in445

the ____ school of thought argues that forward exchange rates do the best possible job of forecasting future spot rates and therefore investing in forecasting services would be a waste of money

efficient market

The flow of foreign direct investment refers to the number of countries a firm is investing in at any given point in time.

False

The globalization of the world economy is having a negative effect on the volume of FDI.

False

fixed exchange rates lead to speculation and uncertainty in the value of currencies

false

Governments can protect consumers from unsafe products by issuing a limit or a ban on such products.

T

Purchasing Power Parity (PPP) theory states that given relatively efficient markets, the price of a "basket of goods" should be

roughly equivalent in each country

to minimize the risk of an unanticipated change in exchange rates a company can protect itself by entering into a forward exchange contract

true

world bank offers low-interest loans to risky customers whose credit rating is often poor

true

Government intervention can be self-defeating because it tends to protect the inefficient rather than help firms become efficient global competitors.

T

Government intervention in international trade can take the form of reducing restrictions on imports and encouraging foreign direct investment.

T

which of the following arguments is against the use of fixed exchange rates

each country has the freedom to choose its own inflation rate

the monetary autonomy argument holds that

each country should be allowed to choose its own inflation rate

what is the concept that is concerned with the long-run effect of changes in exchange rates on future prices, sales, and costs

economic exposure

the Asian economic crisis and the global financial of 2008-2009 crisis were caused by _____

excessive debt

the _____ helps us to compare the relative prices of goods and services in different countries

exchange rate

the rate at which one currency is converted into another is known as the ______

exchange rate

which term refers to the rate at which one currency is converted into another

exchange rate

the international monetary system refers to the institutional arrangements that govern _____

exchange rates

By the early 1990s, the radical position toward FDI was in retreat due to the rise of communism in eastern Europe.

f

adopting a pegged exchange rate regime increases the inflationary pressures in a country

false

an effective business strategy to reduce economic exposure is to contract out high value-added manufacturing

false

arbitrage opportunities abound in the foreign exchange markets and they tend to be available for long periods of time

false

carry trade is non-speculative in nature

false

firms should not utilize the forward exchange market when they are faced with uncertainty about the future value of currencies

false

gold was declared as the formal reserve asset in the Jamaica agreement of 1976

false

governments allow convertibility to preserve their foreign exchange reserves

false

if the sport exchange rate is 1euro = $1.50 when the market opens, and 1euro = $1.48 at the end of the day, the pound has appreciated and the dollar has depreciated

false

if the spot is $1 = x120, and the 30-day forward rate is $1 - x130, the dollar is selling at a discount in the forward market

false

implementing a fixed exchange rate regime increases the price inflation in countries

false

in the 1990s, most of the borrowing by the companies who invested in asian countries had been in local currencies

false

is $1 bough more yen with a spot exchange than with a 30-day forward exchange it indicates the dollar is expected to depreciate against the yen in the next 30 days. when this occurs, we say the dollar is selling at a premium on the 30-day forward market

false

market forces have produced a stable dollar exchange rate under a floating exchange rate regime

false

the gold standard called for fixed exchange rates against the US dollar

false

the impact of currency exchange rates on the reported financial statements of a company is called economic exposure

false

the most important trading centers for currencies are Zurich, Frankfurt, Paris, Hong Kong, and Sydney

false

the purchasing power parity (PPP) theory is a strong predictor of short-run movements in exchange rates covering time spans of five years or less

false

there is no evidence that psychological factors plan an important role in determining the expectations of market traders as to likely future exchange rates

false

the ______ states that a country's "nominal" interest rate (i)is the sum of the required "real" rate of interest(r) and the expected rate of inflation over the period for which the funds are to be lent (l)

fisher effect

advocates of a ______ argue that removal of the obligation to maintain exchange rate parity would restore monetary control to a government

floating exchange rate regime

the monetary autonomy argument is supported by the advocates of ______

floating exchange rates

a ____ is a situation in which a country cannot service its foreign debt obligations

