Reading-18-Capital-Flows-and-the-FX-Market-1

CFA
CAPITAL FLOWS AND THE

FX MARKET
18
1 In the currency market, traders quote the:

(A) base currency rate.
(B) nominal exchange rate.
(C) real exchange rate.
2. If we compare the prices of goods in two countries through time, we can use the price
information in concert with the quoted foreign exchange rate to calculate the:
(A) interest rate spread.
(B) nominal exchange rate.
3. In the foreign exchange markets, transactions by households and small institutions

for tourism, cross-border investment, or speculative trading comprise the:
(A) real money market.
(B) retail market.
(C) sovereign wealth market.
4. The sell side of the foreign exchange markets primarily consists of:
(A) multinational banks that deal in currencies.
(B) firms and investors that are hedging their currency risks.
(C) firms and investors that require foreign currencies for transactions.
5. With respect to exchange rate regimes, crawling bands are most likely used in a
transition toward:
(A) a fixed peg arrangement.
(B) a monetary union.
(C) floating exchange rates.
6. An exchange rate at which two parties agree to trade a specific amount of one
currency for another a year from today is best described as a:
(A) future exchange rate.
(B) forward exchange rate.
Econimics 1 Capital Flows and The Fx Market

CFA
7. A government that wishes to reduce the volatility of domestic asset prices and protect
domestic industries is most likely to:
(A) adopt voluntary export restraints.
(B) impose capital restrictions.
(C) participate in regional trading agreements.
8. Which approach to analysis of trade deficits indicates that in the absence of excess
capacity in the economy, currency devaluation provides only a temporary improvement
in a country's trade deficit, and that long-term improvement requires either a smaller
fiscal deficit or a larger excess of domestic savings over domestic investment?
(A) Real wealth approach.
(B) Absorption approach.
(C) Elasticities approach.
9. The Marshall-Lerner condition suggests that a country's ability to narrow a trade

deficit by devaluing its currency depends on:
(A) capacity utilization in the domestic economy.
(B) elasticity of demand for imports and exports.
(C) national saving relative to domestic investment.
10. Assuming no changes in the prices of a representative consumption basket in two

currency areas over the measurement period, changes in the nominal exchange rate:
(A) can be converted to the real exchange rate using interest rates.
(B) can be extrapolated to calculate interest rates.
(C) are equal to changes in the real exchange rate.
11. At a base period, the CPIs of the countries of Tuolumne (currency is the TOL) and
Bodee (currency is the BDE) are both 100, and the exchange rate is 0.90 BDE/TOL.
One year later, the exchange rate is 0.75 BDE/TOL, and the CPI has risen to 110 in
Tuolumne and 105 in Bodee. The real exchange rate is closest to:
(A) 0.72 BDE/TOL.
(B) 0.79 BDE/TOL.
(C) 0.83 BDE/TOL.
12. Participants in foreign exchange markets that can be characterized as "real money
accounts" most likely include:
(A) central banks.
(B) hedge funds.
(C) insurance companies.

CFA
13. Under the absorption approach, which of the following is least likely required to move
the balance of payments toward surplus?
(A) Decreased domestic expenditure relative to income.
(B) Increased savings relative to domestic investment.
(C) Sufficient elasticities of export and import demand.
14. A government that imposes restrictions on capital flows into or out of its country is
most likely attempting to:
(A) encourage competition among domestic industries.
(B) reduce the volatility of domestic asset prices.
(C) implement floating exchange rates.
15. The difference between Country D's nominal and real exchange rates with Country F
is most closely related to:
(A) Country D’s inflation rate.
(B) the ratio of the two countries’ price levels.
(C) the risk-free interest rates of the two countries.
16. In which of the following exchange rate regimes can a country participate without
giving up its own currency?
(A) Crawling peg or formal dollarization.
(B) Monetary union or currency board.
(C) Target zone or conventional fixed peg.
17. Akor is a country that has chosen to use a conventional fixed peg arrangement as the
country's exchange rate regime. Under this arrangement, Akor's exchange rate
against the currency to which it pegs:
(A) will be equal to the peg rate.
(B) is market-determined.
(C) may fluctuate around the peg rate.
18. A country's central bank announces a monetary policy goal of a stable exchange
rate with the euro, which it defines as deviations of no more than 3% from its current
exchange rate of 2.5000. The country's exchange rate regime is best described as a:
(A) crawling band.
(B) fixed peg.
(C) target zone.

CFA
19. The exchange rate for Chinese yuan (CNY) per euro (EUR) changed from CNY/EUR
8.1588 to CNY/EUR 8.3378 over a 3-month period. It is most accurate to state that the:
(A) CNY has depreciated 2.19% relative to the EUR.
(B) EUR has appreciated 2.15% relative to the CNY.
(C) EUR has appreciated 2.19% relative to the CNY.
20. The tendency for currency depreciation to increase a country's trade deficit in the
short run is known as the:
(A) absorption effect.
(B) J-curve effect.
(C) Marshall-Lerner effect.
21. Which of the following would least likely be a participant in the forward market?
(A) Arbitrageurs.
(B) Long-term investors.
(C) Traders.
22. The exchange rate for Australian dollars per British pound (AUD/GBP) was 1.4800
five years ago and is 1.6300 today. The percent change in the Australian dollar
relative to the British pound is closest to:
(A) appreciation of 10.1%.
(B) depreciation of 10.1%.
(C) depreciation of 9.2%.
23. The exchange rate for Japanese yen (JPY) per euro (EUR) changes from 98.00 to
103.00 JPY/EUR. How has the value of the EUR changed relative to the JPY in
percentage terms?
(A) Appreciated by 4.9%.
(B) Appreciated by 5.1%.
(C) Depreciated by 4.9%.
24. In the context of the foreign exchange market, investment accounts are said to be
leveraged if they:
(A) borrow and sell foreign currencies.
(B) buy currencies on margin.
(C) use derivatives.

CFA
25. If the exchange rate value of the CAD goes from USD 0.60 to USD 0.80, then the CAD:
(A) appreciated and Canadians will find U.S. goods cheaper.
(B) depreciated and Canadians will find U.S. goods cheaper.
(C) depreciated and Canadians will find U.S. goods more expensive.
26. Other things equal, a real exchange rate (stated as units of domestic currency per
unit of foreign currency) will decrease as a result of an increase in the:
(A) domestic price level.
(B) foreign price level.
(C) nominal exchange rate (domestic/foreign).
27. Which of the following is least likely a common objective of governmental capital
restrictions?
(A) Keep domestic interest rates high.
(B) Maintain fixed exchange rates.
(C) Reduce the volatility of domestic asset prices

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CFA

CAPITAL FLOWS AND THE

1 In the currency market, traders quote the:

3. In the foreign exchange markets, transactions by households and small institutions

Econimics 1 Capital Flows and The Fx Market

9. The Marshall-Lerner condition suggests that a country's ability to narrow a trade

10. Assuming no changes in the prices of a representative consumption basket in two

Econimics 2 Capital Flows and The Fx Market

Econimics 3 Capital Flows and The Fx Market

Econimics 4 Capital Flows and The Fx Market

Econimics 5 Capital Flows and The Fx Market

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