MULTIPLE-CHOICE QUESTIONS NB: Clearly indicate which alternative you think is correct.

1. In a Swan diagram, if an economy is situated below (to the right) of the external balance (EE) curve, there is a balance of payments ________ , and, if the economy is situated above (to the right) of the internal balance (YY) curve, there is ________ . a. deficit; recession or unemployment b. deficit; inflation* c. surplus; recession or unemployment d. surplus; inflation 2. Points below the internal balance line YY of the Swan diagram indicate a. a balance of payments deficit b. a balance of payments surplus c. unemployment* d. inflation 3. The Reserve Bank buying of Australian dollars on the foreign exchange market is recorded in the BOPA as a. a credit item in the current account b. a debit item in the current account c. a debit item in the capital account d. a credit item in the capital account*

4. If, under the Gold Standard, the par value of the franc in terms of the US dollar is $0.20, and if it costs $0.01 to move one francs worth of gold between the two countries, then the gold export point from the US is at ____________, and the gold import point into the US is at _____________. a. $0.20 = 1 franc; $0.20 b. $0.19 = 1 franc; $0.21 c. $0.21 = 1 franc; $0.19 d. $0.22 = 1 franc; $0.21 = 1 franc = 1 franc = 1 franc* = 1 franc

5. The J-curve effect occurs when

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a. the trade balance improves sharply following revaluation b. the trade balance improves sharply following devaluation c. the trade balance worsens then improves following devaluation* d. the volume of exports decreases continuously 6. Currency arbitrage a. encourages destabilising currency speculation b. increases the risk of taking short or long positions in a foreign currency c. helps to even out the amplitude of currency exchange rate fluctuation in the long run* d. none of the above 7. AUD/USD = 1.8984, USD/GBP = 1.4514. What is the consistent cross rate for AUD/GBP? a. 0.7645 b. 1.3078 c. 2.7553* d. none of the above 8. If the AUD price of GBP is 2.50 and the EUR price of GBP is 6.30, what is the EUR price of the AUD? a. 0.3968 b. 2.50 c. 2.52 * d. none of the above 9. The bid exchange rate is determined by A: the demand by customers and the supply by market-makers. B: the demand by customers and the demand by market-makers. C: the supply by customers and the supply by market-makers. D: None of the above* 10. In 2005, the EUR/AUD exchange rate fell from 0.5764 to 0.5403. Calculate the percentage change in the AUD against the EUR. A: +6.26% B: -6.26%* C: +6.68% D: -6.68%

11. The receipt of an interest payment on a long-term loan made by a commercial bank to a foreign resident is entered in the US balance of payments as a a. credit in the short-term capital account b. credit in the current account* c. credit in the long-term capital account d. debit in the long-term capital account 12. For the MNC, agency costs are typically: a. b. c. d. non-existent. larger than agency costs of a small purely domestic firm.* smaller than agency costs of a small purely domestic firm. the same as agency costs of a small purely domestic firm.

13. A rise in the domestic and foreign growth rates leads to: A: Depreciation of the foreign currency. B: Depreciation of the domestic currency. C: No change in the domestic currency. D: The effect cannot be determined without knowing the exact growth rates.* 14. The main participants in the Eurocurrency market are: a. b. c. d. consumers. small firms. large corporations.* small European firms needing European currencies for international trade.

15. Assume countries A, B, and C produce goods that are substitutes of each other and that these countries engage in trade with each other. Assume that country As currency floats against country Bs currency, and that country Cs currency is pegged to Bs. If As currency depreciates against B, then As exports to C should _______, and As imports from C should _______. A: Decrease; increase B: Decrease; decrease C: Increase; decrease* D: Increase; increase 16. To strengthen the USD using sterilized intervention, the Fed would _____________ USD and simultaneously ____________ Treasury securities. A: Buy; sell B: Sell; buy C: Buy; buy* D: Sell; sell

17. You are given the following exchange rate quotes in Sydney:
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GBP/USD SEK/USD SEK/GBP

0.5500 7.3500 16.0000

Calculate the USD profit, if any, on a three-point arbitrage. A: USD 0.1578 for every 1 USD invested B: USD 1.1973 for every 1 USD invested C: USD 0.1973 for every 1 USD invested* D: USD 1.1578 for every 1 USD invested 18. Dealer A quotes 1.25001.2550 for the AUD/USD exchange rate to dealer B. The price (in US dollars) at which B can buy one unit of the Australian dollar is a.1.2500. b.1.2550. c.0.8000.* d. 0.7968. 19. The Bretton Woods system was a system of a. fixed but adjustable exchange rates.* b. crawling peg. c. managed floating. d. fixed exchange rates.

20. Central banks buy and sell currencies on the foreign exchange market to a. make profit and accumulate reserves. b. smooth out fluctuations in exchange rates.* c. finance the countrys international transactions. d. smooth out capital movements.

Formulas

(x/y)0 to (x/y)1 . y = [(x/y)1/(x/y)0] - 1

= - y /(1 +

y)