ABC

1 What major dimension sets apart international finance from domestic finance?
a) Foreign exchange and political risks
b) Market imperfections
c) Expanded opportunity set
d) All of the above

D

2 An example of a political risk is
a) expropriation of assets.
b) adverse change in tax rules.
c) the opposition party being elected.
d) both answers a) and b) are correct.

D

3 Production of goods and services has become globalized to a large extent as a result of
a) natural resources being depleted in one country after another.
b) skilled labor being highly mobile.
c) multinational corporations' efforts to source inputs and locate production anywhere where costs are lower and profits higher.
d) common tastes worldwide for the same goods and services.

C

4 Recently, financial markets have become highly integrated. This development
a) allows investors to diversify their portfolios internationally.
b) allows minority investors to buy and sell stocks.
c) has increased the cost of capital for firms.
d) answers a) and c) are both correct.

A

5 Japan has experienced large trade surpluses. Japanese investors have responded to this by
a) liquidating their positions in stocks to buy dollar denominated bonds.
b) investing heavily in U.S. and other foreign financial markets.
c) lobbying the U.S. government to depreciate its currency.
d) lobbying the Japanese government to allow the yen to appreciate.

B

6 Suppose your firm invests $100,000 in a project in Italy. At the time the exchange rate is $1.25 = €1.00. One year later the exchange rate is the same, but the Italian government has expropriated your firm's assets paying only €80,000 in compensation. This is an example of
a) exchange rate risk.
b) political risk.
c) market imperfections.
d) none of the above, since $100,000 = €80,000 × $1.25/€1.00

B

7 Suppose you start with $100 and buy stock for £50 when the exchange rate is £1 = $2. One year later, the stock rises to £60. You are happy with your 20 percent return on the stock, but when you sell the stock and exchange your £60 for dollars, you only get $45 since the pound has fallen to £1 = $0.75. This loss of value is an example of
a) exchange rate risk.
b) political risk.
c) market imperfections.
d) weakness in the dollar.

A

8 Suppose that Great Britain is a major export market for your firm, a U.S.-based MNC. If the British pound depreciates against the U.S. dollar,
a) your firm will be able to charge more in dollar terms while keeping pound prices stable.
b) your firm may be priced out of the U.K. market, to the extent that your dollar costs stay constant and your pound prices will rise.
c) to protect U.K. market share, your firm may have to cut the dollar price of your goods to keep the pound price the same.
d) both b) and c) are correct

D

9 Suppose Mexico is a major export market for your U.S.-based company and the Mexican peso appreciates drastically against the U.S. dollar. This means
a) your company's products can be priced out of the Mexican market, as the peso price of American imports will rise following the peso's fall.
b) your firm will be able to charge more in dollar terms while keeping peso prices stable.
c) your domestic competitors will enjoy a period of facing lessened price competition from Mexican imports.
d) both b) and c) are correct

D

10 Suppose Mexico is a major export market for your U.S.-based company and the Mexican peso depreciates drastically against the U.S. dollar, as it did in December 1994. This means
a) your company's products can be priced out of the Mexican market, as the peso price of American imports will rise following the peso's fall.
b) your firm will be able to charge more in dollar terms while keeping peso prices stable.
c) your domestic competitors will enjoy a period of facing little price competition from Mexican imports.
d) both b) and c) are correct

A

11 Suppose that you are a U.S. producer of a commodity good competing with foreign producers. Your inputs of production are priced in dollars and you sell your output in dollars. If the U.S. currency depreciates against the currencies of our trading partners,
a) your competitive position is likely improved.
b) your competitive position is likely worsened.
c) your competitive position is unchanged.

A

12 Undoubtedly, we are now living in a world where all the major economic functions—consumption, production, and investment
a) are still inherently local.
b) are still regional in nature.
c) are slowly becoming globalized.
d) are highly globalized.

D

13 Most governments at least try to make it difficult for people to cross their borders illegally. This barrier to the free movement of labor is an example of
a) information asymmetry.
b) excessive transactions costs.
c) racial discrimination.
d) a market imperfection.