foreign debt crisis

it follows from the Fisher effect that if the real interest rate is the same worldwide; any difference in interest rates between countries reflects differing expectations about _____

inflation rates

an exchange rate of 1euro = $1.30 indicates that

one euro buys 1.30 dollars

if a country has an external convertible currency

only nonresidents may convert it into a foreign currency without any limitations

suppose the price of a Big Mac in New York is $3.00 and the price of a Big Mac in Paris is equivalent to $3.75 at the prevailing euro/dollar exchange rate. using the concept of purchasing power parity, the euro is

overvalued by 25% against the dollar

under a ________ exchange rate regime, a country will attach the value of its currency to that of a major currency

pegged

a _____ means the value of a currency is fixed relative to a reference currency

pegged exchange rate

the great virtue claimed for a _____ is that it imposes monetary discipline on a country and leads to low inflation

pegged exchange rate

which of the following statements is true of pegged exchange rates

pegged exchange rates are popular among many of the world's smaller nations

international monetary fund members were _____ in the Jamaica agreement

permitted to sell their own gold reserves at the market price

assuming the 30-day forward exchange rate was $1 = x 130 and the spot exchange rate was $1 = x120, the dollar is selling at a _____ on the 30-day forward market

premium

the world bank was established at the Bretton woods conference to

promote general economic development

the _____ suggest that given relatively efficient markets, the price of a "basket of goods" should be roughly equivalent in each country

purchasing power parity theory

The six countries on the northern side of the Pacific Rim agreed to reduce and ultimately remove tariff and nontariff barriers to the free flow of goods, services and factors of production between each other. The agreement among these countries is referred to as

regional economic integration

the purchasing power parity (PPP) theory tells us that a country with a high inflation rate will

see depreciation in its currency exchange rate

currency _____ typically involves the long-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates

speculation

when a tourist goes to a bank in a foreign country to convert money into the local currency, the exchange rate used is the ______

spot

when 2 parties agree to exchange currency and execute the deal immediately, the transaction is a ______

spot exchange

the ______ is the rate at which a foreign exchange deal converts one currency into another currency on a particular day

spot exchange rate

_____ are reported on a real time basis on many financial websites and are continually changing -- their value being determined by supply and demand for that currency relative to others

spot exchange rates

According to the extreme version of radical view, no country should ever permit foreign corporations to undertake FDI, because they can never be instruments of economic development, only of economic domination.

t

Both import quotas and voluntary export restraints (VERs) benefit domestic producers by limiting import competition.

t

Economists refer to knowledge "spillovers" as externalities, and there is a well-established theory suggesting that firms can benefit from such externalities by locating close to their source.

t

Multipoint competition arises when two or more enterprises encounter each other in different regional markets, national markets, or industries.

t

_____ uses price and volume data to determine past trends, which are expected to continue into the future

technical analysis

a pair of shoes cost 40euro in Britain. An identical pair costs $50 in the US when the exchange rate is 1eruo = $1.50

the US offers a better deal

assume that an American company today invests some of its spare cash in a Hungarian money market account that will earn 8% for a period of two months. which of the following, if it happens during the next two months, would imply that the company will earn less than 8% on its investment

the dollar appreciates against the Hungarian forint

if the demand for dollars outstrips its supply of Japanese yen is greater than the demand for it, what will happen

the dollar will appreciate against the yen

which of the following is referred to as the purchasing power parity puzzle

the failure to find a strong link between relative inflation rates and exchange rate movements

A firm is most likely to favor foreign direct investment over exporting when

the firm wishes to maintain control over its operations and business strategy.

