chapter 8—relationships among inflation, interest rates, and exchange rates quiz.rtf

7/18/2019 Chapter 8Relationships among Inflation, Interest Rates, and Exchange Rates quiz.rtf

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Chapter 8Relationships among Infation, Interest Rates, andExchange Rates

1. Assume a two-country world: Country A and Country B. Which of the following iscorrect about purchasing power parity (PPP as related to these two countries!

a. "f Country A#s in$ation rate e%ceedsCountry B#s in$ation rate& CountryA#s currency will wea'en.

b. "f Country A#s interest rate e%ceedsCountry B#s in$ation rate& CountryA#s currency will wea'en.

c. "f Country A#s interest rate e%ceedsCountry B#s in$ation rate& CountryA#s currency will strengthen.

d. "f Country B#s in$ation rate e%ceedsCountry A#s in$ation rate& CountryA#s currency will wea'en.

A): A P*): 1

+. ,ien a home country and a foreign country& purchasing power parity (PPPsuggests that:a. a home currency will depreciate if

the current home in$ation ratee%ceeds the current foreign interestrate.

b. a home currency will appreciate ifthe current home interest ratee%ceeds the current foreign interestrate.

c. a home currency will appreciate ifthe current home in$ation rate

e%ceeds the current foreign in$ationrate.

d. a home currency will depreciate ifthe current home in$ation ratee%ceeds the current foreign in$ationrate.

A): P*): 1

/. *he international 0isher eect ("02 suggests that:

a. a home currency will depreciate ifthe current home interest rate

e%ceeds the current foreign interestrate.

b. a home currency will appreciate ifthe current home interest ratee%ceeds the current foreign interestrate.

c. a home currency will appreciate ifthe current home in$ation rate


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e%ceeds the current foreign in$ationrate.

d. a home currency will depreciate ifthe current home in$ation ratee%ceeds the current foreign in$ationrate.

A): A P*): 1

3. Because there are a ariety of factors in addition to in$ation that aect e%changerates& this will:a. reduce the probability that PPP shall

hold.b. increase the probability that PPP

shall hold.c. increase the probability the "02 will

hold.d. B and C

A): A P*): 1

4. Because there are sometimes no substitutes for traded goods& this will:a. reduce the probability that PPP shall

hold.

b. increase the probability that PPPshall hold.

c. increase the probability the "02 willhold.

d. B and C

A): A P*): 1

5. According to the "02& if British interest rates e%ceed 6.). interest rates:

a. the British pound#s alue will remainconstant.

b. the British pound will depreciateagainst the dollar.

c. the British in$ation rate willdecrease.

d. the forward rate of the British poundwill contain a premium.

e. today#s forward rate of the Britishpound will e7ual today#s spot rate.

A): B P*): 1

8. ,ien a home country and a foreign country& the international 0isher eect ("02suggests that:a. the nominal interest rates of both

countries are the same.b. the in$ation rates of both countries

are the same.c. the e%change rates of both


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countries will moe in a similardirection against other currencies.

d. none of the aboe

A): P*): 1

9. ,ien a home country and a foreign country& purchasing power parity suggeststhat:a. the in$ation 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 aboe

A): P*): 1

. "f interest rates on the euro are consistently below 6.). interest rates& then for theinternational 0isher eect ("02 to hold:

a. the alue of the euro would oftenappreciate against the dollar.

b. the alue of the euro would oftendepreciate against the dollar.

c. the alue of the euro would remainconstant most of the time.

d. the alue of the euro wouldappreciate in some periods anddepreciate in other periods& but onaerage hae a ;ero rate ofappreciation.

A): A P*): 1

1


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inestments.

A): C P*): 1

11. 6nder purchasing power parity& the future spot e%change rate is a function of theinitial spot rate in e7uilibrium and:a. the income dierential.

b. the forward discount or premium.

c. the in$ation dierential.d. none of the aboe

A): C P*): 1

1+. According to the international 0isher eect& if 6.). inestors e%pect a 4> rate ofdomestic in$ation oer one year& and a +> rate of in$ation in 2uropean countriesthat use the euro& and re7uire a /> real return on inestments oer one year& thenominal interest rate on one-year 6.). *reasury securities would be:

a. +>.

b. />.c. +>.

d. 4>.e. 9>.

A): 2SOLUTION 4> ? /> @ 9>

P*): 1

1/. According to the international 0isher eect& if inestors in all countries re7uire thesame real rate of return& the dierential in nominal interest rates between anytwo countries:

a. follows their e%change rate

moement.b. is due to their in$ation dierentials.

c. is ;ero.d. is constant oer time.

e. C and

A): B P*): 1

13. Assume that 6.). and British inestors re7uire a real return of +>. "f the nominal6.). interest rate is 14>& and the nominal British rate is 1/>& then according tothe "02& the British in$ation rate is e%pected to be about the 6.). in$ationrate& and the British pound is e%pected to .

a. + percentage points aboedepreciate by about +>

b. / percentage points aboedepreciate by about />

c. / percentage points belowappreciate by about />

d. / percentage points belowdepreciate by about />


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e. + percentage points belowappreciate by about +>

A): 2 P*): 1

14. Assume 6.). and )wiss inestors re7uire a real rate of return of />. Assume thenominal 6.). interest rate is 5> and the nominal )wiss rate is 3>. According tothe international 0isher eect& the franc will by about .

a. appreciate />

b. appreciate 1>c. depreciate />

d. depreciate +>

e. appreciate +>

A): 2 P*): 1

15. Assume that the 6.). and Chile nominal interest rates are e7ual. *hen& the 6.).nominal interest rate decreases while the Chilean nominal interest rate remainsstable. According to the international 0isher eect& this implies e%pectations of

than before& and that the Chilean peso should against the dollar.

a. lower 6.). in$ation depreciate

b. lower 6.). in$ation appreciate

c. higher 6.). in$ation depreciated. higher 6.). in$ation appreciate

A): A P*): 1

18. According to the international 0isher eect& if ene;uela has a much highernominal rate than other countries& its in$ation rate will li'ely be than othercountries& and its currency will .

a. lower strengthen

b. lower wea'en

c. higher wea'end. higher strengthen

A): C P*): 1

19. "f interest rate parity holds& then the one-year forward rate of a currency will be the predicted spot rate of the currency in one year according to theinternational 0isher eect.a. greater than

b. less than

c. e7ual tod. answer is dependent on whether the

forward rate has a discount orpremium

A): C P*): 1

1. *he 0isher eect is used to determine the:a. real in$ation rate.

b. real interest rate.

c. real spot rate.


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d. real forward rate.

A): B P*): 1

+


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+3. *he following regression analysis was conducted for the in$ation rate informationand e%change rate of the British pound:

Kegression results indicate that a& while the interest rate in the 6.). is 4>. *hespot rate for the British pound is H1.4 and nominal 6.). interest rates are 5>&then the British pound (M is e%pected to by about >& according to theinternational 0isher eect ("02.

a. depreciate +.


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b. appreciate +.c. depreciate 1.

chapter 8—relationships among inflation, interest rates, and exchange rates quiz.rtf

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