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ECONOMICS 461

Test 1

Fall Quarter 2014

Prof. Giorgio Canarella

The test is due Saturday November 1, 2014

1. A country can make 100 machines and produce 50 tons of wheat per week or make 20 machines andproduce 150 tons of wheat per week. These outcomes represent part of the countrysA) gains from international trade.B) redistributive effects of international trade.C) production possibilities curve.

D) consumption desirability curve.E) absolute advantage in international trade.

2. A country can produce 400,000 machine parts per week and produce 600,000 board feet of lumber. Ifthe country could also produce 300,000 machine parts and 750,000 board feet of lumber per weekthen the average opportunity cost of 1 board foot of lumber is

A) 2/3 of one machine part.B) 1.5 machine parts.C) 2.5 machine parts.D) 2 machine parts.E) 1/2 of one machine part.

3. Generally speaking, as a country transfers more and more resources to the production of one good orservice theA) absolute advantage of producing that good or service declines.B) production possibilities curve shifts outward.C) comparative advantage of producing that good or service rises.

D) opportunity cost of producing that good or service rises.E) total cost of producing that good or service falls.

4. Everything else equal, as a country transfers more and more resources to the production of one goodor service theA) absolute advantage of producing that good or service declines.B) production possibilities curve shifts inward.C) comparative advantage of producing that good or service falls.

D) opportunity cost of producing that good or service falls.E) total cost of producing that good or service falls.

5. The production possibilities curve is __________ because as more of a countrys resources are usedto produce a good or service the opportunity cost to produce that good or service usually __________.A) convex; risesB) convex; fallsC) concave; rises

D) concave; fallsE) exponential; stays the same

6. If there is no international trade then a nations consumption possibilities curve is __________ itsproduction possibilities curve.A) the same asB) less thanC) greater thanD) flatter than

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E) steeper than7. A country that can produce more of a good or service than another country, or produce it at lower cost

than another country is said to have __________ over the other country.A) a comparative advantageB) a redistributive advantageC) an international trade

D) an opportunity cost advantageE) an absolute advantage

8. Consider the following monthly production possibilities for two countries per 100 workers:

Country A Country B

Product Labor Output Labor Output

Food 100 workers 60 tons 100 workers 50 tons

Equipment 100 workers 100 units 100 workers 120 units

By specializing and trading, total global output in food can be increased __________ and total globaloutput in machines can be increased __________ per 100 workers.

A) 10 tons; 20 units

B) 20 tons; 10 unitsC) 40 tons; 20 unitsD) 20 tons; 40 unitsE) 30 tons; 30 units

9. Consider the following monthly production possibilities for two countries per 100 workers:

Country A Country B

Product Labor Output Labor Output

Food 100 workers 500 tons 100 workers 600 tons

Equipment 100 workers 200 units 100 workers 120 units

To maximize total global output Country A should produce __________ and Country B shouldproduce __________.A) only food; only equipmentB) slightly more food; slightly more equipmentC) slightly less food; slightly less equipment

D) only equipment; only foodE) only equipment; only equipment

10. International trade allows countries to specialize in the production of goods and services in whichthey have an absolute advantage. This can lead toA) big countries exploiting small countries which lack these advantages.B) an increase in total global output.C) more efficient allocation of a countrys scarce resourcesD) both A) and B)

E) both B) and C)11. If Country D has an absolute advantage over Country E in the production of all goods and services

thenA) Country D may gain from international trade with Country E but Country E cannot gain.B) Country E may gain from international trade with Country D but Country D cannot gain.C) neither country can gain from international trade with each other.

D) both countries may still be able to gain from international trade with each other.E) Country D must have a comparative advantage over Country E for all goods and services.

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12. If Country D has an absolute advantage over Country E in the production of all goods and servicesthen the production possibilities curve for Country D __________ the production possibilities curvefor Country E.A) intersects

B) is greater at all points thanC) equal to

D) bisectsE) is less at all points than

13. The ability of a nation to produce an additional unit of a good or service at a lower opportunity costthan another nation is referred to asA) marginal cost.B) marginal revenue.C) absolute advantage.D) redistributive advantage.