a country is said to be in balance-of-trade equilibrium when

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

a country is said to be in balance-of-trade equilibrium when

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

if the law of one price were true for all goods and services, the purchasing power parity (PPP) exchange rate could be found from any individual set of prices

true

interest rates adjust automatically under a strict currency board system

true

moral hazard arises when people behave recklessly because they know they will be saved if things go wrong

true

the agreement reached at Bretton Woods established the International Monetary fund and the world bank

true

the current system of foreign exchange is a mixed system of government intervention and speculative activity

true

the efficient market school argues that investing in exchange rate forecasting services would be a waste of money

true

the fixed exchange rate system established at Bretton Woods failed due to speculative pressures on the US dollar

true

the foreign exchange market is a market for converting the currency of one country into that of another country

true

the international fisher effect states that for any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates for the two countries

true

the international monetary fund made pegging the Mexican peso to the dollar, a condition for lending money to the Mexican government in the 1980s

true

the international monetary fund's original function was to provide a pool of money from which members could borrow in the short term

true

the international monetary system refers to the institutional arrangements that govern exchange rates

true

the quality of investments declined significantly in the asian countries during the 1990s

true

the value of a currency is determined by the interaction between the demand and supply of that currency relative to the demand and supply of other currencies

true

there are no impediments to the free flow of goods and services in an efficient market

true

transaction exposure includes obligations for the purchase or sale of goods and services at previously agreed prices and the borrowing or lending of funds in foreign currencies

true

the united states had large and growing trade deficit between 1980 and 1985. despite this, the value of US dollar rose during this period. which of the following is a factor t hat caused this occurrence?

united states attracted heavy inflows of capital from foreign investors during this period

after WW2, 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

fixed exchange rate

a pegged exchange rate means that the value of a currency is

fixed relative to a reference currency

______ exchange rates were declared as acceptable in the Jamaica agreement of the international monetary fund

floating

when the foreign exchange market determines the relative value of a currency, we say that the country is adhering to a _____ regime

floating exchange rate

assume that the current exchange rate is 1euro = $1.50. if you exchange 1,000 euros for dollars you will receive ______

1,500

The Euro zone is comprised of the

19 member nations who use the euro as their currency

according to the law of one price, if the exchange rate between the British pound and the dollar is 1euro = $1.50, a shirt that retails for $120 in New York should sell for _____ in London

80 euro

Location-specific advantages for a firm are those that arise from

A) utilizing resource assets that are tied to a particular foreign location and valuableenough to be combined with the firm's own unique assets.

Which of the following groups benefits the most from the imposition of tariffs?

A. Domestic producers

Which of the following statements is true about import quotas?

A. Import quotas benefit domestic producers by limiting import competition.

Which view of FDI traces its roots to Marxist political and economic theory?

A. Radical

Which of the following is the term for when a lower tariff rate is applied to imports within the quota than those over the quota?

A. Tariff rate quota

By lowering production costs, subsidies help domestic producers to:

A. gain export markets.

According to the free market view, how does FDI increase the efficiency of the world economy through MNEs?

A. The MNE is an instrument for dispersing the production of goods and services to the most efficient locations around the globe.

Which of the following concepts helps explain how location factors affect the direction of FDI?

A. The eclectic paradigm

Which of the following best indicates the motive for foreign firms to engage in dumping?

A. Unloading excess production in foreign markets

Which of the following indicates the difference between GATT and WTO?

A. WTO has strict time limits unlike GATT

According to the radical view of FDI, multinational enterprises (MNEs) that already exist in a country should be:

A. immediately nationalized.

A government should use subsidies to support promising firms that are active in newly emerging industries, according to:

A. strategic trade policy.

What was a change proposed by the Single European Act?

Apply the principle of "mutual recognition" to product standards

The European Parliament plays an important role in the European Union and creates a(n) ___ to coordinate the economic, social, and foreign policy of the member states.

Political union

One result of the Single European Act was that it

Providing the impetus for the restructuring of substantial sections of European industry.

The European Economic Community was established with the signing in 1957 of the Treaty of

Rome

Antidumping actions seem to be concentrated in certain sectors of the economy such as basic metal industries (e.g., aluminum and steel), chemicals, plastics, and machinery and electrical equipment.

T

Despite the move toward a free market stance in recent years, many countries still have a rather pragmatic stance toward FDI.

T

Dumping is variously defined as selling goods in a foreign market at below their costs of production, or as selling goods in a foreign market at below their "fair" market value.