D

14 Although the world economy is much more integrated today than was the case 10 or 20 years ago, a variety of barriers still hamper free movements of people, goods, services, and capital across national boundaries. These barriers include
a) legal restrictions.
b) excessive transportation costs.
c) information asymmetry.
d) all of the above

D

15 The Japanese automobile company Honda decided to establish production facilities in Ohio, mainly to
a) circumvent trade barriers.
b) reduce transportation costs.
c) reduce transactions costs.
d) both a) and b)

A

16 When individual investors become aware of overseas investment opportunities and are willing to diversify their portfolios internationally,
a) they trade one market imperfection, information asymmetry, for another, exchange rate risk.
b) they benefit from an expanded opportunity set.
c) they should not bother to read or to understand the prospectus, since its probably written in a foreign language.
d) they should invest only in dollars or euros.

B

17 Deregulated financial markets and heightened competition in financial services provided an environment for financial innovations that resulted in the introduction of various instruments. Examples of these innovative instruments include
a) currency futures and options, foreign stock index futures and options.
b) multicurrency bonds.
c) international mutual funds, country funds, exchange traded funds.
d) all of the above

D

18 The goal of shareholder wealth maximization
a) is not appropriate for non-U.S. business firms.
b) means that all business decisions and investments that a firm makes are done for the purpose of making the owners of the firm better off financially.
c) is a sub-objective the firm should attempt to achieve after the objective of customer satisfaction is met.
d) is in conflict with the privatization process taking place in third-world countries.

B

19 The owners of a business are the
a) taxpayers.
b) workers.
c) suppliers.
d) shareholders.

D

20 The massive privatization that is currently taking place in formerly socialist countries, will likely
a) eventually enhance the standard of living to these countries' citizens.
b) depend on private investment.
c) increase the opportunity set facing these countries' citizens.
d) all of the above

D

21 The ultimate guardians of shareholder interest in a corporation, are the
a) rank and file workers.
b) senior management.
c) boards of directors.
d) all of the above.

c

22 In countries like France and Germany,
a) managers have often made business decisions with regard maximizing market share to the exclusion of other goals.
b) managers have often viewed shareholders as one of the "stakeholders" of the firm, others being employees, customers, suppliers, banks and so forth.
c) managers have often regarded the prosperity and growth of their combines, or families of related firms, as their critical goal.
d) managers have traditionally embraced the maximization of shareholder wealth as the only worthy goal

B

23 When corporate governance breaks down
a) shareholders are unlikely to receive fair returns on their investments.
b) managers may be tempted to enrich themselves at shareholder expense.
c) the board of directors is not doing its job.
d) all of the above

D

24 Privatization refers to process of
a) having government operate businesses for the betterment of the public sector.
b) government allowing the operation of privately owned business.
c) prohibiting government operated enterprises.
d) a country divesting itself of the ownership and operation of a business venture by turning it over to the free market system.

D

25 Deregulation of world financial markets
a) provided a natural environment for financial innovations, like currency futures and options.
b) has promoted competition among market participants.
c) has encouraged developing countries such as Chile, Mexico, and Korea to liberalize by allowing foreigners to directly invest in their financial markets.
d) all of the above

D

26 The emergence of global financial markets is due in no small part to
a) advances in computer and telecommunications technology.
b) enforcement of the Soviet system of state ownership of resources of production.
c) government regulation and protection of infant industries.
d) none of the above

A

27 The common monetary policy for the euro zone is now formulated by
a) the Bundesbank in Germany.
b) the Federal Reserve Bank.
c) the World Bank.
d) the European Central Bank.

D

28 Since the end of World War I, the dominant global currency has been the
a) British pound.
b) Japanese yen.
c) Euro.
d) U.S. dollar.

D

29 Since the end of World War I, the U.S. dollar has played the role of the dominant global currency, displacing the
a) German mark.
b) French Franc.
c) Japanese Yen.
d) British pound.

D

30 The ascendance of the dollar the dominant global currency reflects several key factors such as
a) the size of the U.S. population.
b) the mature and open capital markets of the U.S. economy.
c) exchange rate stability.
d) all of the above

B

31 The euro
a) is the common currency of Europe.
b) is divisible into 100 cents, just like the U.S. dollar.
c) may eventually have a transaction domain larger than the U.S. dollar.
d) all of the above.

