IMS 3310 FINAL EXAM REVIEW || Top Grade Assured.
What determines foreign exchange rates? correct answers Relative price differences & PPP
Interest rates and money supply
Productivity & balance of payments
Exchange rate policies
Investor psychology
What is the theory of Purchasing Power Parity (PPP) correct answers ◦When inflation is high, a
currency should depreciate
◦The growth of a country's money supply determines its likely future inflation rate
◦When the growth in the money supply is greater than the growth in output, inflation will occur
Interest rates and money supply correct answers If a country's interest rate is high relative to
other countries, then the country will attract foreign funds
A high interest rate will also increase the demand for the home currency, thus enhancing its
exchange value
Productivity and Balance of Payments correct answers The rise of a country's productivity
relative to that of other countries, will improve its competitive position. More FDI will be
attracted to the country, increasing demand for its home currency, e.g., appreciation of Chinese
Yuan.
, What is a flexible exchange rate policy? correct answers -a government policy to let supply-and-
demand conditions determine exchange rates
What is a clean (free) float exchange rate policy? correct answers a pure market solution to
determine exchange rates
What is a dirty (managed) float correct answers using selective government intervention to
determine exchange rates
What is a fixed exchange rate policy correct answers a government policy to set the exchange
rate of a currency relative to other currencies
What is a target exchange rate correct answers specified upper or lower bounds within which an
exchange rate is allowed to fluctuate
What is a peg correct answers a stabilizing policy of linking a developing country's currency to a
key currency
What is a bandwagon effect correct answers the effect of investors moving in the same direction
at the same time, like a herd
What is a capital flight correct answers a phenomenon in which a large number of individuals
and companies exchange domestic currency for a foreign currency
What is a spot transaction? correct answers the rate at which a foreign exchange dealer converts
one currency into another currency on a particular day; the classic single-shot exchange of one
currency for another:
What is a forward transaction correct answers a foreign exchange transaction in which
participants buy and sell currencies now for future delivery
What determines foreign exchange rates? correct answers Relative price differences & PPP
Interest rates and money supply
Productivity & balance of payments
Exchange rate policies
Investor psychology
What is the theory of Purchasing Power Parity (PPP) correct answers ◦When inflation is high, a
currency should depreciate
◦The growth of a country's money supply determines its likely future inflation rate
◦When the growth in the money supply is greater than the growth in output, inflation will occur
Interest rates and money supply correct answers If a country's interest rate is high relative to
other countries, then the country will attract foreign funds
A high interest rate will also increase the demand for the home currency, thus enhancing its
exchange value
Productivity and Balance of Payments correct answers The rise of a country's productivity
relative to that of other countries, will improve its competitive position. More FDI will be
attracted to the country, increasing demand for its home currency, e.g., appreciation of Chinese
Yuan.
, What is a flexible exchange rate policy? correct answers -a government policy to let supply-and-
demand conditions determine exchange rates
What is a clean (free) float exchange rate policy? correct answers a pure market solution to
determine exchange rates
What is a dirty (managed) float correct answers using selective government intervention to
determine exchange rates
What is a fixed exchange rate policy correct answers a government policy to set the exchange
rate of a currency relative to other currencies
What is a target exchange rate correct answers specified upper or lower bounds within which an
exchange rate is allowed to fluctuate
What is a peg correct answers a stabilizing policy of linking a developing country's currency to a
key currency
What is a bandwagon effect correct answers the effect of investors moving in the same direction
at the same time, like a herd
What is a capital flight correct answers a phenomenon in which a large number of individuals
and companies exchange domestic currency for a foreign currency
What is a spot transaction? correct answers the rate at which a foreign exchange dealer converts
one currency into another currency on a particular day; the classic single-shot exchange of one
currency for another:
What is a forward transaction correct answers a foreign exchange transaction in which
participants buy and sell currencies now for future delivery