E) none of the above14. You can buy either 3 candy bars or 2 snack cakes. The opportunity cost of a snack cake is:

A) 2/3 of a candy barB) 5 candy bars

C) 1.5 candy barsD) 1 candy barE) indeterminate without knowing the price of each

15. __________ is more useful in explaining modern international trading patterns than __________.A) Relative advantage; comparative advantageB) Absolute advantage; comparative advantage

C) Comparative advantage; absolute advantageD) Absolute advantage; relative advantageE) Total cost; opportunity cost

16. Residents of Ireland decide it is cheaper to import 100,000 more bushels of wheat from Canada thanit is to reallocate domestic land to wheat production. In this case,

A) the opportunity cost of wheat must be lower in Canada than in Ireland.

B) Canada must have an absolute advantage in wheat production over Ireland.C) Ireland must have an absolute advantage over Canada in goods and services other than wheat.D) Ireland has a comparative advantage in wheat production.E) no conclusion can be drawn about comparative advantage of wheat in Ireland and Canada.

17. As a nation dedicates an increasing amount of its resources to the production of one good or service,the opportunity cost to produce that good or service normally

A) rises.B) falls.C) stays the same.D) falls at first, then rises.E) rises at first, then falls.

18. A country experiences large increases in labor costs and stable capital costs. Everything else equal,

labor intensive industries will have their comparative advantage __________ and the countrysoverall absolute advantage will __________.A) reduced; stay the same

B) reduced; decline

C) increased; stay the sameD) increased; declineE) unchanged; stay the same

19. Improvements in technology will generallyA) increase opportunity costs

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B) shift the production possibilities curve outwardC) shift the consumption possibilities curve inwardD) reduce international trade

20. At current levels of production Country D has a comparative advantage in food production over therest of the world. Similarly, Country E currently has a comparative advantage in heavy equipmentproduction over the rest of the world. Neither engages in international trade. If both countries wish

to maximize their consumption possibilities then which of the following is/are correct?A) Country D should specialize and produce only food and trade with Country E.B) Country E should specialize and produce only heavy equipment and trade with Country D.

C) Country E may be able to benefit by exporting some equipment to Country D in exchange

for food imports from Country D.D) Both A) and B) are correct.E) None of the above is correct.

21. Consider the following table of the value of labor inputs required for two countries to produceidentical quantities of the three goods:

Textiles Food Equipment

Malaysia 3 4 9

India 2 6 6

Malaysia can benefit by exporting which good(s) to India?A) textilesB) textiles and equipment

C) foodD) textiles, food and equipmentE) none

22. When a large country institutes a tariff,

I. domestic consumer surplus is reduced.II. domestic producer surplus and government tariff revenues are increased.

III. foreign producer surplus is increased.IV. deadweight losses occur in the exporting and the importing country.

A) I and II onlyB) I and III onlyC) II and III only

D) I, II and IV onlyE) I, II, III and IV

23. Consider the following table of the value of labor inputs required for two countries to produceidentical quantities of the two goods:

Wool Leather

Australia 4 3Britain 4 8

Britain could be made better of by importing __________ and Australia can be made better off byimporting __________.A) wool; leatherB) leather; neither goodC) leather; wool

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D) neither good; woolE) wool; neither good

24. A U.S. tourist traveling in Europe spends money on a hotel room and food in Paris. Thesetransactions result in a __________ to the __________ category of the U.S. balance of payments.A) debit; goodsB) credit; goods

C) debit; servicesD) credit; servicesE) credit; income

25. In the U.S. balance of payments accounts U.S. firms importing goods results in a __________ andU.S. residents purchasing foreign stocks and bonds results in a __________.A) debit; creditB) credit; debitC) credit; credit

D) debit; debit26. A German resident buys a long term U.S. Treasury bond and receives coupon interest in the same

year. The purchase price of the Treasury bond is recorded in the German __________ account andthe income is recorded in the German __________ account.

