Suppose spot exchange rate E¥/$ = 85. If the price of a music compact disc (CD) is $18 in the U.S. and the same CD costs 1,900 yen in Japan, then the dollar price of CDs sold in Japan is _____, which implies the law of one price _____. $105.55; does not hold $18; hol

1. Suppose spot exchange rate E_¥/$ = 85. If the price of a music compact disc (CD) is $18 in the U.S. and the same CD costs 1,900 yen in Japan, then the dollar price of CDs sold in Japan is _____, which implies the law of one price _____.
   105. $105.55; does not hold
   106. $18; holds
   107. $10.5; does not hold
   108. $21; does not hold
   109. $22.35; does not hold

 

2. Suppose the law of one price does not hold between Japan and China because the Yuan (Chinese currency) price of a digital camera sold in Japan is higher than the price of the same camera sold in China. If we assume that there are no transportation costs or barriers to trade between the two countries, then:
   1. the Japanese traders will want to sell cameras in China.
   2. the Japanese will want to buy cameras from China.
   3. the Chinese will want to buy cameras from Japan.
   4. the price of cameras in Japan will increase.
   5. the price of cameras in China will fall.

 

3. Suppose the cost of a market basket of goods in Hong Kong is 1,245 Hong Kong dollars, while the cost of the same market basket in Philippines is 6,500 Philippine peso. Calculate the Philippine peso/ Hong Kong dollar exchange rate if purchasing power parity holds between the two.
   1. 19
   2. 82
   3. 81
   4. 22
   5. 32

 

4. Consider the following table that lists the items included in the market basket along with the quantities consumed and the per unit prices in 2000 and 2009.

Calculate the value of the consumer price index using 2000 as the base year.

123. 29
124. 98
125. 5
126. 87
127. 2

 

5. Suppose purchasing power parity holds between China and Japan. An increase in Chinese inflation will cause _____ of the Yuan and _____ of the yen and _____ in the Yuan/yen exchange rate.
   1. a depreciation; an appreciation; an increase

1. an appreciation; a depreciation; a fall
2. a depreciation; an appreciation; a fall
3. an appreciation; a depreciation; an increase
4. a depreciation; an appreciation; no change

 

6. _____ has been shown to be the major potential problem faced by countries with floating exchange rates.

1. Deflation
2. Stagflation
3. Inflation
4. Cyclical unemployment
5. Balance of payment surplus

 

7. A(n) ______ allows traders to hedge exchange rate risks in the Forex market, by fixing an exchange rate today for a future transaction.
   1. securities trade
   2. spot exchange contract
   3. options trade
   4. investment in a foreign asset
   5. forward exchange contract

 

8. _____ refers to the independence of a country’s central bank to affect its own money supply and conditions in its domestic economy.
   1. Fiscal autonomy
   2. Monetary autonomy
   3. Bureaucratic control
   4. Fiscal prudence
   5. Political autonomy

 

9. Which of the following is a policy lever available with the central bank in a fixed exchange rate system which is not available in a floating exchange rate system?
   1. Monetary policy
   2. Fiscal policy
   3. Exchange rate policy
   4. Trade policy
   5. Interest rate policy

 

10. ______________ is a mechanism whereby a company can sell its invoice(s) to a third party provider called a ______, that purchases the invoice(s), providing immediate but discounted payment against the amount due under the invoice.
    1. Factoring; factor
    2. Discounting; discounter
    3. Forwarding; forward contractor
    4. Hedging; hedger