Part One. Choose the right answer.(2pts*24=48pts)1. Which of the following is considered a capital inflow?a. A sale of U.S. financial assets to a foreign buyerb. A loan from a U.S. bank to a foreign borrowerc. A purchase of foreign financial assets by a U.S. buyerd. A U.S. citizen's repayment of a loan from a foreign bank2. Which of the following is classified as a credit in the U.S. balance of payments?a. U.S. exportsb. U.S. gifts to other countriesc. A flow of gold out of the U.S.d. Foreign loans made by U.S. companies3. Credit (+) items in the balance of payments correspond to anything that:a. Involves receipts from foreignersb. Involves payments to foreignersc. Decreases the domestic money supplyd. Increases the demand for foreign exchange4. Reducing a current account surplus requires a country to:a. Increase the government's deficit and increase private investment relative to savingb. Increase the government's deficit and decrease private investment relative to savingc. Decrease the government's deficit and increase private investment relative to savingd. Decrease the government's deficit and decrease private investment relative to saving5. Which of the following tends to cause the U.S. dollar to appreciate in value?a. An increase in U.S. prices above foreign pricesb. Rapid economic growth in foreign countriesc. A fall in U.S. interest rates below foreign levelsd. An increase in the level of U.S. income6. Suppose that real incomes increase more rapidly in the China than in Japan. This situation would likely result in a (an):a. Increase in the demand for Japanese yenb. Decrease in the demand for Japanese yenc. Increase in the supply of Japanese yen sd. Decrease in the supply of pesos Japanese yen7. In a supply-and-demand diagram for Japanese yen, with the exchange rate in dollars per yen on the vertical axis, the demand schedule for yen is drawn sloping:a. Upwardb. Verticalc. Downwardd. Horizontal8. Most foreign exchange trading occurs between banks and:a. National governmentsb. Other banksc. Corporationsd. Household investors9. In the interbank market for foreign exchange, the ____ refers to the difference between the offer rate and the bid rate.a. Cross rateb. Optionc. Arbitraged. SpreadTable 1. Supply and Demand of British PoundsQuantity Dollars Quantityof Pounds per of Pounds Supplied Pound Demanded1,000 2.00 200800 1.80 400600 1.50 600400 1.40 800200 1.20 1,00010. Refer to Table 1, The equilibrium exchange rate equals:a. $1.20 per poundb. $1.40 per poundc. $1.80 per poundd. $1.50 per poundTable 2. Forward Exchange RatesU.S. Dollar EquivalentWednesday TuesdaySwitzerland (Franc) .6598 .6590 30-day Forward .6592 .658590-day Forward .6585 .6578180-day Forward .6577 .657211. Refer to Table 2. On Wednesday, the 30-day forward franc was selling at a:a. 1 percent premium per annum against the dollarb. 2 percent premium per annum against the dollarc. 1 percent discount per annum against the dollard. 2 percent discount per annum against the dollar12. If Canada runs a trade surplus with Mexico and exchange rates are floating:a. The peso will depreciate relative to the dollarb. The dollar will depreciate relative to the pesoc. The prices of all foreign goods will fall for Canadiansd. The prices of all foreign goods will rise for Canadians13. If Mexico's labor productivity rises relative to Europe's labor productivity:a. The peso tends to depreciate against the euro in the short runb. The peso tends to appreciate against the euro in the short runc. The peso tends to depreciate against the euro in the long rund. The peso tends to appreciate against the euro in the long run14. Given a system of floating exchange rates, weaker U.S. preferences for imports would trigger:a. An increase in the demand for imports and an increase in the demand for foreign currencyb. An increase in the demand for imports and a decrease in the demand for foreign currencyc. A decrease in the demand for imports and an increase inthe demand for foreign currencyd. A decrease in the demand for imports and a decrease in the demand for foreign currency15. Which example of market expectations causes the dollar to appreciate against RMB--expectations that the U.S. economy will have:a. Faster economic growth than Chinab. Higher future interest rates than Chinac. More rapid money supply growth than Chinad. Higher inflation rates than China16. An exchange rate is said to ____ when its short-run response to a change in market fundamentals is greater than its long-run response.a. Overshootb. U ndershootc. Depreciated.Appreciate17. Concerning exchange rate forecasting, ____ relies on econometric models which are based on macroeconomic variables likely to affect currency