A) capital; currentB) capital; capitalC) current; capitalD) current; official settlementsE) official settlements; capital

27. A Swiss resident buys a long term U.S. Treasury bond and receives coupon interest in the same year.The purchase of the Treasury bond is a __________ in the Swiss balance of payments and the incomereceived is a __________.A) debit; debitB) credit; credit

C) debit; credit

D) credit; debit

28. Suppose that in a given month U.S. residents buy $16 million of foreign stocks and bonds, at thesame time foreigners buy $25 million of U.S. stocks and bonds and the official settlement accountincreases $10 million. The net effect of these three sets of transactions is toA) increase the capital account by $51 million.B) decrease the capital account by $41 million.

C) increase the capital account by $19 million.

D) decrease the capital account by $1 million.E) none of the above

29. Changes in the financial assets and deposits of government agencies are recorded in theA) current account.B) services account.C) capital account.

D) official settlements account.E) income account.

30. A country imports $800 million worth of goods and services and exports $600 million. The countrysprivate agents purchase $200 million of foreign assets and foreigners buy $300 million of domesticassets. If the statistical discrepancy is$100 million, what must be the net official settlementsbalance if there are no other transactions?A) $400 million credit

B) $200 million creditC) $300 million debit

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D) $200 million debitE) $400 million debit

31. A country has a current account surplus of $300 million and a capital account deficit of $400 million.If the statistical discrepancy is zero this situation must result inA) a balances of payment deficit.B) a positive official settlements balance.

C) a negative official settlements balance.D) both A) and B)E) both A) and C)

32. The current account includes which of the following categories?

I. goodsII. servicesIII. incomeIV. unilateral transfers

A) I and II onlyB) I and III only

C) II and IV onlyD) I, II and IV onlyE) I, II, III and IV

33. A capital account surplus implies that a countrys domestic residentsA) purchased more foreign assets than foreigners purchased domestic assets.

B) purchased less foreign assets than foreigners purchased domestic assets.

C) imported more goods and services than they exported.D) exported more goods and services than they imported.E) received more income from foreign asset holdings than foreigners received on their domestic

asset holdings.Table 1, Balance of Payment Data

Hypothetical U.S. BOP DataBill $ Bill $

Exports of merchandise $125 Imports of merchandise $120Exports of services $ 55 Imports of services $ 45U.S. foreign aid payments to

Afghanistan$ 10

Income received from domesticholdings of foreign assets

$ 11

Statistical discrepancy Foreign purchases of U.S. assets $ 25Official Settlements Balance $ 5 U.S. purchases of foreign assets $ 55Income paid to foreigners on their

domestic asset holdings$ 9

34. Refer to Table 1 to answer the following question: The current account must be equal to a

A) $27 billion surplus.B) $17 billion surplus.C) $15 billion surplus.D) $27 billion deficit.E) $17 billion deficit.

35. Refer to Table 1 to answer the following question: The capital account must be equal to aA) $28 billion deficit.

B) $30 billion deficit.C) $28 billion surplus.

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D) $18 billion surplus.E) $30 billion surplus.

36. Refer to Table 1 to answer the following question: The statistical discrepancy must be equal to________ billion.A) +$3B) $3

C) $0D) +$2

E) $237. Which one of the following does not belong in the current account?

A) humanitarian foreign aid paymentsB) income earned on foreign assets

C) purchases of domestic financial assets by foreignersD) payments for military services abroadE) exports and imports of services

38. The foreign exchange market is a market for the exchange of

A) currency.B) goods.

C) services.D) income streams.E) none of the above

39. The U.S. had a capital account surplus in 2001. This means that the U.S.

A) either net sold assets to foreigners and/or net increased its indebtedness to foreigners.B) exported more than goods than services.C) exported more goods and services than it imported.D) imported more goods and services than it exported.E) must have had a positive official settlements balance.

40. The bulk of foreign exchange trading activity isA) hard currency transfers across borders.B) due to tourism, travel and illegal activities.

C) in the forward market.D) done with currency futures.E) electronic or phone originated trades of foreign currency denominated financial

instruments.

41. Citigroup has a 10 million deposit in the U.K. that they wish to convert to Swiss francs (Sfr). UBSis willing to switch the pounds to francs at a rate of 2.32 Sfrs per pound. Deutsche Bank will accept0.43 per franc. Based on these quotes, what is the greatest amount of francs that Citigroup can getfor its 10 million?

