Madura chp8

Chapter 8 Relationships Among Inflation,Interest Inflation, Interest Rates, and Exchange Rates 1.Assume 1.Ass ume a two-coun two-country try world: wor ld: Country Country A and Country Coun try B. Whi Which ch of the follo fol lowi wing ng is correct correct

222  International Financial Management  4.Because there are a variety of factors in addition to inflation that affect exchange rates, this will:A)reduce the probability that PPP shall hold.B)increase the probability that PPP shall hold C)increase the

Chapter 8: Relationships Among Inflation, Interest Rates, and Exchange Rates 223 A)some corporations with excess cash can lock in a guaranteed higher return on future foreignshort-term investments.B)some corporations with excess cash could have

224  International Financial Management  14.Assume that U.S. and British investors require a real return of 2%. If the nominal U.S. interest rateis 15%, and the nominal British rate is 13%, then according to the IFE, the British inflation rate isexpected to be about

Chapter 8: Relationships Among Inflation, Interest Rates, and Exchange Rates 225 18.If interest rate parity holds, then the one-year forward rate of a currency will be _______ the predicted spot rate of the currency in one year according to the

226  International Financial Management  22.The inflation rate in the U.S. is 3%, while the inflation rate in Japan is 1.3%. The current exchangerate for the Japanese yen (¥) is $0.0075. After supply and demand for the Japanese yen has adjustedin the

Chapter 8: Relationships Among Inflation, Interest Rates, and Exchange Rates 227 25.Which of the following is indicated by research regarding purchasing power parity (PPP)?A)PPP clearly holds in the short run.B)Deviations from PPP are reduced in the

228  International Financial Management  29.

Which of the following is not  true regarding IRP, PPP, and the IFE?A)IRP suggests that a currency’s spot rate will change according to interest rate differentials.B)PPP

Chapter 8: Relationships Among Inflation, Interest Rates, and Exchange Rates 229 35.If interest rate parity holds, and the international Fisher effect (IFE) holds, foreign currencies withrelatively high interest rates should have forward discounts and those