Incorrect Answers L2V2M1 (Economics - Currency Exchange Rates)

L2V2M1-1-2.1 Question: A country benefits from lasting productivity gains and sustained capital inflows. Its currency would most likely: A) appreciate in the short-run and appreciate in the long-run. B) depreciate in the short-run and appreciate in the long-run. C) remain stable in the short-run and depreciate in the long-run. Correct Answer: A L2V2M1-1-2.2 Question: A country experiences persistent monetary easing and weak investor confidence. Its currency would most likely: A) depreciate in the short-run and depreciate in the long-run. B) appreciate in the short-run and depreciate in the long-run. C) appreciate in the short-run and appreciate in the long-run. Correct Answer: A L2V2M1-2-4.1 Question: According to the international Fisher effect, exchange rates are most likely to adjust for differences in: A) trade balances. B) nominal interest rates between countries. C) reserve requirements. Correct Answer: B L2V2M1-2-4.2 Question: Real interest rate parity most accurately states exchange rates reflect differences in: A) inflation targets. B) fiscal balances. C) real interest rates between countries. Correct Answer: C L2V2M1-3-5.1 Question: In a country with high capital mobility, which policy is most likely to weaken the domestic currency? A) a loose monetary policy. B) a restrictive fiscal policy. C) tighter capital controls. Correct Answer: A L2V2M1-3-5.2 Question: In a high capital mobility economy, which policy is most likely to support the domestic currency through lower government borrowing? A) expansionary monetary policy. B) a restrictive fiscal policy. C) expansionary fiscal policy. Correct Answer: B L2V2M1-4-6.1 Question: Which statement regarding absolute purchasing power parity is most accurate? A) Relative PPP applies only to services. B) The concept concerns interest rates only. C) Under absolute PPP the foreign price level expressed in domestic currency terms should be equal to the domestic country’s price level. Correct Answer: C L2V2M1-4-6.2 Question: Which statement best describes absolute PPP? A) Absolute PPP is similar to the law of one price, except it concerns a basket of goods rather than a single good. B) It applies only to bonds. C) It requires fixed exchange rates. Correct Answer: A L2V2M1-5-18.1 Question: A strategy with frequent gains but occasional downside shocks is most likely characterized by: A) positive skewness and positive excess kurtosis. B) negative skewness and negative excess kurtosis. C) zero skewness and zero excess kurtosis. Correct Answer: B L2V2M1-5-18.2 Question: A strategy with occasional large upside outcomes is most likely characterized by: A) negative skewness and zero excess kurtosis. B) positive skewness and positive excess kurtosis. C) symmetric returns and zero kurtosis. Correct Answer: B L2V2M1-6-23.1 Question: Carry trades are least likely to be profitable when: A) uncovered interest rate parity holds. B) forward rates are biased predictors. C) funding spreads widen. Correct Answer: A L2V2M1-6-23.2 Question: Which condition most likely exists when nominal rates fail to fully reflect expected inflation? A) current account deficits narrow. B) the Fisher relation is violated. C) reserve balances rise. Correct Answer: B L2V2M1-7-25.1 Question: In balance-of-payments approaches, exchange rates are most likely influenced by the: A) weather cycle. B) legal structure only. C) trade balance. Correct Answer: C L2V2M1-7-25.2 Question: Monetary approaches to exchange rate determination most likely emphasize changes in: A) tourism demand only. B) exports only. C) inflation. Correct Answer: C L2V2M1-8-31.1 Question: Under high capital mobility, a country sharply cuts interest rates through monetary easing. Its currency is most likely to: A) depreciate. B) appreciate. C) remain unchanged. Correct Answer: A L2V2M1-8-31.2 Question: If offsetting fiscal and monetary policies leave relative yields unchanged, a country’s currency is most likely to: A) remain stable. B) appreciate. C) depreciate. Correct Answer: A L2V2M1-9-33.1 Question: Which of the following is most likely a warning sign of an impending currency crisis? A) Stable reserve growth B) Inflation declines sharply C) Liberalized capital markets that allow for a free flow of capital. Correct Answer: C L2V2M1-9-33.2 Question: Which of the following developments is most likely associated with external pressure on a currency? A) Rising productivity growth B) Balanced trade flows C) Terms of trade deteriorate. Correct Answer: C L2V2M1-10-34.1 Question: Foreign currency bid-ask spreads are most likely to vary because they: A) are fixed by central banks. B) are influenced by time window in a trading day. C) depend only on tax rates. Correct Answer: B L2V2M1-10-34.2 Question: Foreign currency bid-ask spreads are most accurately described as measures that: A) are a function of transaction volume and volatility. B) never change intraday. C) depend only on GDP growth. Correct Answer: A L2V2M1-11-35.1 Question: If hedged foreign returns are below domestic returns, capital would most likely: A) remain equally split. B) move randomly between markets. C) flow into the domestic country. Correct Answer: C L2V2M1-11-35.2 Question: If investors diversify equally despite identical risk-adjusted returns, funds may most likely: A) flow in and out of the domestic country. B) flow only outward. C) flow only inward. Correct Answer: A L2V2M1-12-37.1 Question: Which of the following is most likely a warning sign of an impending currency crisis? A) Official foreign exchange reserves decline dramatically. B) Export competitiveness rises sharply. C) Inflation remains subdued. Correct Answer: A L2V2M1-12-37.2 Question: Which condition is most likely consistent with an overvalued currency vulnerable to correction? A) Currency value is substantially higher than the mean-reverting level. B) Currency trades below purchasing power parity. C) External debt declines rapidly. Correct Answer: A L2V2M1-13-38.1 Question: Which statement most accurately describes a case where forward markets do not perfectly forecast future spot rates? A) Covered interest parity must fail. B) The forward rate is a biased predictor of the expected future spot rate, and uncovered interest rate parity would not hold. C) Spot and forward rates must be equal today. Correct Answer: B L2V2M1-13-38.2 Question: Which statement best describes an equilibrium where expected spot rates match forward rates but investor preferences still differ? A) Forward discounts vanish permanently. B) Covered parity cannot hold. C) the forward rate is an unbiased predictor of the expected future spot rate, and uncovered interest rate parity would not hold. Correct Answer: C L2V2M1-14-40.1 Question: Which concept most likely applies when an investor uses a forward contract to hedge foreign currency exposure while comparing yields? A) Purchasing power parity B) Fisher relation C) covered interest rate parity. Correct Answer: C L2V2M1-14-40.2 Question: Which concept most accurately links exchange rates to relative price levels across countries? A) purchasing-power parity. B) Duration matching C) Liquidity preference theory Correct Answer: A L2V2M1-15-41.1 Question: Under an overshooting framework, an overly loose monetary stance followed by gradual adjustment may cause the domestic currency to: A) excessively depreciate in the long-term. B) appreciate immediately and permanently. C) remain fixed. Correct Answer: A L2V2M1-15-41.2 Question: Persistent deflationary pressure with delayed price adjustment could most likely cause the currency to: A) excessively appreciate in the long-term. B) depreciate instantly forever. C) stay unchanged. Correct Answer: A L2V2M1-16-43.1 Question: A country achieves sustained productivity growth and rising investor confidence. Its currency is most likely to: A) depreciate. B) appreciate. C) remain stable. Correct Answer: B L2V2M1-16-43.2 Question: If strong fiscal credibility offsets higher debt levels, the currency may most likely: A) depreciate sharply. B) remain stable. C) appreciate excessively. Correct Answer: B