11 According to the Theory of Covered Interest Rate Parity, if the 6-month deposit interest rate for the New Taiwan Dollar (NTD) is 2% and the 6-month deposit interest rate for the US Dollar (USD) is 5%, the relationship between the USD spot exchange rate ( E ) and the forward exchange rate ( F ) is ________.
(A)F > E
(B)F < E
(C)F = E
(D) indeterminate

12 Which of the following would cause an increase in the supply of foreign exchange? (A) An increase in domestic investment abroad. (B) An increase in domestic spending on foreign travel. (C) An increase in domestic exports. (D) An increase in domestic imports.

13 If the exchange rate between the US Dollar and the New Taiwan Dollar changes from 30 to 25, then US goods will become ________. (A) cheaper in Taiwan (B) cheaper in the U.S. (C) more expensive in Taiwan (D) more expensive in the U.S.

14 According to the Offshoring Model, when all other factors are constant, which of the following outcomes is most consistent with the model’s prediction? (A) The relative wage of high-skilled workers, measured as the ratio of high-skilled to low-skilled wages, rises in both the home and host countries. (B) The relative wage of high-skilled workers rises in the home country but falls in the host country. (C) The relative wage of high-skilled workers falls in the home country but rises in the host country. (D) The relative wage of high-skilled workers falls in both the home and host countries.

15 That the U.S. significantly increases in import tariffs, other things being equal, will result in ________. (A) an appreciation in the US dollar (B) an increase in imports (C) a depreciation in the US dollar (D) an increase in domestic demand for foreign products

16 The commodity costs US$720 in the U.S. and €600 in Germany. Assume that absolute purchasing power parity holds. If the exchange rate is expressed as US dollars per euro, what should the equilibrium exchange rate be? (A) US$0.83 per euro. (B) US$1.00 per euro. (C) US$1.20 per euro. (D) US$1.32 per euro.

17 The current spot exchange rate is US$1.00 per euro, and the one-year forward exchange rate is US$1.05 per euro. Assume that both covered interest rate parity and uncovered interest rate parity hold. Which of the following statements is correct? (A) There is an expected 5% appreciation of the euros. (B) The market expects the spot exchange rate one year from now to remain at US$1.00 per euro because the spot exchange rate is unaffected by the forward market. (C) The euro is trading at a 5% forward discount; therefore, the US dollar is expected to depreciate by 5%. (D) The forward exchange rate reflects only the inflation-rate differential between the two countries and cannot reflect the expected future exchange rate.

18 An international concert promoter receives US$1 million in ticket revenue from overseas and needs to convert the funds into British pounds to pay venue rental fees. The finance manager observes the following three spot exchange rates: US$1 = €0.8 €1 = £0.7 US$1 = £0.5 Assume that transactions can be conducted simultaneously in all three markets and that there are no transaction costs, bid–ask spreads, or quantity restrictions. Which of the following is correct? (A) There is no arbitrage opportunity. (B) The arbitrage profit is US$120,000. (C) The arbitrage profit is £50,000. (D) Whether a triangular arbitrage opportunity exists is not related to the British pound exchange rate.

19 Which of the following policies is most consistent with the predictions of the Gravity Model of trade? (A) Encouraging domestic firms to increase research and development spending in order to reduce average production costs. (B) Reducing cross-border transportation and transaction costs through regional economic integration. (C) Requiring all firms to export goods while prohibiting them from importing products in the same category. (D) Dividing the domestic market into more administrative regions in order to increase product variety.

20 If a large amount of “hot money” flows into Taiwan, what change will occur in the country’s balance of payments? (A) The current account balance decreases. (B) The current account balance increases. (C) The financial account balance decreases. (D) The financial account balance increases.

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