Chapter 11 International Business

21) The ________ refers to the institutional arrangements that govern exchange rates.

A) World Bank

B) international monetary system

C) currency exchange

D) gold standard

B) international monetary system

22) A ________ means the value of a currency is fixed relative to a reference currency.

A) pegged exchange rate

B) floating exchange rate

C) managed float system

D) fixed exchange rate

A) pegged exchange rate

23) When a country tries to hold the value of its currency within some range against an important reference currency such as the U.S. dollar without adopting a formal pegged rate, it is referred to as a

A) gold standard.

B) pegged float.

C) dirty float.

D) currency peg.

C) dirty float.

24) The amount of a currency needed to purchase one ounce of gold was referred to as the

A) golden rule.

B) gold standard.

C) pegged gold value.

D) gold par value.

D) gold par value.

25) A country is said to be in balance-of-trade equilibrium when

A) the income its residents earn from exports is equal to the money its residents pay to other countries for imports.

B) it produces all the goods needed for domestic consumption.

C) the income its residents earn from imports is equal to the money its residents pay to other countries for exports.

D) it produces all the goods needed for exportation.

A) the income its residents earn from exports is equal to the money its residents pay to other countries for imports.

26) The world's four major trading currencies, the Japanese yen, the U.S. dollar, the British pound, and the European Union's euro, are all free to float against each other. What is this an example of?

A) pegged exchange rate regime

B) floating exchange rate regime

C) managed-float system

D) fixed exchange rate regime

B) floating exchange rate regime

27) Prior to the introduction of the euro, many EU countries participated in a ________ system, in which the values of a set of currencies are fixed against each other at some mutually agreed upon exchange rate.

A) floating exchange rate

B) currency board

C) fixed exchange rate

D) pegged exchange rate

C) fixed exchange rate

28) International Monetary Fund members were ________ in the Jamaica agreement.

A) not permitted to sell their own gold reserves

B) permitted to sell their own gold reserves, but only at the price set by IMF

C) required to hold their gold reserves in escrow

D) permitted to sell their own gold reserves at the market price

D) permitted to sell their own gold reserves at the market price

29) The value of U.S. dollar increased between 1980 and 1985

A) despite running a growing trade deficit.

B) despite exporting substantially more than it imported.

C) because of a growing trade surplus.

D) because the country's status as a world financial leader was becoming apparent.

A) despite running a growing trade deficit.

30) Which of the following is a factor that initiated the collapse of the fixed exchange rate system?

A) worsening of Great Britain's balance of trade

B) recession in third world countries

C) price inflation in Europe

D) worsening of U.S. foreign trade position

D) worsening of U.S. foreign trade position

31) Which of the following changes were made to the International Monetary Fund's Articles of Agreement in the Jamaica agreement?

A) IMF members were permitted to use the U.S. dollar as the convertible currency.

B) Gold was declared as a formal reserve asset for IMF members.

C) IMF members were permitted to sell their gold reserves at the market price.

D) IMF members were restricted from entering the foreign exchange market.

C) IMF members were permitted to sell their gold reserves at the market price.

32) ________ exchange rates were declared as acceptable in the Jamaica agreement of the International Monetary Fund.

A) Pegged

B) Fixed

C) Floating

D) Gold standard

C) Floating

33) The United States had large and growing trade deficits between 1980 and 1985. Despite this, the value of the U.S. dollar rose during this period. Which of the following is a factor that caused this occurrence?

A) The United States attracted heavy inflows of capital from foreign investors during this period.

B) Banks in the United States offered low interest rates to investors during this period.

C) Markets across the world witnessed strong economies during this period.

D) Developed countries in Europe maintained trade equilibrium and supplied goods to underdeveloped countries.

A) The United States attracted heavy inflows of capital from foreign investors during this period.

34) Which of the following is the reason the current foreign exchange system is sometimes thought of as a managed-float system?

A) The exchange rates of a currency are determined by market forces.

B) Governments intervene frequently in the foreign exchange market.

C) Major currencies are allowed to freely float against each other.

D) Countries use a reference currency to estimate the value of their currencies.

B) Governments intervene frequently in the foreign exchange market.

35) The rise in the value of the dollar between 1985 and 1988

A) gave U.S. goods a competitive advantage over others.

B) made imports relatively cheap.

C) gave U.S. goods a comparative advantage over others.

D) made imports expensive.

B) made imports relatively cheap.

36) The international monetary system refers to the institutional arrangements that govern

A) microeconomic parameters.

B) exchange rates.

C) gross domestic produce.

D) foreign direct investment.

B) exchange rates.

37) When the foreign exchange market determines the relative value of a currency, we say that the country is adhering to a ________ regime.

