problem 1: Under a managed float system, the central banks can

a. Permit international reserve changes.
b. Let exchange rates adjust to market pressures.
c. Experience reserve changes and exchange rate changes.
d. All of the above.

problem 2: Assume that the United Kingdom devalues the pound. If both exports and imports are written in terms of pounds, then UK balance of trade:

a. Worsens.
b. Improves.
c. Unaffected.
d. Drops for a while before rising.

problem 3: It costs FF120 to have your car’s oil changed in France. In Switzerland, it costs SF40 to have your car’s oil changed. The exchange rate is FF3.5/SF11. This is an illustration of:

a. Purchasing power parity.
b. Law of one price.
c. Opportunity for arbitrage.
d. None of the above.

problem 4: Exchange rates are similar in different markets at similar time since:

a. All foreign exchange markets are linked to the central market administrator.
b. Each currency is traded in just one market.
c. Arbitrage will immediately remove market violations.
d. Of the existence of forward market.

problem 5: If the exchange rate for Australian dollar is US$0.7833/A$ and the exchange rate for the Hong Kong dollar is US$0.1280/HK$, then the Hong-Kong Australian dollar exchange rate (HK$/A$) is:

a. 1.2767.
b. 7.8133.
c. 6.1195
d. 9.9738.

problem 6: Purchasing power parity (PPP) implies:

a. Exchange rates are similar in different foreign exchange markets at any given time.
b. Interest rates will be similar across countries at any given time.
c. Exchange rates will adjust to offset differing inflation rates between the countries.
d. Law of one price will never hold.

problem 7: If today’s spot rate on the British pound is $2 and the one-month forward rate on the pound is $2.10 (avoiding any interest earnings or costs):

a. Speculator who had purchased 100 British pounds forward today will make a gain of $10 one month from now.
b. Speculator who had purchased 100 British pounds spot today will make a profit of $10 one month from now.
c. Speculator who had sold 100 British pounds forward today will make a gain of 1 pound one month from now.
d. Speculator who had sold 100 British pounds spot today will make a gain of 10 pounds one month from now.
e. None of the above.

problem 8: Which of the given is recorded as a debit item in the U.S. balance of payments accounts?

a. An Italian firms pays $5 million in dividends to the holders of its stock in the United States.
b. The French Club Med hires four American scuba diving instructors for its new resort on the Italian island of Sardinia.
c. Toyota builds a factory in the United States to manufacture the Toyota Camry.
d. Remittances from Cambodian immigrants in the United States flow to their relatives in the Thailand’s refugee centers.