Global Financial Systems
Chapter Exam Questions
Course Introduction
Global Financial Systems explores the structure, function, and evolution of financial institutions, markets, and instruments operating on an international scale. The course examines how global financial systems facilitate capital flows, influence economic development, and respond to crises. Students will analyze regulatory frameworks, the roles of central banks and multinational organizations, and the dynamics of currency exchange, sovereign debt, and cross-border investment. The impact of globalization, financial innovation, and emerging technologies on market integration and systemic risk will also be explored, equipping students with a comprehensive understanding of the interconnected nature of modern finance.
Recommended Textbook
International Money and Finance 8th Edition by Michael Melvin
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Page 2
Chapter 1: The Foreign Exchange Market
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Sample Questions
Q1) When the value of the dollar changes from 0.75 pounds to 0.5 pounds,then the pound has
A) appreciated against the dollar by 33.3%.
B) depreciated against the dollar by 33.3%.
C) appreciated against the dollar by 50.0%.
D) depreciated against the dollar by 50.0%.
Answer: A
Q2) When the exchange rate changes from 0.9 euros per dollar to 1.0 euros per dollar,then
A) the euro has appreciated and the dollar has appreciated.
B) the euro has depreciated and the dollar has appreciated.
C) the euro has appreciated and the dollar has depreciated.
D) the euro has depreciated and the dollar has depreciated.
Answer: B
Q3) Other things equal,if American exports to Japan are higher than American imports from Japan,then,under a floating exchange rate system,we would expect the dollar to appreciate against the yen.
A)True
B)False
Answer: True
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Chapter 2: International Monetary Arrangements
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Sample Questions
Q1) Why was the European Monetary System established?
A) To establish a common currency the euro.
B) To peg all member currencies to the Swiss Franc.
C) To maintain small exchange rate fluctuation among member countries.
D) To unite the coal and steel workers in France and Germany
Answer: C
Q2) Seigniorage is the system where the dominant money producer limits the supply of money to leverage foreign currencies.
A)True
B)False
Answer: False
Q3) The geographic area that would maximize economic benefits by keeping the exchange rate fixed within the area is a an:
A) Trade union
B) Currency board
C) Trade bloc
D) Optimal currency area
Answer: D
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4
Chapter 3: The Balance of Payments
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Sample Questions
Q1) A foreign resident buys shares of in a U.S.company stock in the New York Stock Exchange.
A) Credit in U.S. services
B) Credit to the U.S. unilateral transfers
C) Credit in the U.S. private capital account
D) Debit in U.S. services
Q2) A U.S.resident receives $1,000 in interest from French bonds he owns causes a:
A) Credit to service
B) Debit to service
C) Credit to investment income
D) Debit to investment income
Q3) A Japanese store buys Apple iPods shipped from the U.S.causes a:
A) Credit in the U.S. merchandise account
B) Debit in the U.S. merchandise account
C) Credit to U.S. investment income
D) Debit to U.S. investment income
Q4) The German government donates $100,000 worth of vaccine to Tanzania.This action is recorded as a $100,000 debit to the German unilateral transfers.
A)True
B)False
Page 5
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Chapter 4: Forward-Looking Market Instruments
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Sample Questions
Q1) In what market are currency prices sometimes referred to as a strike price?
A) Forward market
B) Swap market
C) Futures market
D) Options market
Q2) Foreign currency options contracts that give the buyer the right to buy are called:
A) Call options.
B) Purchase rights.
C) Put options.
D) Strike rights.
Q3) When the forward price of a currency is equal to the spot price,it is sold at a forward premium.
A)True
B)False
Q4) Standardized contracts traded on established exchanges for delivery of currencies at a specified future date are called foreign currency futures.
A)True
B)False
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Page 6
Chapter 6: Exchange Rates, interest Rates, and Interest
Parity
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Sample Questions
Q1) If the U.S.and the U.K.have identical term structures of interest rates,we would expect:
A) the pound to appreciate against the dollar.
B) the pound to depreciate against the dollar.
C) no change in the exchange rate between two currencies.
D) there is not enough information to forecast the direction of the exchange rate.
Q2) A forward flat occurs when:
A) The forward rate is greater than the spot rate.
B) The spot rate is greater than the forward rate.
C) The forward and spot rates are equal.
D) None of the above.
Q3) A currency is at a ________ when its interest rate is ________ than the interest rate in the other country.
A) Forward flat, lower
B) Forward discount, lower
C) Forward flat, higher
D) Forward premium, lower
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Chapter 7: Prices and Exchange Rates: Purchasing Power
Parity
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Sample Questions
Q1) Purchasing power parity PPP explains the relationship between interest rates and product price changes.
A)True
B)False
Q2) If the inflation rates of two countries are both equal to the percentage change in the exchange rate,then absolute purchasing power parity holds.
A)True
B)False
Q3) Suppose the exchange rate between the U.S.dollar and the Japanese yen is initially 90 yen per dollar.According to relative purchasing-power parity,if the price of traded goods rises by 10 percent in the United States and remains constant in Japan,the exchange rate will become:
A) 72 yen per dollar
B) 81 yen per dollar
C) 99 yen per dollar
D) 108 yen per dollar
Q4) The real exchange rate is equal to one when absolute PPP holds.
A)True
B)False
8
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Chapter 8: Foreign Exchange Risk and Forecasting
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Sample Questions
Q1) If the foreign exchange market is efficient,the forward exchange rate would differ from the expected future spot exchange rate only by an ________.
