International financial management test bankCh08

International financial management test bankCh08 - Chapter...

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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. ANSWER: A 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. ANSWER: D 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. ANSWER: A 221
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222 International Financial Management 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 hold. D) increase the probability that PPP and IFE will hold. ANSWER: A 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 hold. D) increase the probability that PPE and IFE will hold. ANSWER: A 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. ANSWER: B
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International financial management test bankCh08 - Chapter...

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