A) 23,255,813

B) 23,200,000C) 4,310,345D) 25,433,336

E) 4,300,00042. Rank the following foreign exchange participants from largest to smallest in trading activity:

I. banksII. foreign exchange trading websitesIII. foreign exchange brokers

A) I, II, III

B) I, III, IIC) II, III, I

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D) III, II, IE) III, I, II

43. The currency per U.S. dollar quote for the British pound is 1.55. If you wish to buy $1,000 worth ofpounds, how many pounds could you get?A) 1,550

B) 645

C) 450D) 1000E) 550

44. The exchange rate for the euro changed from 0.9968 on December 2, 2002 to 0.9966 (U.S. dollarequivalent) on December 3, 2002. If you used $1 million to buy euros on December 2 and sold themon December third you madeA) +$200.68.

B) $144.45.

C) $200.64.D) +$144.79.E) none of the above

45. The Canadian dollar is worth 64 cents U.S. If the Canadian dollar drops in value by 2% the Canadian

dollar will be worth __________ cents U.S.A) 62.72B) 65.28C) 66.00D) 62.00E) none of the above

46. The Canadian dollar is worth 64 cents U.S. If the U.S. dollar drops in value by 3% the Canadiandollar will be worth __________ cents U.S.A) 65.28B) 65.92

C) 65.31

D) 62.08

E) none of the above47. The currency per U.S. $ for the South Korean won is 1217. The similar quote for the Japanese yen

against the dollar is 124.533. What is the implied won per yen cross exchange rate?A) 151,556.66B) 0.000007C) 9.9986D) 0.102328E) none of the above

48. The British pound is worth 2.3198 Swiss francs and the Mexican peso is worth 0.14512 Swiss francs.How many pesos is the British pound worth?A) 0.0626B) 0.3354

C) 2.9818D) 15.985E) none of the above

49. The CPI is now at 181 and last year it was at 170. Inflation over the year wasA) 9.00%.B) 1.065%.C) 11.00%.

D) 6.47%.E) 3.23%.

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C) 115.20 yen/$D) 119.81 yen/$E) 125.00 yen/$

57. If the spot exchange rate is $1.57 U.S. to the pound and the pound is expected to depreciate by 3%over the next year, what is the dollar expected to do against the pound?A) appreciate 3%

B) depreciate 3%C) appreciate 3.09%D) depreciate 3.05%E) appreciate 3.05%

58. Which one of the following statements about differences in currency futures and forwards is notcorrect?A) Futures contracts are more standardized than forward contracts.B) Futures contracts may require the holder to pay out cash before contract maturity and forwards do

not.C) Forward contracts are generally for smaller amounts of currency than futures contracts.

D) Futures contracts are more liquid than forward contracts.E) Futures contracts are traded on organized exchanges and forwards are OTC contracts negotiated

between two parties.59. A contract that grants the holder the right to buy a given amount of a foreign currency at a

predetermined exchange rate until or on a specified date is a currencyA) forward contract.B) futures contract.

C) call option.

D) put option.E) swap agreement.

60. A contract that grants the holder the right to sell a given amount of a foreign currency at apredetermined exchange rate until or on a specified date is a currencyA) forward contract.B) futures contract.

C) call option.D) put option.E) swap agreement.

61. A contract that allows the holder to buy a given amount of a foreign currency at a predeterminedexchange rate only on a specified date is a/anA) American put option.B) European put option.C) American call option.

D) European call option.

E) swap agreement.62. Suppose that on the gold standard, the U.S. fixes the price of an ounce of gold at $25. Great Britain

fixes the price of gold at 16 per ounce. What is the implied exchange rate between the dollar and the

pound?A) 1.5625 / $B) $0.65 / C) $1.5625 / D) 0.65 / $E) none of the above

63. Suppose that the U.S. fixed the price of gold at $22 an ounce. Great Britain fixed the price of thepound at $2.20 per pound and France had pegged the French franc (FF) to 10 FF to the dollar. An

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identical basket of goods costs $200 in the U.S., 85 in Great Britain and 3100 francs in France. Ifyou have 10 ounces of gold convertible in the U.S., which of the following statements is/are correct?