A) Strike price
B) Exposure risk
C) Future spot exchange rate
D) Risk premium
Q2) Which forecasting technique uses a fundamental-based model with information that is thought to be important to changes in exchange rates?
A) Structural
B) Hedging
C) Atheoretical
D) Flow
Q3) The effective return differential in the forward exchange market is equal to the strike price.
A)True
B)False
Q4) Information exposure is a type of foreign exchange risk.
A)True
B)False
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Chapter 9: Financial Management of the Multinational Firm
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Sample Questions
Q1) Political instability and currency conversion are reasons why ________ is more complicated for foreign subsidiaries than domestic ones.
A) Currency lagging
B) Capital budgeting
C) Patterning cash flows
D) Forward financing
Q2) The evaluation of prospective investment alternatives and the commitment of funds to preferred projects is referred to as:
A) Capital budgeting
B) Cash management
C) Flow budgeting
D) Decentralized management
Q3) A transfer price is the price that one subsidiary charges another subsidiary of internal good transfers.
A)True
B)False
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Chapter 10: International Portfolio Investment
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Sample Questions
Q1) Which of the following are possible explanations for incomplete portfolio diversification?
I.Risk aversion
II.Home bias
III.Foreign bias
IV.Political risk
A) I and II
B) II and IV
C) I, III, and IV
D) I, II, and IV
Q2) Which of the following statements is TRUE?
I.Diversification is a process of removing systematic risk from a portfolio.
II.Diversification is a process of maximizing possible returns of a portfolio.
A) Only I is true.
B) Only II is true.
C) Both I and II are true.
D) Neither I nor II are true.
Q3) The risk present in all investment opportunities is known as systematic risk.
A)True
B)False
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Chapter 12: Determinants of the Balance of Trade
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Sample Questions
Q1) Which of the following policy examples does NOT reduce the domestic absorption?
A) Collect higher taxes on luxurious goods.
B) Raise interest rates on loans.
C) Give income tax rebates to households.
D) Cut government employees pension payments.
Q2) The J-curve illustrates which of the following?
A) The effect of a devaluation on an economy's income.
B) The immediate increase in the current account after a devaluation.
C) The gradual adjustment of the trade balance in response to a devaluation.
D) The gradual adjustment of prices after currency devaluation.
Q3) The Marshall-Lerner condition indicates that if the sum of absolute values of the elasticities of demand for imports and demand for exports is greater than one,a currency devaluation will fail to improve the balance of trade.
A)True
B)False
Q4) Elasticity refers to
A) The ability of the demand curve to shift in and out
B) The degree by which the demand curve includes other markets
C) The responsiveness of quantity to changes in price
D) The rate that quality increases as prices increase
Page 12
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Chapter 13: The Is-Lm-Bp Approach
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Sample Questions
Q1) Refer to Figure 13.2.In a fixed exchange rate regime,if an economy is experiencing external disequilibrium at point B,then to peg the exchange rate the central bank has to:
A) buy domestic currency, sell foreign currency, and shift the IS to the left.
B) buy foreign currency, sell domestic currency, and shift the LM to the right.
C) buy domestic currency, sell foreign currency, and shift the LM to the left.
D) buy foreign currency, sell domestic currency, and shift the IS to the right.
Q2) Refer to Figure 13.1.In a fixed exchange rate regime,if an economy is experiencing external disequilibrium at point B,then to peg the exchange rate the central bank has to:
A) buy domestic currency, sell foreign currency, and shift the LM to the right.
B) buy foreign currency, sell domestic currency, and shift the LM to the right.
C) buy domestic currency, sell foreign currency, and shift the IS to the left.
D) buy foreign currency, sell domestic currency, and shift the IS to the right.
Q3) Which of the following factors shifts the LM curve to the left?
A) An increase in money supply
B) An decrease in money supply
C) An increase in government spending
D) A depreciation of domestic currency
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13
Chapter 14: The Monetary Approach
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Sample Questions
Q1) The offsetting of international reserve flows by central banks that wish to follow an independent monetary policy is known as:
A) Printing money
B) Balancing the official settlements
C) The monetary approach
D) Sterilization
Q2) Suppose that a central bank sells domestic currency to buy foreign assets to fix the exchange rate.To sterilize this intervention,the central bank will have to:
A) buy bonds in the open market operations to increase domestic money supply.
B) buy bonds in the open market operations to decrease domestic money supply.
C) sell bonds in the open market operations to increase domestic money supply.
D) sell bonds in the open market operations to decrease domestic money supply.
Q3) An unsterilized intervention in which a central bank sells domestic currency to buy foreign assets will lead to:
A) an increase in foreign reserves
B) a decrease in domestic money supply
C) an appreciation of domestic currency
D) All of the above are correct.
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14
Chapter 15: Extensions to the Monetary Approach of Exchange Rate Determination
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Sample Questions
Q1) Which of the following is correct about the 'news' approach to exchange rate determination?
A) Government must control the news to prevent excessive exchange rate volatilities.
B) News reduces the information costs and thus stabilizes the exchange rate movements.
C) News make people act irrationally.
D) News affects people's expectations about the future, causing high swings in exchange rates.
Q2) The following example supports which extension to the Monetary Approach to Exchange rates: The cost of holding a U.S.dollar rises relative to the cost of holding U.K.Pounds.The demand shifts away from dollars to Pounds.
A) General equilibrium approach
B) Trade balance approach
C) Overshooting approach
D) Currency substitution approach
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