International finance and the foreign exchange market

International finance and the foreign exchange market

International finance refers to the financial transactions that take place between countries and organizations. This includes the flow of money for trade, investment, and other financial transactions. One of the most important aspects of international finance is the foreign exchange market, also known as the forex market.

The foreign exchange market is a decentralized market where currencies are bought and sold. It is the largest financial market in the world, with an average daily trading volume of over $5 trillion. The market is open 24 hours a day, five days a week, and currencies are traded globally among the major financial centers of London, New York, Tokyo, and Sydney.

The foreign exchange market plays a crucial role in the global economy, as it allows countries and organizations to buy and sell goods and services in different currencies. For example, a U.S. company may need to purchase goods from a supplier in Japan, and in order to do so, it must exchange U.S. dollars for Japanese yen. This transaction takes place in the foreign exchange market.

In addition to facilitating international trade, the foreign exchange market is also used by investors and speculators to make profit from currency fluctuations. They may buy and sell currencies based on their expectation of future exchange rate movements.

The foreign exchange market is also closely watched by central banks and governments, as currency exchange rates can have a significant impact on a country’s economy. Central banks may intervene in the market to stabilize their currency, while governments may use exchange rate policies to promote exports or discourage imports.

Overall, the foreign exchange market is a vital component of international finance, playing a crucial role in facilitating global trade and investment, and influencing economic policy around the world.

1.Identify the correct statement about a nation’s currency.

Other things constant, an increase in the real gross domestic product of a nation will cause the value of the nation’s currency to appreciate

Other things constant, domestic inflation will cause the value of a nation’s currency to appreciate

Other things constant, a decrease in the real gross domestic product of a nation will cause the value of the nation’s currency to depreciate

Other things constant, domestic inflation will cause the value of a nation’s currency to depreciate

2.Which of the following would be included as a credit item in the capital-account transactions of the United States?

U.S. aid to a foreign government

Private gifts from U.S. residents to their relatives abroad

Investments of foreigners in the United States

U.S. merchandise imports

3.Which of the following is most likely to result in an inflow of financial capital to a country?

A regressive tax structure in the country

A legal system that results in a high degree of uncertainty with regard to the protection of property rights and enforcement of contracts

Well-defined property rights and unbiased enforcement of contracts in the country

High and unstable rates of inflation in the country

4.Which of the following transactions is likely to be included in the capital account of the U.S.?

The import of U.S. merchandise goods

The export of U.S. merchandise goods

Foreign investments by Americans

Private gifts to Americans from foreigners

5.Which of the following occurs as the result of a depreciation of a nation’s currency in the foreign exchange market?

The nation’s exports become more expensive for foreigners

Foreign goods become more expensive for domestic residents

The consumer price index declines

The potential output of the nation increases

6.Suppose Canada was the largest trading partner of the United States in 2020. If the average price level in Canada was relatively stable, while the general level of prices in the United States rose by 3 percent in 2020, which of the following would be most likely to occur?

An increase in the supply of Canadian dollars in the foreign exchange market

A decrease in the demand for Canadian dollars in the foreign exchange market

An increase in the demand for U.S. dollars in the foreign exchange market

An increase in the U.S. demand for Canadian goods

7.Which of the following will be true of the balance-of-payments accounts under a pure flexible exchange rate system?

An inflow of capital will shift the current account toward a surplus

The current and capital account transactions will sum to zero

An outflow of capital will shift the current account toward a deficit

Official reserve-account transactions will be negative

8.Which of the following is most likely to occur in the foreign exchange market when the dollar price of a foreign currency falls below the equilibrium level?

An excess in the quantity demanded of the foreign currency relative to the quantity supplied in the foreign exchange market

An increase in the exports of U.S. goods and services

Downward pressure on the dollar price of the foreign currency

An increase in the quantity of dollars demanded by foreigners

9.Which of the following is most likely to occur when there is an increase in the real interest rate of a country relative to other countries?

An increase in the natural rate of unemployment

An appreciation of the domestic currency relative to other currencies

An increase in the rate of inflation in the country compared to other countries

An increase in the rate of unemployment

10.Which of the following transactions are included in the current account of the U.S.?