I. In the United States you can buy 1.2 baskets.II. In Great Britain you can buy about 1.18 baskets.III. The nominal exchange rate between the pound and the franc is 22 francs per pound.IV. Your money has the greatest purchasing power in Great Britain.

A) I onlyB) II onlyC) II and IV only

D) II, III and IV onlyE) III and IV only

64. The gold standard era occurredA) from 1945 to 1971.B) from 1971 to 1973.C) from 1961 to 1968.D) from 1914 to 1933.

E) prior to 1914.

65. Suppose that Britain and the U.S. are on the gold standard; the U.S. has fixed the price of the dollar at$15 per ounce of gold and Britain has fixed the price of the pound at 6.5 per ounce of gold. Whatwould happen to the value of the dollar and the value of the pound if Britain changed the pound togold ratio to 7 per ounce? The value of the dollar relative to the pound would __________ and thevalue of the pound relative to the dollar would __________.A) not change; devalueB) not change; revalueC) revalue; devalue

D) devalue; revalueE) not change; not change

66. Suppose that Britain and the U.S. are on the gold standard; the U.S. has fixed the price of the dollar at$27 per ounce of gold and Britain has fixed the price of the pound at 8 per ounce of gold. What

would happen to the value of the dollar and the value of the pound if Britain changed the pound togold ratio to 7 per ounce? The value of the pound relative to the dollar wouldA) not change.

B) increase by 14.29%.

C) increase by 12.5%.D) decrease by 12.5%.E) decrease by 14.29%.

67. Suppose that during the Bretton Woods era, Great Britain fixed the price of the pound at 0.80 perdollar and France had pegged the French franc (FF) to 6 Ffr to the dollar. Suppose further that abasket of goods costs 115 in Great Britain. Using only this data, what should have been the cost ofan identical basket of goods in France?A) Ffr 750.00

B) Ffr 143.75C) Ffr 945.20

D) Ffr 862.50E) none of the above

68. Suppose that under the gold standard France exchanged 105 francs for an ounce of gold. At the sametime the franc was also worth $0.25. How much gold should the dollar have been worth?A) $23.81

B) $26.25C) $24.33

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D) $35.00E) $20.46

69. The positive aspects of a gold standard include:I. It promotes long run price stability.II. It promotes short run price stability.III. More flexible domestic monetary policy is possible under the gold standard.

A) I onlyB) II onlyC) I and III onlyD) II and III onlyE) I, II and III

70. The negative aspects of a gold standard include:I. The costs of obtaining, storing and transporting gold.II. The unpredictable nature of the supply of gold available.III. The resulting difficulty in adjusting the money supply to meet changing conditions.

A) I only

B) I and II onlyC) I and III onlyD) I and III only

E) I, II and III71. Part of the reason the gold standard was successful was because:

I. most of that era was relatively peaceful with few wars.II. there was only limited capital mobility among nations.III. there was no currency speculation allowed in that time period.

A) I onlyB) I and II onlyC) II and III only

D) I and III onlyE) I, II and III

72. According to Keynes, during the gold standard era the __________ could have claimed to have beenthe conductor of the international orchestra.A) Federal ReserveB) International Monetary Fund

C) Bank of EnglandD) Rothschild BankE) U.S. economy

73. The institution that serves as an agent for central banks and a center for economic cooperation amongthe worlds largest industrialized nations is the

A) International Monetary Fund.

B) International Bank for Reconstruction and Development.C) Bank of International Settlements. (check)D) World Trade Organization.E) Bretton Woods Organization.

74. The organization that was founded to lend reserves to member countries experiencing a temporaryshortage in foreign exchange reserves is the

A) International Monetary Fund.B) International Bank for Reconstruction and Development.C) Bank of International Settlements.

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D) World Trade Organization.E) Bretton Woods Organization.

75. The organization that focuses on making loans to developing nations was originally called theA) International Monetary Fund.

B) International Bank for Reconstruction and Development.