A) currency board exchange

B) pegged exchange rate

C) fixed exchange rate

D) floating exchange rate

D) floating exchange rate

38) Pegged exchange rate means that the value of a currency is

A) fixed against other currencies based on an agreement.

B) not determined by free market forces.

C) fixed relative to a reference currency.

D) independent of the valuations of other currencies.

C) fixed relative to a reference currency.

39) A country wanted to hold its currency against an important reference currency without a formal pegged rate. This is known as

A) a monetary run.

B) a currency flip.

C) an unpegged rate.

D) a dirty float.

D) a dirty float.

40) After World War II, the world's major industrial nations arranged their currencies against each other at a mutually agreed on exchange rate. This is an example of a ________ system.

A) fixed exchange rate

B) dirty float exchange

C) pegged exchange rate

D) floating exchange rate

A) fixed exchange rate

41) Which of the following statements is true of the gold standard?

A) The gold standard was adopted only by the smaller nations of the world.

B) Currencies were pegged to gold under the gold standard.

C) Convertibility to gold was not guaranteed under the gold standard.

D) The gold standard was not helpful in maintaining balance-of-trade equilibrium.

B) Currencies were pegged to gold under the gold standard.

42) Gold par value refers to the

A) ratio of the price of gold in a currency to the price of gold in U.S. dollars.

B) amount of a currency needed to purchase one ounce of gold.

C) ratio of price of gold in a currency to the price of gold in euros.

D) amount of gold required to equal the reference currency that a nation is using.

B) amount of a currency needed to purchase one ounce of gold.

43) A country is said to be in balance-of-trade equilibrium when

A) it has the potential to produce all goods that its residents want without engaging in foreign trade.

B) the income its residents earn from exports is equal to the money its residents pay for imports.

C) the country imports all goods that its residents want by engaging in foreign trade.

D) it has the potential to balance the production and procurement of the basic amenities that it needs.

B) the income its residents earn from exports is equal to the money its residents pay for imports.

44) A country's trade balance is in surplus when

A) its exports are more than its imports.

B) it experiences negative inflation.

C) its exports equal the imports.

D) the prices of commodities are low in the country.

A) its exports are more than its imports.

45) Which of the following is an advantage of using the gold standard?

A) The standard makes sure that goods are not priced out from markets due to inflation.

B) The standard does not require a commitment from a nation to maintain its currency's value.

C) The standard effectively prevents the devaluation of currencies across the world.

D) The standard contains a powerful mechanism for achieving balance-of-trade equilibrium by all countries.

D) The standard contains a powerful mechanism for achieving balance-of-trade equilibrium by all countries.

46) International Development Association loans

A) receive direct funding from the World Bank.

B) must be countersigned by a partnering, wealthy country such as the United States, Japan, or Germany.

C) are funded through subscriptions from wealthy members.

D) receive direct funding from the International Monetary Fund.

C) are funded through subscriptions from wealthy members.

47) The agreement reached at Bretton Woods established the

A) International Monetary Fund.

B) World Economic Forum.

C) United Nations.

D) International Atomic Energy Agency.

A) International Monetary Fund.

48) Which of the following statements is true of the Bretton Woods agreement?

A) All countries agreed to fix the value of their currency in terms of gold under the agreement.

B) The system accepted the British pound as the official reference currency against gold.

C) The agreement established a floating system of monetary exchange.

D) Two multinational institutions, the World Economic Forum and WTO, were formed under the agreement.

A) All countries agreed to fix the value of their currency in terms of gold under the agreement.

49) The World Bank was established at the at Bretton Woods conference to

A) establish an international monetary system.

B) promote general economic development.

C) establish the gold standard across the world.

D) fund the initiatives of the United Nations.

B) promote general economic development.

50) Identify the currency that was convertible to gold under the Bretton Woods system.

A) pound

B) yen

C) euro

D) dollar

D) dollar

51) What will happen if a country increases its money supply rapidly under a fixed exchange rate regime?

A) Imports will become less attractive in that country.

B) The country will face negative inflation.

C) The trade deficit would widen in that country.

D) The country's products will become more attractive in world markets.

C) The trade deficit would widen in that country.

52) Which of the following is a disadvantage of using a rigid policy of fixed exchange rates?

A) It is likely to create high unemployment in some cases.

B) It will lead to inflationary economies across the world.

C) It is likely to bring about trade wars between nations.

D) It will instigate competitive devaluations and intense competition.

A) It is likely to create high unemployment in some cases.

53) What was the World Bank's initial mission?

A) implementing a rigid fixed exchange rate regime

B) promoting the gold standard across the world

C) providing low-interest loans to help finance the building of Europe's economy

D) implementing a flexible fixed exchange rate regime

C) providing low-interest loans to help finance the building of Europe's economy

54) Which of the following arguments is in favor of floating exchange rates?

