ECS3703
INTERNATIONAL FINANCE
PAST EXAM PACK QUESTIONS AND ANSWERS
(2020 – 2014)
2020 MAY/JUNE EXAM QUESTIONS AND ANSWERS
2020 SUMMARISED NOTES
DISCLAIMER: Extreme care has been used to create this document, however the contents are provided “as is” without any
representations or warranties, express or implied. This document is to be used for comparison, research and reference
purposes ONLY. Directly submitting and/or reselling/ distribution / reproduction any part of this document is not permitted.
, ECS3703: INTERNATIONAL FINANCE
MAY/JUNE EXAM MEMO
COMPILED BY RALPH
All the questions have the following options:
[1] Only a
[2] Only b
[3] Only c
[4] Only a and b
[5] Only a and c
[6] Only b and c
[7] a, b and c
[8] None of the statements are correct.
Question 1
Which of the following statements is/are correct?
(a) A current account deficit on the South African balance of payments is often
associated with a surplus balance on the financial account.
(b) A current account surplus on the South African balance of payments is
often associated with a deficit balance on the financial account.
(c) Interest rates tend to be lower when the current account is in a deficit and
higher when there is a surplus.
[1] Only a
Question 2
Suppose the rand/dollar exchange rate is R18,00/$1 on a Monday, the
following Wednesday it is R19,00/$1 and by the Friday it is again
R18,00/$1. Which of the following statements is/are correct with
reference to the above?
(a) Arbitrage can take place but without any profit.
(b) The rand will depreciate against the pound.
(c) The changes in the exchange rate are the result of uncovered interest
arbitrage.
,[8] None of the statements are correct.
Question 3
Which of the following statements is/are correct? Triangular arbitrage…
(a) increases the supply of the currency in the monetary center where the
currency is cheaper.
(b) increases the demand for the currency in the monetary center where the
currency is more expensive.
(c) unifies all international monetary centers into a single market.
When three currencies and three monetary centers are involved, we have
triangular, or three-point, arbitrage. While triangular arbitrage is not very
common, it operates in the same manner to ensure consistent indirect, or
cross, exchange rates between the three currencies in the three monetary
centers.
[3] Only c
Question 4
Which of the following statements is/are correct? The cost of currency
board arrangements is the inability of the nation’s central bank to…
(a) collect seignorage.
(b) act as a lender of last resort.
(c) conduct its own fiscal policy.
The inability of the nation’s central bank to:
1. Conduct its own monetary policy
2. Act as a lender of last resort
3. To collect seigniorage from issuing its own currency.
[4] Only a and b
Question 5
Which of the following statements is/are correct according to the
portfolio balance model? When local investors demand more USA bonds,
then the…
(a) local demand for dollars increases.
(b) rand will depreciate.
(c) local investors’ wealth will increase.
The portfolio balance model assumes that domestic and foreign bonds are
imperfect substitutes and when local investors demand more USA bonds, then
the local demand for dollars will increase, the rand will depreciate and local
investors wealth will increase.
[7] a, b and c
Question 6
Which of the following statements is/are correct? In an unstable foreign
exchange market…
(a) a disturbance from equilibrium pushes the exchange rate further away from
equilibrium.
(b) the supply curve of foreign exchange is negatively sloped and more elastic
than the demand curve.
, (c) a flexible exchange rate system increases a balance of payments
disequilibrium.
We have an unstable foreign exchange market when a disturbance from
equilibrium pushes the exchange rate further away from equilibrium. A foreign
exchange market is unstable if the supply curve is negatively sloped and more
elastic (flatter) than the demand curve of foreign exchange.
[7] a, b and c
Question 7
Which of the following statements is/are correct according to the
absorption approach? A depreciation of a nation’s currency from a
position of full employment will improve the trade balance when…
(a) domestic absorption decreases automatically.
(b) domestic absorption decreases as a result of contractionary fiscal policy.
(c) government increases real income.
The absorption approach integrates the automatic price and income
adjustment mechanisms. For example, a depreciation or devaluation
stimulates the domestic production of exports and import substitutes and
increases the level of real national income. This induces an increase in the
nation’s imports, which neutralizes part of the original improvement in its trade
balance. But if the nation is at full employment to begin with, production cannot
rise, and the depreciation or devaluation will instead increase domestic prices
so as to leave the trade balance completely unchanged, unless real domestic
absorption is some how reduced.
[4] Only a and b
Question 8
Which of the following can be considered as direct controls?
(a) Fiscal policy.
(b) Monetary policy.
(c) A two-tier foreign exchange market.
Direct controls consist of tariffs, quotas, and other restrictions on the flow of
international trade and capital. Direct control can also take the form of price
and wage controls in an attempt to restrain domestic inflation when more
general policies have failed.
[8] None of the statements are correct.
Question 9
Which of the following statements is/are correct?
(a) Interest is recorded in the financial account.
(b) Dividends are recorded in the financial account.
(c) Net foreign profits are recorded in the current account.
Financial account records exchanges of international asset Subdivided into:
direct investment, portfolio investment and other investment. The Current
Account records Income items which are interest, dividends and foreign
branch profits.
