Questions and Answers
What happens to the price of a currency when its supply decreases?
Which of the following is NOT a reason for the demand for foreign currency?
What primarily drives the supply of foreign exchange?
Which factor does NOT impact future exchange rate movements?
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According to the law of one price, if two identical goods are priced differently in two different countries, what is likely to happen?
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What does the law of one price assert regarding identical products sold in different countries?
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According to purchasing power parity (PPP), what should be roughly equivalent in different countries?
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Which factor does NOT impact future exchange rate movements?
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What does the International Fisher Effect state about spot exchange rate changes?
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Which outcome is predicted by the purchasing power parity theory (PPP)?
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What is the primary function of the foreign exchange market?
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How is the exchange rate defined?
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What term is used to describe a firm protecting itself against foreign exchange risk?
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What is a spot exchange rate?
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What is a forward exchange rate?
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Which of the following is NOT a function of the foreign exchange market?
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Which market operates 24 hours a day for currency trading?
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What does the term 'currency swaps' refer to?
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What does the gold standard ensure regarding a country's currency?
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What was a significant reason for the decline of the gold standard by 1939?
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Which currency was directly convertible to gold under the Bretton Woods agreement?
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What was the primary purpose of establishing the International Monetary Fund (IMF)?
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Which of the following describes a drawback of the gold standard?
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What restriction was placed on countries regarding currency devaluation under the Bretton Woods system?
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What was the main strength attributed to the gold standard?
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Which event marked the end of the gold standard as a dominant monetary system?
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What is one of the primary purposes of the World Bank?
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Which organization is known for addressing balance-of-payments deficits?
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Under which scheme does the World Bank raise money through bond sales?
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What contributed to the collapse of the Bretton Woods system in the late 1960s?
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Who is the President of the World Bank as noted in the content?
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What was a key feature of the International Monetary Fund's operations?
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Which factor put significant strain on the Bretton Woods system?
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What is the primary function of the International Development Association of the World Bank?
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Study Notes
Global Business Environment Overview
- The global monetary system consists of the foreign exchange market, international monetary system, and global capital markets.
Foreign Exchange Market
- A network of banks, brokers, and dealers that facilitates the buying and selling of currencies 24/7.
- Currency conversion and insurance against foreign exchange risk are primary functions.
Exchange Rate
- The price at which one currency is exchanged for another.
- Exchange rates can be quoted in direct or indirect formats.
Insurance Against Foreign Exchange Risk
- Companies hedge against foreign exchange risk by purchasing insurance within the forex market.
Exchange Rate Market Mechanisms
- Spot exchange rate: The current rate for currency conversion on a specific day.
- Forward exchange rate: The agreed-upon rate for currency exchange at a future date.
- Currency swaps facilitate the exchange of cash flows in different currencies.
Demand for Foreign Currency
- Key sources include import payments, tourism, unilateral transfers, foreign asset purchases, and speculation.
Supply of Foreign Currency
- Generated from exports, foreign investments, remittances, and speculative activities.
Equilibrium Exchange Rate
- Achieved when the supply of and demand for foreign currency balance each other.
Currency Depreciation and Appreciation Factors
- Influenced by a country's inflation rates, interest rates, and market psychology.
Pricing and Exchange Rates
- Law of One Price: Identical products in different countries must have the same price when expressed in the same currency.
- Purchasing Power Parity (PPP) theory: A "basket of goods" should cost the same in different countries if markets are efficient.
Inflation and Exchange Rates
- Hyperinflation experiences impact how exchange rates adjust over time.
International Fisher Effect
- Indicates that exchange rate changes will be in the opposite direction to differences in nominal interest rates between two countries.
Exchange Rate Systems
- Types include Gold Standard, Fixed Exchange Rate, Floating Exchange Rate, and Managed Float.
Gold Standard
- A monetary system where currencies are pegged to gold, ensuring currency convertibility.
- Strengths include inflation control, stability in value, and trade balance management.
- System failed due to loss of confidence and demand for gold, leading to its collapse by 1939.
Bretton Woods System
- Established in 1944, set a fixed exchange rate system with currencies pegged to gold; only the U.S. dollar was directly convertible.
- Instituted the International Monetary Fund (IMF) and the World Bank to maintain monetary stability and promote economic development.
International Monetary Fund (IMF)
- Aim: To prevent competitive devaluations and stabilize international trade.
- Provides monetary discipline to member countries and support during balance-of-payments deficits.
- Located in Washington, D.C., with membership of 189 countries.
The World Bank
- Focuses on economic development and poverty reduction by providing loans to developing nations.
- Raises funds through bond sales (IBRD) and via the International Development Association.
- Led by President Ajay Banga and headquartered in Washington, D.C.
Collapse of Bretton Woods
- The system faltered in the late 1960s due to inflation from U.S. welfare programs and the Vietnam War, leading to excessive money supply and trade deficits.
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Description
This quiz focuses on the Global Business Environment, specifically covering topics like the foreign exchange market, international monetary system, and global capital markets. Test your understanding of how these elements interact within the global economy.