Investments by Americans in foreign securities

Foreign companies purchasing stocks of U.S. companies

Income receipts of Americans from abroad

Investments in U.S. real estate by foreign multinational corporations

11.During recent decades, the United States has persistently run trade deficits. Which of the following is true regarding these trade deficits?

These trade deficits are strong evidence that other countries have trade policies that are unfair to the United States

These trade deficits are primarily the result of an economic decline of the United States leading to a decline in the inflow of capital

These trade deficits mean that Americans are heavily indebted to foreigners and repayment of these debts will weaken the future economic growth of the United States

The trade deficits are primarily the result of strong economic growth enlarging imports and the attractiveness of the United States as a place to invest

12.Under a fixed-rate unified currency regime, each country belonging to the system

is committed to conducting highly expansionary monetary policy in order to maintain the convertibility of its currency

gives up its monetary policy independence to one central bank with the power to expand and contract the money supply

must fix its domestic interest rates in order to maintain the convertibility of its currency

may pursue an independent monetary policy

13.Which of the following would be classified as a debit item in the current-account transactions of a country?

Exports of services

Merchandise exports

The net income of domestic citizens from investments abroad

Merchandise imports

14.Suppose the Canadian dollar per euro exchange rate was 1.40 in 2015 and the Canadian dollar per U.S. dollar exchange rate was 1.30 in 2015. If the Canadian dollar per euro exchange rate increases to 1.50 in 2016 and the Canadian dollar per U.S. dollar exchange rate decreases to 1.25 in 2016, which of the following is true in this case?

The Canadian dollar has appreciated against the U.S dollar

The U.S. dollar has appreciated against the Canadian dollar

The euro has depreciated against the Canadian dollar

The Canadian dollar has appreciated against the euro

15.Which of the following is true of the foreign exchange market?

The foreign exchange market determines the goods in which each nation should specialize

The governments of trading nations determine the quantity of foreign exchange bought and sold in this market

The foreign exchange market determines the potential gross domestic product of each nation

The currencies of different nations are bought and sold in this market

16.Which of the following is true of balance of trade?

If the amount of investments made by Americans in foreign countries exceeds the amount of investments made by foreigners in the U.S., it leads to a balance-of-trade surplus

A surplus in the current account always implies that there is a balance-of-trade surplus

An increase in U.S. aid to foreign governments implies that there is a balance-of-trade surplus

If the value of a country’s merchandise exports falls short of the value of its merchandise imports, it leads to a balance-of-trade deficit

17.Suppose India and Canada are trading partners. Which of the following will result in an increase in the supply of loanable funds (inflow of financial capital) in India?

A higher rate of inflation in India than Canada

An increase in real interest rates in India relative to Canada and other countries

A slower growth rate of real GDP in India than in Canada

A larger budget deficit in India than Canada

18.Suppose a country faces political instability and has high and variable rates of inflation. Which of the following is most likely to occur under these circumstances?

Capital outflows from the country

An appreciation in the foreign exchange value of the country’s currency

A high rate of savings in the country

Low real and nominal domestic interest rates

19.Other things constant, if Americans increased their purchase of Mexican vehicles, this will result in a(n):

decrease in the foreign exchange reserves of Mexico

decrease in the supply of Mexican pesos in the foreign exchange market

decrease in the foreign exchange reserves of the United States

increase in the demand for Mexican pesos in the foreign exchange market

20.Suppose the Canadian dollar per euro exchange rate was 1.4 in 2020. Given the information, the dollar price of a bottle of French perfume selling for 100 euros will be:

250 Canadian dollars

100 Canadian dollars

71.43 Canadian dollars

140 Canadian dollars

21.Suppose a Japanese citizen purchases U.S. Treasury bills. This will cause:

the supply of U.S. dollars to decrease in the foreign exchange market

the demand for the Japanese yen to increase in the foreign exchange market

the supply of Japanese yen to decrease in the foreign exchange market

the demand for the U.S. dollar to increase in the foreign exchange market

22.Suppose a British investor decides to set up an automobile factory in Canada. This will cause:

the natural rate of unemployment in Canada to decrease

the demand for Canadian dollars to decrease in the foreign exchange market

Britain’s foreign exchange reserves to decrease

the supply of British pounds to increase in the foreign exchange market

23.Suppose in a two-economy world, Britain and the United States trade between themselves. Which of the following is likely to be true in this case?