D

32 Since its inception the euro has brought about revolutionary changes in European finance. For example,
a) by redenominating corporate bonds and stocks from 12 different currencies into one common currency, the euro has precipitated the emergence of continent wide capital markets in Europe that are comparable to U.S. markets in depth and liquidity.
b) Swiss bank accounts are all denominated in euro.
c) the European banking sector has become much more important as a source of financing for European firms.
d) there have actually not been any revolutionary changes.

A

33 Privatization is often seen as a cure for bureaucratic inefficiency and waste; some economists estimate that privatization improves efficiency and reduces operating costs by as much as
a) 5 percent.
b) 10 percent.
c) 15 percent.
d) 20 percent.

D

34 The World Trade Organization, WTO,
a) has the power to enforce the rules of international trade.
b) covers agriculture and physical goods, but not services or intellectual property rights.
c) recently expelled China for human rights violations.
d) ruled that NAFTA is to be the model for world trade integration.

A

35 Privatization
a) has spurred a tremendous increase in cross-border investment.
b) has allowed many governments to have the funds to nationalize important industries.
c) has guaranteed that new ownership will be limited to the local citizens.
d) has generally decreased the efficiency of the enterprise.

A

36 A multinational firm can be defined as a firm that
a) invests short-term cash inflows in more than one currency.
b) has sales affiliates in several countries.
c) is incorporated in more than one country.
d) incorporated in one country that has production and sales operations in several other countries.

D

37 A MNC may gain from its global presence by
a) spreading R&D expenditures and advertising costs over their global sales.
b) pooling global purchasing power over suppliers.
c) utilizing their technological and managerial know-how globally with minimum additional costs.
d) all of the above are potential gains

D

38 MNCs can use their global presence to
a) take advantage of underpriced labor services available in certain developing countries.
b) gain access to special R&D capabilities residing in advanced foreign counties.
c) boost profit margins and create shareholder value.
d) all of the above

D

39 Foreign-owned manufacturing companies in the world's most highly developed countries
a) generally are more productive and pay their workers more than do comparable locally-owned businesses.
b) generally are less productive and therefore pay their workers less than do comparable locally-owned businesses.
c) tend to specialize in different articles of manufacture than they produce in their home countries.
d) usually do not build their own production facilities but simply buy existing domestic manufacturing firms.

A

40 A purely domestic firm sources its products, sells its products, and raises its funds domestically
a) can face stiff competition from a multinational corporation that can source its products in one country, sell them in several countries, and raise its funds in a third country.
b) can be more competitive than a MNC on its home turf due to superior knowledge of the local market.
c) can still face exchange rate risk, just like a MNC.
d) all of the above are true

D

41 MNC stands for
a) Multinational Corporation.
b) Multi Nationalized Corporation.
c) Military National Cooperation.

A

42 Which is growing at a faster rate, foreign direct investment by MNCs or international trade?
a) FDI by MNCs
b) International trade
c) Since they are linked, they grow at the same rate.
d) None of the above

A

43 A true MNC, with operations in dozens of different countries
a) must effectively manage foreign exchange risk.
b) can ignore foreign exchange risk since it is diversified.
c) will pay taxes in only its home county.
d) none of the above

A

44 A MNC can
a) be a factor that increases the opportunities of the citizens of less developed countries.
b) be a factor that increases the opportunity set of domestic investors.
c) increase economic efficiency.
d) all of the above

D

45 Today for a MNC to produce merchandise in one country on capital equipment financed by funds raised in a number of different currencies through issuing securities to investors in many countries and then selling the finished product to customers in yet other countries is
a) not uncommon.
b) extremely common.
c) uncommon.
d) the norm.

A

46 A corporation that can source its products in one country, sell them in another country, and raise the funds in a third country
a) is a multinational corporation.
b) is a domestic firm if all of the shareholders are from the same country.
c) enjoys a built-in hedge against exchange rate risk.
d) enjoys a built-in hedge against political risk.