A) A country's ability to expand or contract its money supply should be limited by the need to maintain exchange rate parity.

B) Maintaining balance of trade equilibrium is not in the best interest of a country.

C) Countries can isolate themselves from uncertainties when they trade using a mutually agreed on exchange rate.

D) Governments can restore monetary control by removing the obligation to maintain exchange rate parity.

D) Governments can restore monetary control by removing the obligation to maintain exchange rate parity.

55) Advocates of a ________ argue that removal of the obligation to maintain exchange rate parity would restore monetary control to a government.

A) fixed exchange rate regime

B) dirty-float system

C) floating exchange rate regime

D) pegged exchange rate regime

C) floating exchange rate regime

56) The monetary autonomy argument is supported by the advocates of

A) a dirty-float system.

B) fixed exchange rates.

C) pegged exchange rates.

D) floating exchange rates.

D) floating exchange rates.

57) Supporters of floating exchange rates

A) argue that floating rates help adjust trade imbalances.

B) argue that floating rates lead to a more stable world monetary system.

C) claim that trade deficits are determined by the balance between savings and investment in a country.

D) claim that trade deficits are not determined by the external value of currency.

A) argue that floating rates help adjust trade imbalances.

58) The monetary autonomy argument holds that

A) each country should be allowed to choose its own inflation rate.

B) inflation is beneficial to a country's economy and growth.

C) inflation is detrimental to a country's economy and growth.

D) countries should restrict inflation based on the global standards.

A) each country should be allowed to choose its own inflation rate.

59) Which of the following arguments is against the use of fixed exchange rates?

A) Monetary discipline is the most important determinant of a strong economy.

B) Each country has the freedom to choose its own inflation rate.

C) Market speculation can cause fluctuations in exchange rates.

D) Governments are likely to expand the monetary supply far too rapidly due to political pressures.

B) Each country has the freedom to choose its own inflation rate.

60) Which of the following arguments strengthen the idea of floating exchange rates?

A) External agencies should not interfere in the monetary policies of a country.

B) Trade deficits can be corrected through changes in exchange rates.

C) Changes in exchange rates will not impact the trade balance in a country.

D) Governments should act in ways to minimize the uncertainty in monetary markets.

B) Trade deficits can be corrected through changes in exchange rates.

61) Which of the following is an exchange rate policy where the exchange rate is determined completely by market forces?

A) managed float

B) fixed peg

C) free float

D) currency board

C) free float

62) Which of the following is the exchange rate policy where the government intervenes in the exchange rate system only in a limited way?

A) managed-float

B) fixed peg

C) free-float

D) currency board

A) managed-float

63) Under a ________ exchange rate regime, a country will attach the value of its currency to that of a major currency.

A) managed-float

B) pegged

C) free-float

D) currency board

B) pegged

64) Which of the following statements is true of pegged exchange rates?

A) A pegged exchange rate allows a country's currency to be determined by market forces.

B) A pegged exchange rate weakens the monetary discipline of a country.

C) Pegged exchange rates are popular among many of the world's smaller nations.

D) Adopting a pegged exchange rate regime increases inflationary pressures in a country.

C) Pegged exchange rates are popular among many of the world's smaller nations.

65) A country that introduces a currency board commits itself to converting its domestic currency on demand into

A) another currency at a fixed exchange rate.

B) gold or silver at a fixed exchange rate.

C) gold or silver at a floating exchange rate.

D) another currency at a floating exchange rate.

A) another currency at a fixed exchange rate.

66) Under a currency board system

A) inflation rates are maintained at a high level.

B) countries issue domestic notes at will.

C) interest rates remain constant.

D) the government lacks the ability to set interest rates.

D) the government lacks the ability to set interest rates.

67) Exchange rates are ________ under a pure "free float" system.

A) completely balanced

B) determined by market forces

C) wildly variable and unpredictable

D) determined by the government

B) determined by market forces

68) The great virtue claimed for a ________ is that it imposes monetary discipline on a country and leads to low inflation.

A) fixed exchange rate

B) managed-float system

C) pegged exchange rate

D) floating exchange rate

C) pegged exchange rate

69) ________ limits the ability of the government to print money and, thereby, create inflationary pressures.

A) A dirty-float system

B) A managed-float system

C) The European Monetary System

D) A currency board system

D) A currency board system

70) Currencies of countries with currency boards will become uncompetitive and overvalued if

A) local inflation rates remain higher than the inflation rate in the country to which the currency is pegged.

B) the country to which the currency is pegged experiences a trade deficit.