An increase in Britain’s imports will increase the demand for U.S. dollars

A decrease in the U.S. inflation rate will reduce the demand for U.S. dollars

A decrease in the average income level of British citizens will increase the demand for U.S. dollars

An increase in the U.S. real interest rate will reduce the demand for U.S. dollars

24.Suppose France and Canada are major trading partners. Which of the following will cause an appreciation of the Canadian dollar?

An increase in the average income of Canadian residents relative to that of French residents

An increase in the real interest rate in Canada relative to the real interest rate in France

An increase in the unemployment rate in Canada relative to the unemployment rate in France

An increase in the inflation rate in Canada relative to that in France

25.Which of the following purchases will involve a foreign exchange transaction?

Steve, a U.S. citizen, buys a U.S. government bonds

Rachel, a British citizen, purchases a carpet from an Indian weaver during her trip to India

Tony, a British citizen, buys shoes that are manufactured by a firm in England

Joey, a U.S. citizen, buys a meal from an American-owned restaurant that serves Chinese cuisine

26.Which of the following is true of a currency board?

It accepts deposits, including checkable deposits, pays interest on them, and lends funds primarily to its members

It regulates the supply of money of an economy

It issues currency and regulates the market interest rate of an economy

It maintains bonds and other liquid assets denominated in a widely accepted currency that provide 100 percent backing for all of the currency issued by the Currency Board

27.Suppose Britain is the largest trading partner of the United States and the U.S. dollar per pound exchange rate in equilibrium is $1.50 = 1 pound. Which of the following is likely to occur if the dollar price per pound increases above the equilibrium?

The quantity of pounds supplied by British citizens will decrease

British goods will become cheaper for U.S. citizens

The quantity of U.S. dollars demanded by British citizens will decrease

U.S. exports will become cheaper for British citizens

28.Which of the following is a feature of a pegged exchange rate system?

Countries control the exchange rate value of their domestic currencies depending on the amount of gold reserves they hold

The International Monetary Fund sets the exchange rate value of the currencies for each of its member nations

The exchange rate value of a domestic currency under a pegged rate system is determined by the market forces of demand and supply

Countries commit to the maintenance of a specific exchange rate (or range) relative to another currency or bundle of currencies, but also continue to conduct monetary policy

29.The sum of the debit and credit items of the balance-of-payments accounts must be:

equal to 0

smaller than $1 billion

less than 0

greater than $1 billion

30.Other things constant, which of the following will cause the currency of a nation to appreciate in the foreign exchange market?

An increase in the domestic income of the nation

Policies that result in an inflow of capital from abroad

Policies that result in an increase in the marginal tax rates

A higher rate of inflation than its trading partners

31.Which of the following would be most likely to cause a current-account deficit in a country?

An increase in unilateral transfers from abroad

An increase in income from investments made abroad

An increase in merchandise exports

An inflow of foreign investments from abroad

32.Which of the following is most likely to occur when foreigners make more investments in a country than the residents of the country make abroad?

A capital account deficit

A current account surplus

A depreciation in the value of the country’s currency in the foreign exchange market

A current account deficit

33.Which of the following is a function of the International Monetary Fund (IMF)?

It holds currency reserves for member nations and makes currency loans to national central banks

It ensures a minimum standard of living to poor people across the world by providing them additional incomes

It controls the expansion and contraction of the world supply of money

It issues a currency with a fixed designated value relative to a widely accepted currency

34.Which of the following is a feature of a pure gold standard system?

The amount of foreign exchange demanded by a country depends inversely on the amount of gold the country holds

The central bank of each country has the power to determine the total supply of money

The amount of foreign exchange supplied by a country depends inversely on the amount of gold the country holds

The world supply of gold determines the total supply of money of the world

35.Which of the following is true of the balance of payments account?

