Global Business BA310 Chapter 4 Exam

Acquisitions of a foreign company, creation of new manufacturing or research facilities abroad, and expansion of an existing plant in a foreign country are all examples of _____. a. foreign direct investment b. a risk premium c. net financial derivatives d. a current balance account e. a balance of transfers

a. foreign direct investment

The financial account of the BOP consists of three subaccounts: (1) U.S.-owned assets abroad, (2) foreign-owned assets in the U.S., and (3) _____. a. net financial derivatives b. a financial account c. a foreign direct investment d. a balance of transfers e. a risk premium

a. net financial derivatives

Which of the following represents the top trading partner of the United States? a. Canada b. Germany c. Mexico d. France e. Japan

a. Canada

In the equation "F=S(1+P)," "F" is defined as what? a. Forward rate b. Forward premium c. Future rate d. Financial rate e. Spot rate

a. Forward rate

Which of the following is NOT true about the current account balance? a. If foreign capital will not be available to finance the U.S. current account deficit, it can be predicted that the dollar will become stronger. b. It is the sum of the trade, services, income, and net transfers balance. c. The United States has had large account deficits in recent years. d. Countries with current account surpluses generally finance countries with current account deficits. e. China, France, Japan, and Singapore have consistently had current account surpluses over recent years.

a. If foreign capital will not be available to finance the U.S. current account deficit, it can be predicted that the dollar will become stronger.

Which of the following regarding potential problems with an IRP is NOT true? a. There are no problems with IRP. b. Evidence on IRP theories is mixed. c. Herd behavior can cause large purchases or sales of a particular currency that drive values beyond their normal bounds, resulting in problems such as currency crises. d. International investors may globally diversify their investments and behave passively toward arbitrage activities. e. When interest rates change in the U.S., foreign interest rates should also change under the IRP. However, this may not happen.

a. There are no problems with IRP.

According to the law of one price, identical goods should sell for the same price in different countries according to the local currencies. a. True b. False

a. True

If the dollar was expected to appreciate in the 60-day forward market against the Japanese yen, it would be selling at a premium. a. True b. False

a. True

One factor affecting change in currency values is different price levels in different countries for the same goods and services. a. True b. False

a. True

One forecasting approach is to use a multiple regression model to estimate the relationship between changes in spot rates and fundamental factors. a. True b. False

a. True

The International Monetary Fund (IMF) was established under the Bretton Woods Agreement to help ensure the stability of the international monetary and financial system. a. True b. False

a. True

The statistical discrepancy line reconciles any remaining imbalance to ensure that all debit and credit entries in the BOP statement sum to zero. This line captures statistical inconsistencies in the recording of the credit and debit entries as well as illegal trade. a. True b. False

a. True

Together, the dollar, euro, and yen account for around 60 percent of the world economy. a. True b. False

a. True

The difference between bid and ask prices of a currency, or the fee earned by the bank is called the _____. a. bid-ask spread b. hedge c. premium d. forward rate e. exchange rate

a. bid-ask spread

The net of services exports and imports is called the ______. a. services balance b. income balance c. trade balance d. services deficit e. services transfer ratio

a. services balance

_____ refers to the added return required by investors for risk associated with a security or asset. a. Foreign direct investment b. A risk premium c. A balance of transfers d. Net financial derivatives e. A current balance account

b. A risk premium

According to the text, _____ countries' exports are growing the fastest. a. North American b. Asian c. African d. European e. South American

b. Asian

According to the Big Mac Index, the dollar interest rate on U.S. and European bonds should be the same. Otherwise, there would be no arbitrage opportunities for investors. a. True b. False

b. False

An example of inflation is, if the amount of money in a country doubled, but the production of goods and services stayed the same, the price of all goods and services would decline by about half, assuming that other factors, such as external trade, were constant. a. True b. False

b. False

In flow of funds analysis, money moving into a country is a debit (negative sign), while money leaving the same country is a credit (plus sign). a. True b. False

b. False

Indirect quotes give the number of dollars per one unit of foreign currency. a. True b. False

b. False

Security investments have little impact on the BOP's financial account. a. True b. False

b. False

The EMU introduced the euro as a new currency to replace the currencies of the member countries in the Eurozone, which has since grown to 29 members. a. True b. False

b. False

The forex market consists of spot, forward, and discount markets. a. True b. False

b. False

Whether the trade balance is positive (surplus) or negative (deficit) is important because it provides a measure of the financing needs of a particular country. Hence, the trade balance is more important than current account balance. a. True b. False

b. False

The forex market consists of spot, forward, and _____ markets. a. exchange b. futures c. balance d. independent e. foreign

b. futures

The net of investment income from abroad and investment payments to foreigners is called the _____. a. balance of transfers b. income balance c. trade balance d. financial account e. services balance