T

Which of the following statements is most likely to be true regarding the effects of FDIon employment?

B) A beneficial employment effect claimed for FDI is that it brings jobs to a hostcountry that would otherwise not be created there.

Arnold & Sons, a leading manufacturer of cement in the U.S. is considering exporting as its FDI strategy. Exporting may not be a good option for Arnold & Sons because ofcement's

B) low value-to-weight ratio.

A charge of 15-20% was levied by the government of Cadmia on the value of automobile accessories imported from a neighboring country. This increased the price of those imported car accessories for the consumers in Cadmia. Which of the following instruments of trade policy is being used by the government of Cadmia?

B. Ad valorem tariff

Why has FDI grown more rapidly than world trade?

B. Executives of business firms see FDI as a way of circumventing future trade barriers.

Which of the following statements is true regarding foreign direct investment?

B. FDI has grown more rapidly than world trade and world output.

Which of the following refers to the amount of FDI undertaken over a given period (normally a year)?

B. Flow

According to the U.S. Department of Commerce, which of the following, occurs whenever a U.S. citizen, organization, or affiliated group takes an interest of 10 percent or more in a foreign business entity?

B. Foreign direct investment

The United States accused Libya and Iran of supporting terrorist action and building weapons of mass destruction. The U.S. government, therefore, imposed trade sanctions against the two countries. Which of the following political arguments does this exemplify?

B. Furthering foreign policy objectives

Which of the following is most likely to involve establishment of a new operation in a foreign country?

B. Greenfield investment

Why is retaliation by government intervention a risky strategy?

B. It could result in increased tariff barriers by the country that is being pressured.

Which of the following requires that some specific fraction of a good must be produced domestically?

B. Local content requirement

Which of the following is a trade policy instrument that the GATT and WTO have been most successful in limiting?

B. Tariffs

Which of the following identifies an attribute of tariffs?

B. Tariffs reduce the overall efficiency of the world economy.

If Argonia exports vast quantities of cheap toys to Cadmia, selling them at below their costs of production, it would constitute:

B. dumping.

Governments impose quotas to limit:

B. importing.

According to internalization theory:

B. licensing may result in a firm's giving away valuable technological know-how to a potential foreign competitor.

The extra profit that producers make when supply is artificially limited by an import quota is referred to as a:

B. quota rent.

The United States has been an attractive target for FDI partly because of its:

B. stable and dynamic economy.

A firm will favor FDI over exporting as an entry strategy when:

B. the transportation costs or trade barriers are high.

Silicon Valley in California is the world center for the computer and semiconductor industry and has many of the world's major computer and semiconductor companieslocated close to each other, thus offering the location-specific advantage of

C) externalities.

Which of the following groups would benefit the most from receiving subsidies?

C. Domestic producers

Which of the following arises when two or more enterprises encounter each other in different regional markets, national markets, or industries?

D. Multipoint competition

Which of the following involves granting a foreign entity the right to produce and sell the firm's product in return for a royalty fee on every unit sold?

C. Licensing

According to Krugman, which of the following best indicates the dangers of a strategic trade policy?

C. Occurrence of a trade war

Which of the following is the most common political argument for government intervention in international trade?

C. Protecting jobs and industries from unfair foreign competition

Which of the following is most likely to be an objective of export tariffs?

C. Reducing exports from a sector, often for political reasons

Which of the following refers to a quota on trade imposed by the exporting country, typically at the request of the importing country's government?

C. Voluntary export restraint (VER)

FDI is risky because of the problems associated with:

C. doing business in a different culture where the rules of the game may be very different.

A computer manufacturing firm from the United States invests in a microprocessor manufacturing plant in Taiwan. This is an example of:

C. foreign direct investment.

The viability of an exporting strategy is often constrained by transportation costs, particularly of products that can be produced in almost any location and have a:

C. low value-to-weight ratio.

The strategic behavior theory:

C. seeks to explain the patterns of FDI flows based on the idea that FDI flows are a reflection of strategic rivalry between firms in the global marketplace.

