Part 2: Foreign Exchange Market

What does the Law of One Price state?

• The price of identical goods in different markets should always be different due to trade restrictions.

• The price of identical goods in different markets should be the same when the price is expressed in terms of the same currency.

• The price of identical goods is determined solely by local supply and demand, regardless of currency.

• The price of identical goods will always equalize across markets instantly due to perfect competition.

What does the Purchasing Power Parity (PPP) theory state regarding the price of a "basket of goods"?

• It should be roughly equivalent in each country, given relatively efficient markets.

• It should always be higher in countries with stronger currencies.

• It is primarily determined by the Big Mac Index.

• It should vary significantly between countries to reflect local economic conditions.

According to the video, when does inflation occur?

• When the stock of goods and services rises faster than the quantity of money in circulation.

• When the money supply decreases, leading to higher prices.

• When the quantity of money in circulation rises faster than the stock of goods and services.

• When interest rates are expected to be high.

What does the International Fisher Effect (IFE) state about the relationship between nominal interest rates and exchange rates between two countries, assuming real interest rates are the same worldwide?

• The spot exchange rate should change in an equal amount and in the same direction as the difference in nominal interest rates.

• The spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates.

• The spot exchange rate is unrelated to the difference in nominal interest rates.

• The spot exchange rate is solely determined by the real interest rates, not nominal rates.

What is the "Bandwagon Effect" in the context of foreign exchange markets?

• When investors independently analyze market fundamentals and make rational decisions.

• When a large number of traders follow the actions of a major speculator, leading to a self-fulfilling prophecy.

• When exchange rates are solely determined by macroeconomic factors.

• When central banks intervene to stabilize currency values.