values.a. Fundamental analysisb. Technical analysisc. Judgmental analysisd. Sunspot analysis18. Which of the following balance-of-payments adjustment mechanisms is most closely related to the quantity theory of money?a. Income-adjustment mechanismb. Price-adjustment mechanismc. Interest-rate-adjustment mechanismd. Output-adjustment mechanism19. Under the gold standard, a surplus nation facing a gold inflow and an increase in its money supply would also experience a:a. Rise in its interest rate and a short-term financial inflowb. Rise in its interest rate and a short-term financial outflowc. Fall in its interest rate and a short-term financial inflowd. Fall in its interest rate and a short-term financial outflow20. J. M. Keynes suggested that a trade deficit nationa. Would experience a rise in exportsb. Would experience a decline in exportsc. Would require active intervention by the governmentd. Would experience a fall in income21. Starting from a position where the nation's money demand equals the money supply and its balance of payments is in equilibrium, economic theory suggests that the nation's balance of payments would move into a deficit position if there occurred in the nation:a. An increase in the money supplyb. A decrease in the money supplyc. An increase in money demandd. None of the above22. Under Bretton Woods System, member countries were permitted to correct persistent and sizable payment deficits (i.e., fundamental disequilibrium) by:a. Officially revaluing their currenciesb. Officially devaluing their currenciesc. Allowing their currencies to depreciate in the free marketd. Allowing their currencies to appreciate in the free market23. An increase in the yuan price of the dollar announced by central bank is associated with:a. Revaluation of the yuanb.Devaluation of the yuanc. Appreciation of the yuand. Depreciation of the yuan24. An expenditure-reducing policy would consist of a decrease in:a. The par value of a currencyb. Government expendituresc. Import dutiesd. Business or household taxesPart Two: Answer the questions.(10pts*2=20pts)1. What is balance of payment? Why does the balance-of-payments statement balance?2. The supply and demand for foreign exchange are considered to be derived supply and derived demand. Explain.Part Three: Solve the problems(8pts*4=32pts)Part Three: Questions1. How could a Chinese firm, who expects to receive 40 million dollar in 60 days and repay a 40 million dollar loan in 90 days, use forward exchange contracts to hedge its risk exposure?spot exchange rate 6.8￥/$.60-day forward exchange rate 6.9￥/$.90-day forward exchange rate 6.9￥/$The Chinese firm needs to enter into a forward contract to buy 40 million dollars in 90 days. The forward rate is 6.9￥/$, therefore the company must deliver 6.9*40=276 million yuan in 90 days. This way the company has an asset position in dollar through the forward contract that covers its liability of the 40 million dollar loan.2. Suppose $1 = 0.8 euros in New York, 1 euro = 100 yen in Paris, and 1 yen = $0.01 in Tokyo.If you begin by holding $1, how could you profit from these exchange rates? What is your arbitrage profit per dollar initially traded?With $1, one should buy 100 yen in Tokyo. Then 100 yen should be exchanged for 1 euro in Paris. Then convert 1 euro back to dollars in New York , which makes $1.25, yielding a profit of $0.25.3. Consider the case of a U.S. investor holding dollars and deciding whether to invest in Japanese treasury bills or in U.S. treasury bills. Assume that the investor wants to end up holding dollars and investment period is 6 months. What are the three methods available to this investor? In your answer shows the return per dollar invested under each method. Which of these methods is the riskiest and why? Ijp=T-bill interest rate per annum in Japan, Iu.s.=T-bill interest rate per annum in U.S.SR=spot rate, FR(forward rate)=98￥/$, E(SR6)=expected spot rate at the end of six months.The three methods, each described by an equation, per $1 invested, are:a. Covered international investment; covered return = (1 + Ijp/2) * FR/SRb. Uncovered international investment; expected uncovered return = (1 + iJP/2) * E(SR)/SRc. Invest directly in U.S. treasury bills; domestic return = (1 + Iu.s./2)The riskiest is the second option because the investor is exposed to exchange-rate risk and is not covered.You are provided with the following information about a country's international transactions during a given year (in millions):Calculate the merchandise trade balance, goods and services balance, the current account balance and Official settlements balance.Is the country increasing or decreasing its net holdings of official reserve assets?外汇储备的增加计入借方。