Shapiro’s Multinational Financial Management, 9th Edition Test Bank

CHAPTER 4
The Determination of Exchange Rates

1. Of the following, exchange rates depend the most upon relative

a) monetary systems
b) political systems
c) trade deficits
d) inflation rates between nations

2. On Friday, September 13, 1992, the lira was worth DM 0.0013. Over the weekend the lira
devalued against the DM to DM 0.0012. By how much had the lira devalued against the DM?
a) 7.69%
b) 8.33%
c) 5.21%
d) 9.27%

3. Suppose that the Brazilian real devalues by 40% against the U.S. dollar. By how much will the
dollar appreciate against the real?
a) 67%
b) 40%
c) 32%
d) 28%

4. The French euro devalued by 17% against the U.S. dollar. This is equivalent to a revaluation
of the dollar against the euro by
a) 17%
b) 16.31%
c) 20.48%
d) 17.54%

5. If the Australian dollar devalues against the Japanese yen by 10%, the yen will appreciate by
a) 33.32%
b) 25.55%
c) 10.11%
d) 11.11%

6. If the euro depreciates against the U.S. dollar by 50%, the dollar appreciates against the euro
by
a) 55%
b) 100%
c) 200%
d) 1,000%

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7. If the U.S. dollar appreciates against the Nigerian naira by 150%, the naira depreciates against
the dollar by
a) 60%
b) 75%
c) 125%
d) 300%

8. If a foreigner purchases a U.S. government security the

a) supply of dollars rises
b) federal government deficit declines
c) demand for dollars rises
d) U.S. money supply rises

9. The price of foreign goods in terms of domestic goods is called

a. the real exchange rate
b. the balance of trade
c. the trade-weighted exchange rate
d. purchasing parity

10. An increase in the real exchange rate will

a. raise national income
b. lower national income
c. make a country less competitive in international trade
d. lower the cost of foreign goods
e. c and d

11. A slowdown in U.S. economic growth will

a. boost the value of the dollar because inflation fears will be calmed
b. boost the value of the dollar because the Federal Reserve will expand the money supply
c. lower the value of the dollar because the U.S. will be a less attractive place to investors
d. lower the value of the dollar because interest rates will rise

12. The willingness of people to hold money

a. increases with the interest rate
b. rises with price stability
c. rises with national income
d. b and c only

13. Sound economic policies will

a. raise the value of a nation's currency by boosting the economy
b. lower the value of a nation's currency by increasing the precautionary demand for money
c. lower the value of a nation's currency by leading to lower interest rates

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d. both b and c

14. An increase in the supply of U.S. dollars by the Federal Reserve will
a.raise the value of the dollar because it will stimulate U.S. economic growth
b.raise the value of the dollar because it will lead to higher U.S. interest rates
c.reduce the value of the dollar because of inflation fears in the United States
d.decrease the value of the dollar because it will force other countries to raise their interest rates

15. Which of the following is an example of foreign exchange market intervention?

a) the U.S. government pays Social Security checks to pensioners living in Poland
b) IBM sells euros it received in international trade
c) the Canadian government pays interest to Saudi Arabian investors
d) the French government sells dollars in the foreign exchange market to prop up the value of
the euro

16. The _______ for/of foreign currency in the U.S. is derived from the demand for
___________ by American consumers.
a) Demand, foreign products
b) Demand, tax loopholes
c) Supply, lower tariffs
d) Supply, local products

17. The value of the Australian dollar (A$) today is $0.73. Yesterday, the value of the
Australian dollar was $0.69. The Australian dollar ____ by ____%.
a. depreciated; 5.80
b. depreciated; 4.00
c.
appreciated; 5.80 ($0.73 — $0.69)/$0.69 = 5.80%
d. appreciated; 4.00

18.If a currency's spot rate market is ____, its exchange rate is likely to be ____ to a single large
purchase or sale transaction.
a. liquid; highly sensitive
b. illiquid; insensitive
c. illiquid; highly sensitive
d. none of the above.

19. ____ is not a factor that causes currency supply and demand schedules to change.
a. Relative inflation rates
b. Relative interest rates
c. Relative income levels
d. Expectations
e. All of the above are factors that cause currency supply and demand schedules to
change.

