FIN 6420 CH 8 | ACE EVERY QUIZ | CONFIDENCE
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The Fisher effect is used to determine the:
A. Real interest rate
B. Real forward rate
C. Real inflation rate
D. Real spot rate - Answer: real interest rate
The nominal interest rate can be measured as the real interest rate minus the expected
inflation rate. T/F? - Answer: FALSE
According to the Fisher effect (IFE), the exchange rate percentage change should be
approximately equal to the differential in income levels between two countries. T/F? -
Answer: FALSE
If the international Fisher effect (IFE) holds, the local investors are expected to earn the
same return from investing internationally as they would from investing in their local
markets. T/F? - Answer: TRUE
Which of the following theories suggests that the percentage change in the spot
exchange rate of a currency should be equal to the inflation differential between two
countries?
A. Triangular arbitrage
B. International Fisher effect (IFE)
C. Purchasing power parity (PPP)
D. Interest rate parity (IRP) - Answer: purchasing power parity (PPP)
1
APPHIA - Crafted with Care and Precision for Academic Excellence.
, Because there are a variety of factors in addition to inflation that affect exchange rates,
this will:
A. Reduce the probability that PPP will hold
B. Increase the probability that IFE will hold
C. Increase the probability that PPP will hold
D. Increase the probability that PPP will hold and increase the probability that IFE will
hold - Answer: reduce the probability that PPP will hold
The inflation rate in the United States is 4 percent, while the inflation rate in Japan is
1.5%. The current exchange rate for the Japanese yen is $0.0080. After supply and
demand for the Japanese yen have adjusted according to purchasing power parity, the
new exchange rate for the yen will be:
A. $0.00492
B. $0.0082
C. $0.0078
D. $0.0111 - Answer: $0.0082
If the IFE theory holds, that means that covered interest arbitrage is not feasible. T/F? -
Answer: FALSE
According to purchasing power parity (PPP), if a foreign country's inflation rate is below
the inflation rate at home, home country consumers will increase their imports from the
foreign country, and the foreign consumers will lower their demand for home country
products. These market forces cause the foreign currency to appreciate. T/F? - Answer:
TRUE
Given a home country and a foreign country, purchasing power parity (PPP) suggests
that:
2
APPHIA - Crafted with Care and Precision for Academic Excellence.
BACKED BY ACCURACY!
The Fisher effect is used to determine the:
A. Real interest rate
B. Real forward rate
C. Real inflation rate
D. Real spot rate - Answer: real interest rate
The nominal interest rate can be measured as the real interest rate minus the expected
inflation rate. T/F? - Answer: FALSE
According to the Fisher effect (IFE), the exchange rate percentage change should be
approximately equal to the differential in income levels between two countries. T/F? -
Answer: FALSE
If the international Fisher effect (IFE) holds, the local investors are expected to earn the
same return from investing internationally as they would from investing in their local
markets. T/F? - Answer: TRUE
Which of the following theories suggests that the percentage change in the spot
exchange rate of a currency should be equal to the inflation differential between two
countries?
A. Triangular arbitrage
B. International Fisher effect (IFE)
C. Purchasing power parity (PPP)
D. Interest rate parity (IRP) - Answer: purchasing power parity (PPP)
1
APPHIA - Crafted with Care and Precision for Academic Excellence.
, Because there are a variety of factors in addition to inflation that affect exchange rates,
this will:
A. Reduce the probability that PPP will hold
B. Increase the probability that IFE will hold
C. Increase the probability that PPP will hold
D. Increase the probability that PPP will hold and increase the probability that IFE will
hold - Answer: reduce the probability that PPP will hold
The inflation rate in the United States is 4 percent, while the inflation rate in Japan is
1.5%. The current exchange rate for the Japanese yen is $0.0080. After supply and
demand for the Japanese yen have adjusted according to purchasing power parity, the
new exchange rate for the yen will be:
A. $0.00492
B. $0.0082
C. $0.0078
D. $0.0111 - Answer: $0.0082
If the IFE theory holds, that means that covered interest arbitrage is not feasible. T/F? -
Answer: FALSE
According to purchasing power parity (PPP), if a foreign country's inflation rate is below
the inflation rate at home, home country consumers will increase their imports from the
foreign country, and the foreign consumers will lower their demand for home country
products. These market forces cause the foreign currency to appreciate. T/F? - Answer:
TRUE
Given a home country and a foreign country, purchasing power parity (PPP) suggests
that:
2
APPHIA - Crafted with Care and Precision for Academic Excellence.