b. income balance

Which of the following is NOT a subaccount of the current account? a. Net transfers b. Trade balance c. Financial account d. Services balance e. Income balance

c. Financial account

The three largest foreign exchange markets are in London, New York, and _____. a. Paris b. Sydney c. Tokyo d. Singapore e. San Francisco

c. Tokyo

According to the income balance, the "+" sign refers to _____ and the "-" sign refers to _____. a. merchandise imports; incoming dollars b. when foreigners use services in a country; when foreign services are used c. earnings from overseas investment; payments are sent overseas d. incoming dollars; merchandise imports e. when foreign services are used; when foreign services are used

c. earnings from overseas investment; payments are sent overseas

The _____ account consists of domestic-country-owned assets abroad, foreign-owned assets in the domestic country, and net financial derivatives. a. balance b. services c. financial d. trade e. risk

c. financial

he system in which the country pegs its currency at a fixed rate to a major currency or basket of currencies, while the exchange rate fluctuates within a narrow margin around a central rate is called a(n) _____. a. independent floating exchange rate system b. managed floating exchange rate system c. fixed exchange rate system d. spot market e. foreign exchange market

c. fixed exchange rate system

The _____ reconciles any imbalance between the current account and financial account to ensure that all debit and credit entries in the balance of payments statement sum to zero. a. statistical discrepancy b. risk premium c. balance of transfers d. security investment e. foreign direct investment

a. statistical discrepancy

The _____ market is an informal OTC market run by banks. a. ​forward b. ​spot c. ​independent d. ​futures e. ​balance

a. ​forward

Of the following, which is NOT listed in the text as a reason why currency values can change? a. Different price levels in different countries for the same goods and services b. WTO mandates c. Price imbalances due to differential inflation d. Varying interest rates across countries e. Price imbalances due to mispricing

WTO mandates

Of the following, which is NOT a key principle of the Jamaica Agreement? a. Members could adopt their own exchange systems. b. Gold would no longer be a common denominator of the monetary system. c. A system of global fixed exchange rates would only be implemented if approved by a vote of 85 percent of membership. d. All countries would adopt the European Exchange Rate Mechanism. e. The SDR created by the IMF was recommended as the primary reserve asset of the international monetary system.

d. All countries would adopt the European Exchange Rate Mechanism.

Of the following, which is NOT true about the Bretton Woods System? a. It established a global currency system based on a gold standard with the U.S. dollar pegged at a fixed rate of exchange to gold in an effort to control inflation. b. Under the Smithsonian Agreement, the U.S. devalued the dollar against other countries' currencies. c. The IMF was established under the Bretton Woods Agreement. d. It was established in 1965. e. Eventually, major nations met to consider abandoning the Bretton Woods Agreement.

d. It was established in 1965.

A British firm may need dollars to pay for U.S. imports. It can work with banks in London to exchange pounds for dollars to make this payment via electronic transfer. This is an example of a(n) _____ market. a. balance b. futures c. exchange d. spot e. independent

d. spot

Which of the following rose substantially in value against most other currencies as well as served as a reserve asset in many countries during the global economic and financial crises of 2008-2009? a. Japanese yen b. Chinese yuan c. Euro d. British pound e. U.S. dollar

e. U.S. dollar

Balance of payments is generally split into two major components with major business implications: (1) the current account and (2) the _____ account. a. trade b. balance c. income d. services e. financial

e. financial

According to the trade balance, the "+" sign refers to _____ and the "-" sign refers to _____. a. when foreign services are used; when foreign services are used b. when foreigners use services in a country; when foreign services are used c. merchandise imports; incoming dollars d. earnings from overseas investment; payments are sent overseas e. incoming dollars coming in when merchandise is exported; dollars that leave the country to pay for imports

e. incoming dollars coming in when merchandise is exported; dollars that leave the country to pay for imports

In the forward market, the selling of a currency at a spot rate that is more than the forward rate is called _____. a. gaming the exchange rate b. selling at a discount c. forward rate speculation d. cheating the bid-ask spread e. selling at a premium

e. selling at a premium

What is dollarization? a. ​Pegging the value of a foreign currency against the U.S. dollar. b. ​Maintaining an acceptable exchange rate based on government intervention. c. ​Increasing the price of goods based on the supply of money. d. ​Pegging the value of a domestic currency against the market value of gold. e. ​Using the dollar or some other foreign currency together with or instead of a domestic currency.

e. ​Using the dollar or some other foreign currency together with or instead of a domestic currency

In this system, a currency's value depends partly upon active government intervention in the foreign exchange market. a. ​government exchange rate system b. ​fixed exchange rate system c. ​WTO exchange rate system d. ​independent floating exchange rate system e. ​managed floating exchange rate system

e. ​managed floating exchange rate system