Question

1. Most economic theories of exchange rate movements agree that three factors have an important impact on future exchange rate movements in a country’s currency. Which of the following is not of the three main factors?

A. The country’s price inflation

B. The country’s interest rate

C. Market psychology

D. The country’s legal system

2. Which of the following statement is true?

A. In general, FDI occurs whenever a local citizen, organization, or affiliated group takes an interest of 50 percent of more in a foreign business entity

B. Foreign portfolio investment is a form of FDI because foreign portfolio investment involves obtaining a management control

C. When a firm exports its products to a foreign country, foreign direct investment ( FDI) occurs

D. When a firm undertakes FDI, it becomes a multinational enterprise

3. Prior research on the determinants of exchange rate suggest that relative inflation rates and nominal interest rate differentials are all moderately good predictors of short-run changes in exchange rates, but predictors of long-run changes in exchange rates

True

False

4. If the value of the U.S. dollar rises sharply against the Chinese yuan, this exchange rate movements is likely to boost China’s exports to the U.S., holding other things constant

True

False

Answer 1

1. Most economic theories of exchange rate movements agree that three factors have an important impact on future exchange rate movements in a country’s currency. Which of the following is not of the three main factors?

D. The country’s legal system

Explanation: The country's legal system has no role to play in determining the exchange rate.

2. Which of the following statement is true?

C. When a firm exports its products to a foreign country, foreign direct investment ( FDI) occurs

Explanation:Exporting a prodcut is an example of trade, not investment.

3. Prior research on the determinants of exchange rate suggest that relative inflation rates and nominal interest rate differentials are all moderately good predictors of short-run changes in exchange rates, but predictors of long-run changes in exchange rates

False

Explanation: Relative inflation rates and nominal interest are predictors in the short run.

4. If the value of the U.S. dollar rises sharply against the Chinese yuan, this exchange rate movements is likely to boost China’s exports to the U.S., holding other things constant

True

Explanation: When the US dollar appreciates, Chinese imports will become relatively cheaper. So Chinese imports will increase.