C) Bank of International Settlements.D) World Trade Organization.E) Bretton Woods Organization.

76. To become a member of the IMF a country must pay an initial quota. Which of the following is/aretrue?

I. The quota amount is the same for all developed countries.II. Twenty-five percent of the quota must be paid in gold, and seventy-five percent may be

paid in the countrys local currency.III. The U.S., as the founding country, is exempt from the quota.

A) I only

B) II onlyC) I and II onlyD) II and III onlyE) I, II and III

77. In a small country, the imposition of a tariff will result in __________ domestic supply and__________ domestic demand.A) increased; increasedB) increased; decreased

C) decreased; decreasedD) decreased; increasedE) unchanged; decreased

78. A small country imposes a tariff on a good. As a result:

I. Consumer surplus fallsII. Domestic producer surplus risesIII. Foreign producer surplus falls

A) I only

B) I and II onlyC) II and III onlyD) I and III onlyE) I, II and III

79. In general, when a small country imposes a tariff this represents a wealth transfer from __________to __________.

A) domestic producers; foreign producersB) foreign producers; domestic producersC) foreign producers; domestic consumers

D) domestic consumers; domestic producers

E) domestic consumers; foreign producers80. Losses from trade barriers that result in a decline in economic efficiency are called

A) countervailing losses.B) consumer surplus losses.

C) deadweight losses.

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D) producer surplus losses.E) none of the above

81. Deadweight losses include losses due toA) allocating too many scarce resources into protected industries.B) consumers choosing to buy different goods because of the relatively high cost of goods in a

protected industry.C) tariff revenues transferred to the government.D) increased domestic producer surplus.

E) Both A and B constitute deadweight losses.

Figure 1, Soccer balls

A small country imposes a tariff resulting in a shift in global supply made available in this countryfrom S0Globalto S1Global.

82. Refer to Figure 1 to answer the following question: What is the amount of the tariff?A) less than $5B) $5

C) more than $5D) cant tell from the information given

83. Refer to Figure 1 to answer the following question: What is the loss in consumer surplus that resultsfrom the tariff (millions of $)?A) $25.0B) $40.0C) $29.3

D) $32.5

E) $30.084. Refer to Figure 1 to answer the following question: What is the change in domestic producer surplus

that results from the tariff (millions of $)?A) $20.0B) $10.0

C) $15.0D) $12.5E) $17.5

85. Refer to Figure 1 to answer the following question: What are the total deadweight losses?

Price

Quantity(millions)

Supply Domestic

Demand Domestic

S0 Global

S1 Global$15

$10

2 4 5 8

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A) $12.5B) $5.0C) $7.5

D) $17.5E) $25.0

86. A small country imposes a tariff of $100 on imported appliances. As a result quantity demanded

drops to 150,000 units from 175,000 units. The loss in consumer surplus isA) $15,000,000.B) $2,500,000.C) $17,500,000.

D) $16,250,000.E) $1,250,000.

87. For absolute purchasing power parity to strictly hold in two countries all but which one of thefollowing is required?A) zero transportation costs on all goods and servicesB) the same basket of goods must be consumed in the two countriesC) tax rates must be the same in the two countriesD) tariffs must be zero in both countries

E) the nominal exchange rate must equal 188. If flour costs $3 a pound in the U.S. and 35 pesos in Mexico, what should the exchange rate (S) be if

absolute purchasing power parity holds?

A) 0.0857B) 11.67C) 32D) 38E) cannot tell without knowing the price levels in the U.S. and Mexico

89. Suppose that absolute purchasing power parity for lettuce does not hold for the U.S. and Mexico. Theprice of a box (containing about 50 heads) of lettuce in the U.S. is selling for $25 and is selling for175 pesos in Mexico when the exchange rate is 9 pesos to the dollar. As people arbitrage away theprice disparity, the price of lettuce in the U.S. will __________ and the value of the peso will tend to

__________.A) rise; riseB) fall; fallC) rise; fall

D) fall; riseE) stay the same; stay the same

90. Assuming that absolute purchasing power parity holds, what should the U.S./Canadian exchange ratebe if the CPI in Canada is 225 and the CPI in the U.S. is 179 and the U.S. interest rate is 6%?A) 1.257