[3] Only c
INTERNATIONAL FINANCE
PAST EXAM PACK QUESTIONS AND ANSWERS
(2020 – 2014)
2020 MAY/JUNE EXAM QUESTIONS AND ANSWERS
2020 SUMMARISED NOTES
DISCLAIMER: Extreme care has been used to create this document, however the contents are provided “as is” without any
representations or warranties, express or implied. This document is to be used for comparison, research and reference
purposes ONLY. Directly submitting and/or reselling/ distribution / reproduction any part of this document is not permitted.
, ECS3703: INTERNATIONAL FINANCE
MAY/JUNE EXAM MEMO
COMPILED BY RALPH
All the questions have the following options:
[1] Only a
[2] Only b
[3] Only c
[4] Only a and b
[5] Only a and c
[6] Only b and c
[7] a, b and c
[8] None of the statements are correct.
Question 1
Which of the following statements is/are correct?
(a) A current account deficit on the South African balance of payments is often
associated with a surplus balance on the financial account.
(b) A current account surplus on the South African balance of payments is
often associated with a deficit balance on the financial account.
(c) Interest rates tend to be lower when the current account is in a deficit and
higher when there is a surplus.
[1] Only a
Question 2
Suppose the rand/dollar exchange rate is R18,00/$1 on a Monday, the
following Wednesday it is R19,00/$1 and by the Friday it is again
R18,00/$1. Which of the following statements is/are correct with
reference to the above?
(a) Arbitrage can take place but without any profit.
(b) The rand will depreciate against the pound.
(c) The changes in the exchange rate are the result of uncovered interest
arbitrage.
,[8] None of the statements are correct.
Question 3
Which of the following statements is/are correct? Triangular arbitrage…
(a) increases the supply of the currency in the monetary center where the
currency is cheaper.
(b) increases the demand for the currency in the monetary center where the
currency is more expensive.
(c) unifies all international monetary centers into a single market.
When three currencies and three monetary centers are involved, we have
triangular, or three-point, arbitrage. While triangular arbitrage is not very
common, it operates in the same manner to ensure consistent indirect, or
cross, exchange rates between the three currencies in the three monetary
centers.
[3] Only c
Question 4
Which of the following statements is/are correct? The cost of currency
board arrangements is the inability of the nation’s central bank to…
(a) collect seignorage.
(b) act as a lender of last resort.
(c) conduct its own fiscal policy.
The inability of the nation’s central bank to:
1. Conduct its own monetary policy
2. Act as a lender of last resort
3. To collect seigniorage from issuing its own currency.
[4] Only a and b
Question 5
Which of the following statements is/are correct according to the
portfolio balance model? When local investors demand more USA bonds,
then the…
(a) local demand for dollars increases.
(b) rand will depreciate.
(c) local investors’ wealth will increase.
The portfolio balance model assumes that domestic and foreign bonds are
imperfect substitutes and when local investors demand more USA bonds, then
the local demand for dollars will increase, the rand will depreciate and local
investors wealth will increase.
[7] a, b and c
Question 6
Which of the following statements is/are correct? In an unstable foreign
exchange market…
(a) a disturbance from equilibrium pushes the exchange rate further away from
equilibrium.
(b) the supply curve of foreign exchange is negatively sloped and more elastic
than the demand curve.
, (c) a flexible exchange rate system increases a balance of payments
disequilibrium.
We have an unstable foreign exchange market when a disturbance from
equilibrium pushes the exchange rate further away from equilibrium. A foreign
exchange market is unstable if the supply curve is negatively sloped and more
elastic (flatter) than the demand curve of foreign exchange.
[7] a, b and c
Question 7
Which of the following statements is/are correct according to the
absorption approach? A depreciation of a nation’s currency from a
position of full employment will improve the trade balance when…
(a) domestic absorption decreases automatically.
(b) domestic absorption decreases as a result of contractionary fiscal policy.
(c) government increases real income.
The absorption approach integrates the automatic price and income
adjustment mechanisms. For example, a depreciation or devaluation
stimulates the domestic production of exports and import substitutes and
increases the level of real national income. This induces an increase in the
nation’s imports, which neutralizes part of the original improvement in its trade
balance. But if the nation is at full employment to begin with, production cannot
rise, and the depreciation or devaluation will instead increase domestic prices
so as to leave the trade balance completely unchanged, unless real domestic
absorption is some how reduced.
[4] Only a and b
Question 8
Which of the following can be considered as direct controls?
(a) Fiscal policy.
(b) Monetary policy.
(c) A two-tier foreign exchange market.
Direct controls consist of tariffs, quotas, and other restrictions on the flow of
international trade and capital. Direct control can also take the form of price
and wage controls in an attempt to restrain domestic inflation when more
general policies have failed.
[8] None of the statements are correct.
Question 9
Which of the following statements is/are correct?
(a) Interest is recorded in the financial account.
(b) Dividends are recorded in the financial account.
(c) Net foreign profits are recorded in the current account.
Financial account records exchanges of international asset Subdivided into:
direct investment, portfolio investment and other investment. The Current
Account records Income items which are interest, dividends and foreign
branch profits.
[3] Only c
