1. If the direct price of the dollar is 2.5 in Sofia and transaction costs are .

Question

1. If the direct price of the dollar is 2.5 in Sofia and transaction costs are .4% of the amount transacted, then the minimum maximum direct quotes for the Bulgarian Lev in New York were:

a) $.39684032

b) $2.48002.5200

c) $.3984.4016

d) $2.49002.5100

2. In a freely floating exchange rate system, if the current account is running a deficit

a) the balance of payments must run a deficit

b) the balance of payments must be zero

c) the capital account must run a surplus

d) b and c above

3. According to the J-curve theory, a country’s trade deficit

a) Decrease just after its currency depreciates

b) Increases just after its currency appreciates

c) Increases just after its currency is pegged to the dollar

d) Worsens just after its currency depreciates

4. Balance of payments data of the host country is a useful forecasting tool for a foreign company because

a) It shows how much the company has been able to export

b) It shows the total amount of foreign investment accumulated by the country

c) It provides information about past currency fluctuation

d) It reflects imbalances that may give rise to political action

Explanation / Answer

1. Answer is a

Minimum - Maximum Direct quotes

$.3968 - 4032

2.Answer is d

b) the balance of payments must be zero

c) the capital account must run a surplus

3)Answer is d

d) Worsens just after its currency depreciates

4)Answer is b

b) It shows the total amount of foreign investment accumulated by the country

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