B) 0.796C) 1.332D) 0.843

E) none of the above91. Suppose that the exchange rate between the Polish Zloty and the U.S. dollar is currently 4 Zls to the

dollar. The one year forward rate for the Zloty is 4.5 Zls to the dollar. If U.S. inflation is 3% what isthe approximate Polish inflation rate if relative purchasing power holds?A) 12.75%B) 9.50%C) 8.11%D) 15.50%

E) 14.11%

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92. Suppose that the exchange rate between the Russian ruble and the U.S. dollar is currently $0.03 to theruble. The one year forward rate for the ruble is $0.025 dollars to the ruble. If Russian inflation is20% what is the approximate U.S. inflation rate if relative purchasing power holds?A) 16.67%

B) 3.33%C) 0.00%

D) 40.00%E) 4.32%

93. Most studies indicate thatI. relative PPP performs better than absolute PPP.II. the Big Mac Index is a reliable predictor of short term exchange rate movements.III. relative PPP only holds over long time periods.

A) I onlyB) I and II onlyC) II and III only

D) I and III onlyE) I, II and III

94. A U.S. investor is considering investing in a bond denominated in Swiss francs. One year U.S bondrates are 6% and the Swiss franc is currently worth about 68 U.S. If Swiss bond rates on similarbonds are paying 7%, the investor is better off investing in the U.S. if over the next year theA) dollar is expected to depreciate by more than 1%.B) Swiss franc is expected to appreciate by more than 1%.

C) dollar is expected to appreciate by 3%.

D) Swiss franc is expected to appreciate by less than 1%.95. Suppose that the one year Swiss franc interest rate is 5% and the one year U.K. interest rate is 4%. If

the one year forward rate is 0.45 pounds per francs what must the spot exchange rate be (/Sfr) ifcovered interest parity holds?A) 0.2250B) 0.4455

C) 0.4545D) 1.4500E) 0.4645

96. Suppose that the one year U.S. interest rate is 5%. If the one year forward rate against the pound is$1.75 per pound and the spot exchange rate is $1.78 per pound, what must the equivalent Britishinterest rate be if covered interest parity holds?A) 3.29%B) 6.69%C) 3.31%D) 6.83%E) 5.45%

97. If uncovered interest parity holds and the U.S. interest rate on a one year bond is 5% and the Russian

rate on a similar one year bond is 8% which one of the following is true?A) The forward rate for the dollar must be less than the spot rate.B) The forward rate for the ruble must be greater than the spot rate.C) The expected future spot rate for the ruble must be less than the 1 year forward rate.D) The expected future spot rate for the dollar must be greater than the 1 year forward rate.

E) none of the above98. Rates on one year British bonds are 9%. The expected one year change in the value of the dollar is

+2%. If rates on similar maturity U.S. bonds are 6%, and investors charge a risk premium which ofthe following is true assuming that uncovered interest parity holds with a risk premium?

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A) British bonds are perceived to be riskier than U.S. bonds.B) U.S. bonds are perceived to be riskier than British bonds.C) The risk premium must be zero.D) All investors must prefer British bonds to U.S. bonds.E) U.S. bonds and British bonds are equally risky.

99. Which of the following methods of currency forecasting are not strictly adaptive expectations?

A) Plotting historical exchange rates on a graph, you rough out a trend line and use the trend toforecast next years exchange rate.

B) Your regress historical exchange rates using ordinary least squares to estimate the intercept andslope of the line and then use the equation to give you a predicted exchange rate value.

C) You obtain a forecast of next years expected balance of payment data and try to figure out

how this will cause the exchange rate to move.

D) You calculate a 3 year moving average of exchange rates and use the average as your predictionof exchange rates.

E) You estimate that the current exchange rate is the best estimate of the future exchange rate.100. Nominal one year interest rates in the U.S. are 9% and U.S. inflation is 3%. One year British interest

rates are 11% and the current British CPI is 190. What is the projected CPI level in Britain in oneyear if real interest parity holds?

A) 191.9B) 180.5C) 188.1

D) 199.5E) 193.4