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Midterm2AK

Midterm2AK - ECN 162 International Economic Relations Ina...

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1 ECN 162 International Economic Relations University of California - Davis Ina Simonovska Fall 2010 Midterm Exam 2 (Total Points = 100) Tuesday, November 9 6:10-7:30 p.m. Name: _________________________________________ Instructions This exam paper has 9 pages. 1. There are three sections: multiple choice questions, essay questions, and problems. 2. This is a closed book, closed notes exam. 3. Simple calculator is allowed. 4. Please show all your work (except for the multiple choice questions). If you need more space, use the back of the page. 5. Fully label all graphs. Good Luck.

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2 Part I: Multiple Choice Questions (Total = 50 points, 2 points each) Choose the best answer. Explanation is not required. 1. If the exchange rate between the dollar and yen (E dollar/yen ) has risen, this would be consistent with: (a) a rise in the U.S. interest rate. (b) a rise in U.S. inflation. (c) a fall in the Japanese interest rate. (d) all of the above. 2. The higher the exercise price (E x dollar/euro ) relative to the current spot rate (E dollar/euro ), the more valuable (a) the put option on the Euro. (b) the call option on the Euro. (c) the arbitrage operation. (d) the triangular arbitrage. 3. In swap transactions, the trader is interested in (a) the difference between spot and forward rates. (b) only the spot rate. (c) only the forward rate. (d) both the spot and deposit interest rate. 4. If absolute PPP held, then the real exchange rate must be equal to (a) a non-constant number. (b) one. (c) zero. (d) a negative number number. 5. If the 12-month interest rates for the United States and the United Kingdom are 6%, and £1 = \$2 in the spot market, then what do you expect the 12-month forward rate to be? (a) 2.10\$/£ (b) 1.90\$/£ (c) 2.00\$/£ (d) 2.11\$/£ 6. The euro is said to be selling at a ______ if the spot dollar price is \$1.14 and the nine-month forward rate is \$1.16 (a) forward discount (b) forward premium (c) forward spread (d) none of the above 7. If Wisconsin cheddar cheese sells for \$2.00 per pound in the US and for 60 pesos in Mexico, according to the law of one price, what should be the exchange rate between the dollar and the peso? (a) \$1=30 pesos (b) \$30=1 peso (c) Cannot infer with the available information 8. If a tariff of \$10 has no effect on the world price, the optimal tariff on that product (a) is \$10. (b) is zero. (c) is higher than \$10. (d) depends upon the amount of government revenue collected.
3 Answer question 9 based on the following diagram. 9. If the government was to auction quota licenses competitively, it could earn up to

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Midterm2AK - ECN 162 International Economic Relations Ina...

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