A

The institutional framework within which international payments are made, movements of capital are accommodated, and exchange rates among currencies are determined is referred to as the ______.

A. international exchange system
B. monetary exchange system
C. international monetary system

C

During the bimetallism period, the _____ ________ among currencies were determined by either their gold or silver contents.
Exchange rates

OK

An international gold standard can be said to exist when which of the following hold?

A. There is two-way convertibility between gold and national currencies at a stable ratio.
B. Gold may be freely exported or imported.
C. Private citizens may not own gold other than through currency.
D. Gold alone is assured of unrestricted coinage.

A,B,D

The phrase "Bad money drives out good" is ______ Law.
A. Smith's
B. Gresham's
C. Ricardo's
D. Triffin's

B

The first gold standard was established in 1821 when notes from the ______ were made fully redeemable for gold.

A. Bank of England
B. European Central Bank
C. Federal Reserve
D. Bundesbank

A

The German price level was higher in 1923 relative to before World War I by a factor of over one ______.

A. trillion
B. million
C. thousand
D. billion

A

The 1987 meeting in which the G-7 countries agreed on a managed float system intended to stabilize exchange rates is referred to as the ______.

A. Bretton Woods Agreement
B. Louvre Accord
C. Uruguay Round
D. Jamaica Agreement

B

Select all that apply
Key institutions developed at Bretton Woods in 1944 included the ______.

A. International Monetary Fund (IMF)
B. Asian Development Bank (ADB)
C. European Central Bank (ECB)
D. International Bank for Reconstruction and Development (World Bank)
E. Interamerican Development Bank (IDB)

A,D

Which countries have free floating exchange rates? (Recall that free floating is defined differently than floating.)

A. Japan
B. Brazil
C. Mexico
D. Saudi Arabia
E. Ecuador

A,C

To establish a "zone of monetary stability" in Europe, the EEC countries in 1979 launched the ______.

A. European Economic Community (EEC)
B. EURO
C. European Monetary System (EMS)
D. European Central Bank (ECB)

C

During the interwar period, many countries abandoned the _____ standard and switched to an inconvertible paper standard instead.

GOLD

Which statements about the euro zone are correct?

A. No countries have been added to the euro zone since its introduction.
B. All countries in the European Union are in the euro zone.
C. Only countries in the European Union are in the euro zone.

C

The Jamaica agreement that followed the end of the Bretton Woods system instituted a ______ exchange rate system.

A. flexible
B. fixed
C. gold-based
D. dollar-based gold-exchange

A

The Bretton Woods era ended when the United States would not control its monetary ______ and the convertibility of the dollar into ______ was suspended.

A. expansion; SDRs
B. contraction; gold
C. expansion; gold
D. contraction; SDRs

C

The ECB's monetary policy would be most effective with ______ factor mobility.

A. zero
B. a high amount of
C. a low amount of

A

A tax on financial transactions that would both generate revenue and restrict capital flows is known as a ______ tax.

A. Tobin
B. Gresham
C. Triffin
D. Ricardo

A

To establish a "zone of monetary stability" in Europe, the EEC countries in 1979 launched the ______.

A. European Economic Community (EEC)
B. euro
C. European Central Bank (ECB)
D. European Monetary System (EMS)

D

What are benefits of monetary union?

A. Promotion of greater investment and trade within the union
B. Elimination of exchange rate uncertainty within the union
C. Greater national monetary independence
D. Reduced transaction costs

A,B,D

A good ______ should provide (i) liquidity, (ii) adjustment, and (iii) confidence.

A. international exchange system
B. monetary exchange system
C. international monetary system

C

The incompatible trinity, or "trilemma," states that it is impossible to have what at the same time?

A. An independent fiscal policy
B. A flexible exchange rate
C. An independent monetary policy
D. Restricted capital flows
E. Free international flows of capital
F. A fixed exchange rate

C,E,F

What are advantages of flexible exchange rates relative to fixed exchange rates?

a. Easier external adjustments
b. Lower transaction costs
c. Less exchange rate uncertainty
d. National policy autonomy

A,D

1 The current account balance, which is the difference between a country's exports and imports, is a component of the country's GNP. Other components of GNP include
a) consumption and investment and government expenditure.
b) consumption and government expenditure and net exports.
c) consumption and net exports and government expenditure.
d) consumption less imports.