The European Parliament is described as a(n) _____ body

Consultative

Which of the following best explains the reason for the rise in protectionist pressures around the world during the 1980s?

D. The persistent trade deficit in the world's largest economy, the United States

Why has FDI grown more rapidly than world trade?

D) Executives of business firms see FDI as a way of circumventing future trade barriers.

Omega, Inc. produces an entire line of stationery products at its manufacturing facility in 1) the U.S. and then ships all over Europe for sale. Omega, Inc. is

D) exportin

When a country is importing more goods and services than it is exporting, it is incurring

D) trade surplus.

Which of the following are bureaucratic rules designed to make it difficult for imports to enter a country?

D. Administrative trade policies

Which of the following specifies that U.S. government agencies must give preference to U.S. products when putting contracts for equipment out to bid unless the foreign products have a significant price advantage?

D. Buy America Act

Which of the following states that combining location-specific assets or resource endowments and the firm's own unique assets often requires FDI, and it also requires the firm to establish production facilities where those foreign assets or resource endowments are located?

D. Eclectic paradigm

Many host countries are concerned that a foreign-owned manufacturing plant may import many components from its home country, which has negative implications for the host country's:

D. balance-of-payments position.

The Smoot-Hawley Act had a damaging effect on:

D. employment abroad.

One of the main reasons why many economists remain critical of the infant industry argument is its reliance on the assumption that:

D. firms are unable to make efficient long-term investments by borrowing money from the domestic or international capital markets.

Many developing countries have a potential comparative advantage in manufacturing, but new manufacturing industries cannot initially compete with well-established industries in developed countries, according to:

D. infant industry argument.

A critical competitive feature of an oligopoly is the:

D. interdependence of the major players.

The argument that firms prefer FDI over licensing to retain control over know-how, manufacturing, marketing, and strategy or because some firm capabilities are not amenable to licensing constitutes the:

D. internalization theory.

Bilateral voluntary export restraints, or VERs, circumvented GATT agreements, because:

D. neither the importing country nor the exporting country complained to the GATT bureaucracy for it to take action.

The European Free Trade Association initially consisted of member nations that

Decided not to be part of European Community

Which of the following reflects internalization theory?

E) Licensing may result in a firm's giving away valuable technological know-how to a potential foreign competitor.

Which of the following is one of the limitations of exporting that leads companies to 3) prefer FDI over exporting?

E) presence or threat of trade barriers

The pragmatic nationalist view is that:

E. FDI has both benefits and costs.

Mergers and acquisitions differ from greenfield investments in that:

E. the percentage of mergers and acquisitions is lower than greenfield investments in developing nations.

The _____ is responsible for proposing European Union legislation, implementing it, and monitoring compliance with European Union laws by member states.

European Commission

By lowering production costs, subsidies help foreign competitors gain export markets.

F

Free trade as a government policy was first officially embraced by Germany in 1846, when the Bundestag repealed the Corn Laws.

F

Governments of developed nations are setting an example by unilaterally lowering their trade barriers.

F

In recent decades, a fall in subsidies, quotas, and voluntary export restraints has been accompanied by a rise in tariff barriers.

F

Political arguments for government intervention are usually concerned with protecting consumer interests within the country.

F

Pressures for greater protectionism increased around the world during the 1980s and early 1990s due to the strain caused by the persistent trade deficit in the world's largest economy, Japan.

F

Some countries argue that government intervention to protect certain domestic industries can compromise national security.

F

Specific tariffs are levied as a proportion of the value of the imported good.

F

The European Union is an example of a perfect economic union.

FALSE. The EU is an economic union, although an imperfect one.

In a customs union, trade barriers are eliminated among member countries, and each country maintains its own external trade polices with nonmember countries.

FALSE: A customs union eliminates trade barriers between member countries and adopts a common external trade policy.

A common market entails even closer economic integration and cooperation than an economic union.

FALSE: An economic union entails even closer economic integration and cooperation than a common market.

Establishment of the euro created the largest currency zone in the world, replacing the position the U.S. dollar had held for decades.

