FIN 6420 CH 8 EXAM QUESTIONS AND ANSWERS ALREADY PASSED
The Fisher effect is used to determine the:
a. real interest rate
b. real forward rate
c. real inflation rate
d. real spot rate - Answers real interest rate
The nominal interest rate can be measured as the real interest rate minus the expected inflation
rate. T/F? - Answers 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? - Answers
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? -
Answers 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) - Answers purchasing power parity (PPP)
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 -
, Answers 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 - Answers $0.0082
If the IFE theory holds, that means that covered interest arbitrage is not feasible. T/F? - Answers
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? - Answers TRUE
Given a home country and a foreign country, purchasing power parity (PPP) suggests that:
a. the home currency will appreciate if the current home inflation rate exceeds the current
foreign inflation rate
b. the home currency will depreciate if the current home inflation rate exceeds the current
foreign inflation rate
c. the home currency will appreciate if the current home interest rate exceeds the current
foreign interest rate
d. the home currency will depreciate if the current home inflation rate exceeds the current
foreign interest rate - Answers the home currency will depreciate if the current home inflation
rate exceeds the current foreign inflation rate
Assume that the one-year interest rate in the United States is 7 percent and the United Kingdom
is 5 percent. According to the international Fisher effect, the British pound's spot exchange rate
should ___ by about ___ over the year.
The Fisher effect is used to determine the:
a. real interest rate
b. real forward rate
c. real inflation rate
d. real spot rate - Answers real interest rate
The nominal interest rate can be measured as the real interest rate minus the expected inflation
rate. T/F? - Answers 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? - Answers
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? -
Answers 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) - Answers purchasing power parity (PPP)
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 -
, Answers 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 - Answers $0.0082
If the IFE theory holds, that means that covered interest arbitrage is not feasible. T/F? - Answers
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? - Answers TRUE
Given a home country and a foreign country, purchasing power parity (PPP) suggests that:
a. the home currency will appreciate if the current home inflation rate exceeds the current
foreign inflation rate
b. the home currency will depreciate if the current home inflation rate exceeds the current
foreign inflation rate
c. the home currency will appreciate if the current home interest rate exceeds the current
foreign interest rate
d. the home currency will depreciate if the current home inflation rate exceeds the current
foreign interest rate - Answers the home currency will depreciate if the current home inflation
rate exceeds the current foreign inflation rate
Assume that the one-year interest rate in the United States is 7 percent and the United Kingdom
is 5 percent. According to the international Fisher effect, the British pound's spot exchange rate
should ___ by about ___ over the year.