A

2 If the United States imports more than it exports, then this means that
a) the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus.
b) the demand for dollars is likely to exceed the supply in the foreign exchange market, ceteris paribus.
c) the U.S. dollar would be under pressure to appreciate against other currencies.
d) both b) and c) are correct

A

3 Balance of payments
a) is defined as the statistical record of a country's international transactions over a certain period of time presented in the form of a double-entry bookkeeping.
b) provides detailed information concerning the demand and supply of a country's currency.
c) can be used to evaluate the performance of a country in international economic competition.
d) all of the above

D

4 If a country is grappling with a major balance-of-payment difficulty, it may not be able to expand imports from the outside world. Instead, the country may be tempted to
a) impose measures to restrict imports.
b) impose measures to discourage capital outflows.
c) Both a) and b)
d) None of the above

C

5 If the United States imports more than it exports, then
a) the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus.
b) one can infer that the U.S. dollar would be under pressure to depreciate against other currencies.
c) a) and b)
d) None of the above

C

6 Generally speaking, any transaction that results in a receipt from foreigners
a) will be recorded as a debit, with a negative sign, in the U.S. balance of payments.
b) will be recorded as a debit, with a positive sign, in the U.S. balance of payments.
c) will be recorded as a credit, with a negative sign, in the U.S. balance of payments.
d) will be recorded as a credit, with a positive sign, in the U.S. balance of payments.

D

7 Generally speaking, any transaction that results in a payment to foreigners
a) will be recorded as a debit, with a negative sign, in the U.S. balance of payments.
b) will be recorded as a debit, with a positive sign, in the U.S. balance of payments.
c) will be recorded as a credit, with a negative sign, in the U.S. balance of payments.
d) will be recorded as a credit, with a positive sign, in the U.S. balance of payments.

A

8 If Japan exports more than it imports, then
a) the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus.
b) one can infer that the yen would be likely to appreciate against other currencies.
c) a) and b)
d) None of the above

B

9 The balance of payments records
a) only international trade, (exports and imports).
b) only cross-border investments (FDI and portfolio investment).
c) not only international trade, (exports and imports) but also cross-border investments.
d) none of the above

C

10 Credit entries in the U.S. balance of payments
a) result from foreign sales of U.S. goods and services, goodwill, financial claims, and real assets.
b) result from U.S. purchases of foreign goods and services, goodwill, financial claims, and real assets.
c) give rise to the demand for dollars.
d) give rise to the supply of dollars.
e) both a) and c)

E

11 A country experiencing a significant balance-of-payments surplus would be likely to
a) expand imports, offering marketing opportunities for foreign enterprises.
b) refrain from imposing foreign exchange restrictions.
c) expand exports, offering international marketing opportunities for domestic enterprises.
d) Both a) and b)

D

12 The current account includes
a) the export and import of goods and services.
b) all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses.
c) all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs).
d) none of the above

A

13 A country with a current account surplus
a) acquires IOUs from foreigners, thereby increasing its net foreign wealth.
b) must borrow from foreigners or draw down on its previously accumulated foreign wealth.
c) will experience a reduction in the country's net foreign wealth.
d) both b) and c)

A

14 The capital account includes
a) the export and import of goods and services.
b) all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses.
c) all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs).
d) none of the above

B

15 The official reserve account includes
a) the export and import of goods and services.
b) all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses.
c) all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs).
d) none of the above

C

16 A country's international transactions can be grouped into the following three main types:
a) current account, medium term account, and long term capital account.
b) current account, long term capital account, and official reserve account.
c) current account, capital account, and official reserve account.
d) capital account, official reserve account, trade account

C

17 Invisible trade refers to
a) services that avoid tax payments.
b) the underground economy.
c) legal, consulting, and engineering services.
d) tourist expenditures, only.