FALSE: By adopting the euro, the EU has created the second most widely traded currency in the world after that of the U.S. dollar.

The Single European Act committed EU countries to adopting a common currency by January 1, 1999.

FALSE: In December 1991, EC members signed a treaty (the Maastricht Treaty) that committed them to adopting a common currency by January 1, 1999.

In theory, WTO rules should ensure that a free trade agreement results in trade diversion.

FALSE: In theory, WTO rule should ensure that a free trade agreement does not result in trade diversion.

The movement toward regional economic integration been most successful in Asia.

FALSE: Nowhere has the movement toward regional economic integration been more successful than in Europe.

Since its establishment, the euro has had a stable trading history.

FALSE: Since January 1, 1999 the Euro has had a volatile trading history against the world's major currency, the US dollar.

The attractiveness of exporting increases in comparison to FDI or licensing when products have a low value-to-weight ratio.

False

A common market has no barriers to trade between member countries, includes a common external trade policy, and allows factors of production to move freely between members.

TRUE: A common market, has no barriers to trade between member countries, includes a common external trade policy, and allows factors of production to move freely between members.

A major impediment to economic integration is the loss of sovereignty it entails.

TRUE: A major impediment to integration arises from concerns over national sovereignty.

An acquisition does not result in a net increase in the number of players in a market.

True

the foreign exchange market is

the market never sleeps

a currency swap deal enables companies to insure themselves against foreign exchange risk

true

currency fluctuations can make seemingly profitable trade and investment deals unprofitable and vice versa

true

government projects were a factor behind the investment boom in most southeast asian economies

true

The Smoot-Hawley Act aimed to liberalize trade by eliminating tariffs, subsidies, and import quotas.

F

The location-specific advantages argument associated with John Dunning helps explain why firms prefer FDI to licensing or to exporting.

F

The main gains from subsidies accrue to importers, whose international competitiveness is increased as a result of these subsidies.

F

The threat of antidumping action enhances the ability of a firm to use aggressive pricing to gain market share in a country.

F

The Council of the European Union is responsible for proposing EU legislation, implementing it, and monitoring compliance with EU laws by member states

FALSE: The European Commission is responsible for proposing EU legislation, implementing it, and monitoring compliance with EU laws by member states.

The governments of both Canada and the United States are keen on adding other Latin American countries to NAFTA

FALSE: The Number of other Latin American countries have indicated their desire to eventually join NAFTA. The governments of both Canada and the US are adopting a wait-and-see attitude with regard to most countries.

The judges of the European Court of Justice are required to act as representatives of national interests, rather than as independent officials

FALSE: The judges are required to act as independent officials, rather than as representatives of national interests.

Great Britain, Sweden, and France have led the push toward adopting the euro.

FALSE: Three long-term EU members, Great Britain, Denmark, and Sweden, are still sitting on the sidelines. They have not adopted the euro.

Trade diversion occurs when higher-cost external producers are replaced by lower-cost external producers within the free trade area.

FALSE: Trade creation occurs when higher-cost external producers are replaced by lower-cost external producers within the free trade area.

Because of the fact that everyone benefits from economic integration, it is easy to achieve and sustain.

FALSE: While a nation as a whole may benefit significantly from a regional free trade agreement, certain groups may lose.

The Treaty of Rome, signed in 1957, established the European Free Trade Association.

FALSE: With the signing of the Treaty of Rome in 1957, the European Community was established.

A critical competitive feature of an oligopoly is independence of the major players.

False

According to the pragmatic nationalist view, no country should ever permit foreign corporations to undertake FDI.

False

By limiting imports through quotas, governments reduce the attractiveness of FDI and licensing.

False

FDI has grown significantly slower than world trade and world output.

False

Historically, most FDI has been directed at the least developed nations of the world.

False

Offshore production refers to FDI undertaken to serve the host market.

False

Services such as telecommunications, retailing, and many financial services, where the service has to be produced where it is delivered, lend themselves well to exporting.