It measures variations in the exchange rate between two countries

It measures the total amount of output produced in a year by the citizens of a country, including those who reside in foreign countries

It measures the value of all final goods and services produced in an economy during a specific period of time

It shows all payments and liabilities to foreigners and all payments and obligations received from foreigners

36.A country with highly attractive domestic investment opportunities and a low savings rate will tend to

tend to be relatively poor (compared with other countries)

run a current account surplus

run a current account deficit

experience a net outflow of capital

37.Which of the following will cause a decrease in the demand for U.S. dollars in the foreign exchange market?

An increase in the interest rate on U.S. Treasury bonds

American electronic goods replacing Japanese electronic goods in the world market

An increase in the number of factories set up by foreigners in the United States

Chinese toys replacing American toys in the world market

38.If the U.S. dollar appreciates relative to the British pound:

the imports of the United States will generally decline

American goods will become less expensive for the British

the exports of the United States will generally increase

British goods will become less expensive for Americans

39.Suppose 1 British pound exchanges for 1.50 U.S. dollars. If the price of a smartphone in London is 2,000 pounds, then the dollar price of the phone to an American would be:

2,000 U.S. dollars

2,500 U.S. dollars

1,333 U.S. dollars

3,000 U.S. dollars

40.Which of the following is true of a currency board?

It accepts checks and savings deposits from the public and uses a portion of them to extend loans

It controls the money supply of an economy by changing the real interest rate

It has the authority to issue new bonds that increase the supply of money in an economy

It issues a currency with a fixed designated value relative to a widely accepted currency

41.Which of the following led to the demise of the fixed exchange rate regime that dominated for a quarter of a century following World War II?

The tendency of countries to reduce tariffs

The tendency of countries to increase marginal income tax rates

The tendency of countries to increase taxes in order to achieve a balance budget

The tendency of countries to impose trade restrictions and regulations that reduced the convertibility of their currency

42.Which of the following is a credit item in the current-account transactions of a country?

Imports of services

Merchandise exports

Investments in real assets abroad

Merchandise imports

43.Which of the following is most likely to increase the demand for U.S. dollars in the foreign exchange market?

An increase in the prices of U.S. goods and services

An increase in the income of U.S. citizens

A decrease in the real interest rate of the United States relative to its trading partners

An increase in the income of the major trading partners of the United States

44.Which of the following will occur if the Canadian dollar depreciates against other major currencies in the foreign exchange market?

Canada’s net exports will fall

Canadian goods will become less expensive for foreign buyers

Canada’s foreign exchange reserves will fall

Foreign goods will be cheaper for the residents of Canada

45.Which of the following is true of a fixed exchange rate system?

Under this system, there are no restrictions on the convertibility of currencies

Exchange rates are determined by the market forces of supply and demand

Under this system, a currency board has the authority to issue new bonds to increase the money supply in an economy

Exchange rates are set at a determined amount by government policy

46.The balance of merchandise trade is also called:

balance of payments

net exports

the balance of current account

net national product

47.Other things constant, which of the following will cause the currency of a nation to depreciate in the foreign exchange market?

A rapid growth of domestic income relative to its trading partners

A higher domestic real interest rate compared to its trading partners

A shift toward sound policies that result in an inflow of capital

A lower rate of inflation than that of its trading partners

48.Identify the correct statement about the exchange rate of a country.

It enables consumers in the country to translate the prices of foreign goods into units of their own currency

It is inversely related to the nominal interest rate of the country

It enables the government of the country to estimate the potential gross domestic product of the country

It is directly proportional to the amount of private investment in a country

49.Suppose Mexico is a major trading partner of Canada. A sudden decrease in the average income of Mexican consumers is likely to cause:

a downward movement along the demand curve for Canadian dollars

the demand curve for Canadian dollars to shift to the right

an upward movement along the demand curve for Canadian dollars

the demand curve for Canadian dollars to shift to the left

International finance and the foreign exchange market

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