Quiz # 1 - Foreign Exchange Market Quiz

What is the importance of currency convertibility discussed in the chapter?

• It affects international travel

• It influences global stock markets

• It impacts international trade and investment

• It determines local interest rates

What determines spot exchange rates?

• Government regulations

• The interaction between demand and supply of currencies

• International trade agreements

• Central bank policies

What is the effect of arbitrage on currency rates in different markets?

• It widens the gap

• It closes the gap

• It has no effect

• It stabilizes the rates

What is the primary function of high-speed computer linkages in the foreign exchange market?

• To slow down transactions

• To create a single market

• To limit access to certain regions

• To increase transaction costs

What does the PPP theory assume about government intervention in exchange rates?

• Governments frequently intervene to stabilize exchange rates.

• Governments do not intervene to affect exchange rates.

• Governments only intervene during economic crises.

• Governments set fixed exchange rates.

In the International Fisher Effect formula, what does S1 represent?

• Spot exchange rate at the end of the period

• Spot exchange rate at the beginning of the period

• Nominal interest rate in the first country

• Nominal interest rate in the second country

What is the main focus of the section titled "INTEREST RATES AND EXCHANGE RATES"?

• The impact of government policies on trade

• The relationship between interest rates and exchange rates

• The effect of inflation on economic growth

• The role of central banks in setting interest rates

What was a key strength of the gold standard?

• It allowed for unlimited currency printing

• It provided a balance-of-trade equilibrium

• It eliminated the need for gold reserves

• It increased inflation rates

What flexibility did the IMF provide under the Bretton Woods agreement?

• Allowing countries to print unlimited currency

• Lending foreign currencies during balance-of-payments deficits

• Eliminating all trade barriers

• Setting fixed interest rates globally

What is one argument critics make against the floating exchange rate system?

• It limits monetary policy autonomy

• It causes import prices to rise and increases inflation

• It prevents economic recovery

• It restricts trade balance adjustments