Chapter 11: International Monetary System

Devaluation has the effect of

• removing the small denominations of paper currency from circulation

• increasing a currency’s purchasing power

• decreasing a currency’s purchasing power

• leveling a currency’s purchasing power

Which of the following is the definition of revaluation?

• Leveling of a currency’s purchasing power

• Removal of the small denominations of paper currency from circulation

• Intentional lowering of a currency’s value by the nation’s government

• Intentional raising of a currency’s value by the nation’s government

To increase the accuracy of financial planning, managers prefer currency values to be

• high

• stable

• unpredictable

• low

The idea that prices of financial instruments reflect all publicly available information is called the

• efficient market view

• public information view

• private information view

• inefficient market view

Which of the following is the definition of the inefficient market view?

• Prices of financial instruments do not reflect all publicly available information

• Prices of financial instruments reflect all private information

• Prices of financial instruments reflect all publicly available information

• Prices of financial instruments reflect all expected profits

Which of the following forecasts exchange rates using statistical models based on economic indicators?

• Law of one price

• Fundamental analysis

• Technical analysis

• Purchasing power parity

The forecasting of exchange rates using charts of past trends in currency prices and other factors is called

• the law of one price

• purchasing power parity

• fundamental analysis

• technical analysis

The principle that an identical item must have an identical price in all countries when the price is expressed in a common currency is called

• devaluation parity

• purchasing power parity

• revaluation parity

• the law of one price

The principle that says economic forces will push a market exchange rate toward that predicted by the principle is called

• market exchange rate theory

• the law of purchasing price theory

• the law of one price

• purchasing power parity theory

If the purchasing power parity (PPP) implied exchange rate between the US dollar and euro is $1 = €0.90 but the market exchange rate is $1 = €0.85, the euro is

• undervalued in currency markets

• experiencing lost purchasing power

• overvalued in currency markets

• violating the law of one price