given a home country and a foreign country, purchasing power parity suggests that:

a. the inflation rates of both countries will be the same.

b. the nominal interest rates of both countries will be the same.

c. A and B

d. none of the above

ANS: D PTS: 1

9. If interest rates on the euro are consistently below U.S. interest rates, then for the international Fisher

effect (IFE) to hold:

a. the value of the euro would often appreciate against the dollar.

b. the value of the euro would often depreciate against the dollar.

c. the value of the euro would remain constant most of the time.

d. the value of the euro would appreciate in some periods and depreciate in other periods, but

on average have a zero rate of appreciation.

ANS: A PTS: 1

10. If the international Fisher effect (IFE) did not hold based on historical data, then this suggests that:

a. some corporations with excess cash can lock in a guaranteed higher return on future

foreign short-term investments.

b. some corporations with excess cash could have generated profits on average from covered

interest arbitrage.

c. some corporations with excess cash could have generated higher profits on average from

foreign short-term investments than from domestic short-term investments.

d. most corporations that consistently invest in foreign short-term investments would have

generated the same profits (on average) as from domestic short-term investments.

ANS: C PTS: 1

11. Under purchasing power parity, the future spot exchange rate is a function of the initial spot rate in

equilibrium and:

a. the income differential.

b. the forward discount or premium.

c. the inflation differential.

d. none of the above

ANS: C PTS: 1