C) local inflation rates are lower than the inflation rate in the country to which the currency is pegged.

D) the country to which the currency is pegged experiences a trade surplus.

A) local inflation rates remain higher than the inflation rate in the country to which the currency is pegged.

71) The International Monetary Fund has been criticized for exacerbating moral hazard

A) with its rescue programs.

B) by increasing the probability of debt default.

C) making loans to countries that are trying to reduce national debt by "playing the market."

D) by refusing to bail out banks that made loans to overleveraged Asian companies during the 1990s.

A) with its rescue programs.

72) A currency crisis occurs due to

A) the loss of confidence in a country's banking system.

B) heavy foreign debt obligations.

C) high levels of trade deficit.

D) a speculative attack on the exchange value.

D) a speculative attack on the exchange value.

73) Moral hazard arises when people behave recklessly because

A) of the restrictions that exist in a country's monetary policy.

B) of the restrictions the IMF has imposed on them.

C) they know they will be saved if things go wrong.

D) they face financial difficulties arising out of external factors.

C) they know they will be saved if things go wrong.

74) Which of the following is a common criticism against the powerful International Monetary Fund?

A) IMF lacks any real mechanism for accountability.

B) It is hesitant to help banks when they are in crisis.

C) IMF has not intervened to resolve the Asian crisis.

D) It did not try to resolve the Mexican currency crisis.

A) IMF lacks any real mechanism for accountability.

75) A ________ is a situation in which a country cannot service its foreign debt obligations.

A) currency crisis

B) banking crisis

C) foreign debt crisis

D) moral crisis

C) foreign debt crisis

76) Loans issued by the IMF

A) are conditional loans.

B) are unconditional loans.

C) include a macroeconomic policy that calls for lower interest rates.

D) include a macroeconomic policy that calls for increases in public spending to improve infrastructure in a country.

A) are conditional loans.

77) The Asian economic crisis and the global financial crisis of 2008-2009 were caused by

A) high inflation rates.

B) excessive debt.

C) low inflation rates.

D) a huge trade surplus.

B) excessive debt.

78) Which of the following is a common underlying cause of financial crises?

A) a narrowing current account deficit

B) excessive expansion of domestic borrowing

C) low relative price inflation rates

D) asset price deflation

B) excessive expansion of domestic borrowing

79) A ________ crisis refers to a loss of confidence in the banking system that leads to a run on banks as individuals and companies withdraw their deposits.

A) currency

B) banking

C) foreign debt

D) domestic debt

B) banking

80) Which of the following observations is true of the current system of the foreign exchange market?

A) Most of the currencies can be converted to gold in the current system of foreign exchange.

B) The current system is driven by fixed exchange rates.

C) Currencies float freely against others in the current system.

D) The current system is a combination of government intervention and speculative activity.

D) The current system is a combination of government intervention and speculative activity.

81) Which of the following will help a company hedge against currency fluctuations?

A) finding a large supplier to supply all the raw materials

B) manufacturing raw materials in-house

C) basing business in a single country

D) dispersing production to different geographic locations

D) dispersing production to different geographic locations

82) Contracting out manufacturing allows companies to reduce economic exposure because

A) multiple suppliers attract subsidies from government.

B) it reduces the pressure on them to maintain a trade surplus.

C) it allows companies to shift suppliers from country to country.

D) quality issues are insignificant when manufacturing is contracted to others.

C) it allows companies to shift suppliers from country to country.

83) Increasingly the ________ has been acting as macroeconomic police of the world economy, insisting that countries seeking significant borrowings adopt certain macroeconomic policies.

A) Economic and Social Council (ECOSOC)

B) International Monetary Fund (IMF)

C) United Nations (UN)

D) World Bank

B) International Monetary Fund (IMF)

84) Countries that require substantial loans from the International Monetary Fund to survive will ________ due to IMF-mandated economic policies.

A) benefit from a sharp expansion of demand in the long term

B) endure a sharp contraction of demand in the long term

C) benefit from a sharp expansion of demand in the short term

D) endure a sharp contraction of demand in the short term

D) endure a sharp contraction of demand in the short term

85) In the face of unpredictable movements in exchange rates, businesses should

A) pursue strategies that will reduce their economic exposure.

B) pursue strategies that will decrease their strategic flexibility.

C) pursue strategies that will reduce their foreign market exposure.

D) sell off investments in foreign subsidiaries and consolidate domestic facilities.

A) pursue strategies that will reduce their economic exposure.

86) It is difficult if not impossible to get adequate insurance coverage for exchange rate changes that

A) will occur in the next few weeks.

B) might occur in the next few months.

C) might occur several years in the future.

D) might occur in the coming days.

C) might occur several years in the future.