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20. A large increase in the income level in Mexico along with no growth in the U.S. income
level is normally expected to cause (assuming no change in interest rates or other factors) a(n)
____ in Mexican demand for U.S. goods, and the Mexican peso should ____.
a. increase; appreciate
b. increase; depreciate
c. decrease; depreciate
d. decrease; appreciate

21. An increase in U.S. interest rates relative to German interest rates would likely ____ the
U.S. demand for euros and ____ the supply of euros for sale.
a. reduce; increase
b. increase; reduce
c. reduce; reduce
d. increase; increase

22. Investors from Germany, the United States, and the U.K. frequently invest in each other
based on prevailing interest rates. If British interest rates increase, German investors are likely to
buy ____ dollar-denominated securities, and the euro is likely to ____ relative to the dollar.
a. fewer; depreciate
b. fewer; appreciate
c. more; depreciate
d. more; appreciate

23. When the "real" interest rate is relatively low in a given country, then the currency of that
country is typically expected to be:
a. weak, since the country's quoted interest rate would be high relative to the inflation
rate.
b. strong, since the country's quoted interest rate would be low relative to the
inflation rate.
c. strong, since the country's quoted interest rate would be high relative to the
inflation rate.
d. weak, since the country's quoted interest rate would be low relative to the inflation
rate.

24. Assume that the inflation rate becomes much higher in the U.K. relative to the U.S. This
will place ____ pressure on the value of the British pound. Also, assume that interest rates in the
U.K. begin to rise relative to interest rates in the U.S. The change in interest rates will place ____
pressure on the value of the British pound.
a. upward; downward
b. upward; upward
c. downward; upward
d. downward; downward

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25. Assume that Swiss investors have francs available to invest in securities, and they
initially view U.S. and British interest rates as equally attractive. Now assume that U.S. interest
rates increase while British interest rates stay the same. This would likely cause:
a. the Swiss demand for dollars to decrease and the dollar will depreciate against the
pound.
b. the Swiss demand for dollars to increase and the dollar will depreciate against the
Swiss franc.
c. the Swiss demand for dollars to increase and the dollar will appreciate against the
Swiss franc.
d. the Swiss demand for dollars to decrease and the dollar will appreciate against the
pound.

26. The real interest rate adjusts the nominal interest rate for:
a. exchange rate movements.
b. income growth.
c. inflation.
d. government controls.
e. none of the above

27. If U.S. inflation suddenly increased while European inflation stayed the same, there
would be:
a. an increased U.S. demand for euros and an increased supply of euros for sale.
b. a decreased U.S. demand for euros and an increased supply of euros for sale.
c. a decreased U.S. demand for euros and a decreased supply of euros for sale.
d. an increased U.S. demand for euros and a decreased supply of euros for sale.

28. If inflation in New Zealand suddenly increased while U.S. inflation stayed the same,
there would be:
a. an inward shift in the demand schedule for NZ$ and an outward shift in the supply
schedule for NZ$.
b. an outward shift in the demand schedule for NZ$ and an inward shift in the supply
schedule for NZ$.
c. an outward shift in the demand schedule for NZ$ and an outward shift in the
supply schedule for NZ$.
d. an inward shift in the demand schedule for NZ$ and an inward shift in the supply
schedule for NZ$.

29. If the U.S. and Japan engage in substantial financial flows but little trade, ____ directly
influences their exchange rate the most. If the U.S. and Switzerland engage in much trade but
little financial flows, ____ directly influences their exchange rate the most.
a. interest rate differentials; interest rate differentials
b. inflation and interest rate differentials; interest rate differentials
c. income and interest rate differentials; inflation differentials
d. interest rate differentials; inflation and income differentials
e. inflation and income differentials; interest rate differentials

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30. If inflation increases substantially in Australia while U.S. inflation remains unchanged,
this is expected to place ____ pressure on the value of the Australian dollar with respect to the
U.S. dollar.
a. Upward
b. Downward
c. either upward or downward (depending on the degree of the increase in Australian
inflation)
d. none of the above; there will be no impact

31. Assume that British corporations begin to purchase more supplies from the U.S. as a
result of several labor strikes by British suppliers. This action reflects:
a. an increased demand for British pounds.
b. a decrease in the demand for British pounds.
c. an increase in the supply of British pounds for sale.
d. a decrease in the supply of British pounds for sale.

32. The exchange rates of smaller countries are very stable because the market for their
currency is very liquid.
a. True
b. False

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