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Question 1

The International Fisher equation states that...

a) ...domestic inflation rates will tend to equal foreign inflation rates

b) ...domestic real interest rates will tend to equal foreign real interest rates

c) ...the expected exchange rate depreciation of the domestic currency is equal to the future inflation differential (foreign minus domestic inflation)

d) ...the difference between the bid-ask spread for an exchange rate is equal to the future inflation differential (foreign minus domestic inflation)

Question 2

To understand the current nominal exchange rate, we need to know all of the following except...

a) The long-run value of the exchange rate

b) Last period's nominal exchange rate

c) Present and future expected domestic interest rates.

d) Present and future expected foreign interest rates.

Question 3

Suppose the following bilateral spot exchange rates are being quoted for the Danish krone (DKK), the US dollar (US$) and the euro (€):
US$/€ = 1.5
DKK/€ = 7.0
DKK/$ = 5.0
If you start with 100€, the most you could end up with in a single round of triangular arbitrage would be…

a) 93.33

b) 98.66

c) 103.25

d) 107.14

Question 4

(A) ________ interest parity involves (B) _______ domestic and foreign interest rates and the spot and the (C) __________ exchange rates.

a) (A) Covered ; (B) riskless ; (C) expected future

b) (A) Covered ; (B) riskless ; (C) forward

c) (A) Uncovered ; (B) future ; (C) forward

d) (A) Uncovered ; (B) future; (C) forward

Question 5

Over the long run the rate of depreciation of the nominal exchange rate between two countries is approximately equal to the difference in national _________ rates.

a) real output growth

b) real interest

c) productivity growth

d) inflation

Oxford University Press, Online Resource Centre, Chapter 15.

Chapter 15

Instructions

Question 1

Question 2

Question 3

Question 4

Question 5