C

18 In 2007 the United States had a current account deficit. The current account deficit implies that the United States
a) had a surplus on legal consulting and engineering services.
b) produced more output than it consumed.
c) consumed more output than it produced.
d) none of the above

C

19 The current account is divided into four finer categories:
a) merchandise trade, services, factor income, and statistical discrepancy.
b) merchandise trade, services, factor income, and unilateral transfers.
c) merchandise trade, services, portfolio investment, and unilateral transfers.
d) merchandise trade, services, factor income, and direct investment.

B

20 The "J-curve effect" shows
a) the initial deterioration and the eventual improvement of a country's trade balance following a currency depreciation.
b) the initial improvement and the eventual depreciation of a country's trade balance following a currency depreciation.
c) the trade balance's lack of responsiveness to the exchanges rate changes.
d) none of the above

A

21 The J-curve effect received wide attention when
a) the British trade balance worsened after a strengthening of the pound in 1967.
b) the British trade balance worsened after a devaluation of the pound in 1967.
c) the British trade balance improved after a devaluation of the pound in 1967.
d) none of the above

B

22 A currency depreciation will begin to improve the trade balance immediately
a) if the demand for imports and exports are inelastic.
b) if the demand for imports and exports are elastic.
c) if imports decrease and exports decrease.
d) none of the above

B

23 When a country's currency depreciates against the currencies of major trading partners,
a) the country's exports tend to rise and imports fall.
b) the country's exports tend to fall and imports rise.
c) the country's exports tend to rise and imports rise.
d) the country's exports tend to fall and imports fall.

A

24 A depreciation will begin to improve the trade balance immediately if
a) imports and exports are responsive to the exchange rate changes.
b) imports and exports are inelastic to the exchange rate changes.
c) consumers exhibit brand loyalty and price inelasticity.
d) b) and c)

A

25 In the short run a currency depreciation can make a trade balance worse if
a) there is no domestic producer of an import.
b) there is no domestic buyer for an import.
c) there is no export market for a country's output.

A

26 In the long run, both exports and imports tend to be
a) unresponsive to changes in exchange rates.
b) responsive to changes in exchange rates.
c) both a) and b)
d) none of the above

B

27 With regard to the capital account
a) the capital account balance measures the difference between U.S. sales of assets to foreigners and U.S. purchases of foreign assets.
b) U.S. sales (or exports) of assets are recorded as credits, as they result in capital inflow.
c) U.S. purchases (imports) of foreign assets are recorded as debits, as they lead to capital outflow.
d) all of the above

D

28 The difference between Foreign Direct Investment and Portfolio Investment is that
a) Portfolio Investment mostly represents the sale and purchase of foreign financial assets such as stocks and bonds that do not involve a transfer of control.
b) Foreign Direct Investment mostly represents the sale and purchase of foreign financial assets such as stocks whereas Portfolio Investment mostly involves the sales and purchase of foreign bonds.
c) Foreign Direct Investment is about buying land and building factories, whereas portfolio investment is about buying stocks and bonds.
d) All of the above

A

29 In the latter half of the 1980s, with a strong yen, Japanese firms
a) faced difficulty exporting.
b) could better afford to acquire U.S. assets that had become less expensive in terms of yen.
c) financed a sharp increase in Japanese FDI in the United States.
d) all of the above

D

30 International portfolio investments have boomed in recent years, as a result of
a) a depreciating U.S. dollar.
b) increased gasoline and other commodity prices.
c) the general relaxation of capital controls and regulation in many countries.
d) none of the above

C

31 If the interest rate rises in the U.S. while other variables remain constant
a) capital inflows into the U.S. will increase.
b) capital inflows into the U.S. may not materialize.
c) capital will flow out of the U.S.
d) none of the above

A

32 The capital account measures
a) the sum of U.S. sales of assets to foreigners and U.S. purchases of foreign assets.
b) the difference between U.S. sales of assets to foreigners and U.S. purchases of foreign assets.
c) the difference between U.S. sales of manufactured goods to foreigners and U.S. purchases of foreign products.
d) none of the above
Answer: b)

B

33 When Honda, a Japanese auto maker, built a factory in Ohio,
a) it was engaged in foreign direct investment.
b) it was engaged in portfolio investment.
c) it was engaged in a cross-border acquisition.
d) none of the above.

A