False

When a firm exports its products to a foreign country, foreign direct investment occurs.

False

Canada and the United States agree to remove all barriers to the trade of goods between them. However, the countries agree that each would be allowed to determine its own trade policies with regard to nonmembers. The economic integration between these countries is called a(n)

Free trade area

Which of these situations shows how concerns over national sovereignty can act as an impediment to regional economic integration?

Great Britain refusing to adopt the common currency of the European Union, the euro

which of the following changes were made to the international monetary fund's articles of agreement in the jamaica agreement

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

Many investor nations now have government-backed insurance programs to cover major types of foreign investment risk like the risks of expropriation (nationalization), war losses, and the inability to transfer profits back home.

T

One of the reasons for the trend toward greater protectionism was that many countries found ways to get around GATT regulations.

T

Ownership restraints and performance requirements are the two most common ways in which host governments restrict FDI.

T

Paul Krugman asserts that a strategic trade policy is almost certain to be captured by special-interest groups within the economy, who will distort it to their own needs.

T

The Buy America Act specifies that government agencies must give preference to American products when putting contracts for equipment out for bid unless the foreign products have a significant advantage.

T

The strategic trade policy arguments of the new trade theorists suggest an economic justification for government intervention in international trade and this justification challenges the rationale for unrestricted free trade.

T

A regional free trade agreement will benefit the world only when the amount of trade it creates exceeds the amount of trade it diverts.

TRUE: A regional free trade agreement will benefit the world only if the amount of trade it creates exceeds the amount it diverts

Regional economic integration involves agreements among countries in a geographic region to reduce, and ultimately remove, tariff and nontariff barriers to the free flow of goods, services, and factors of production between each other.

TRUE: By regional economic integration we mean agreements among countries in a geographic region to reduce, and ultimately remove, tariff and nontariff barriers to the free flow of goods, services, and factors of production between each other.

The establishment of the euro required participating countries to give up their monetary policy.

TRUE: Establishing the euro required participating national governments not only to give up their own currencies, but also to give up control over monetary policy.

There are two main trading blocs in Europe, the European Union and the European Free Trade Association.

TRUE: Europe has two trade blocs—the European Union and the European Free Trade Association.

Linking neighboring countries economically and making them interdependent creates incentives to increase political cooperation as well.

TRUE: Linking neighboring economies and making them increasingly dependent on each other creates incentives for political cooperation between the neighboring states and reduces the potential for violent conflict.

On average, studies indicate that NAFTA's overall impact has been small but positive.

TRUE: Studies of NAFTA's impact suggest its initial effects were at best muted, and both advocates and detractors may have been guilty of exaggeration. On average, studies indicate that NAFTA's overall impact has been small but positive.

The ultimate controlling unit within the EU us the European Council.

TRUE: The European Council represents the interests of member states. It is clearly the ultimate controlling authority.

The European Parliament is primarily a consultative rather than legislative body.

TRUE: The European Parliament, which now has 732 members, is directly elected by the populations of the member states. It is primarily a consultative rather than legislative body.

A central reason for the establishment of the EU was the devastation of Western Europe during two world wars and the desire for a lasting peace.

TRUE: The European Union (EU) is the product of two political factors: (1) the devastation of Western Europe during two world wars and the desire for a lasting peace, and (2) the European nations' desire to hold their own on the world's political and economic stage.

A key benefit resulting from the adoption of the euro is the ability to compare prices across member markets.

TRUE: The adoption of a common currency makes it easier to compare prices across Europe. This has been increasing competition because it has become easier for consumers to shop around.

Coordination and policy harmonization problems are largely a function of the number of countries that seek agreement.

TRUE: The greater the number of countries involved, the more perspectives that must be reconciled, and the harder it will be to reach agreement.

The implied loss of national sovereignty to the ECB underlies the decision by Great Britain, Denmark, and Sweden to stay out of the euro zone for now.

TRUE: The implied loss of national sovereignty to the ECB underlies the decision by Great Britain, Denmark, and Sweden to stay out of the euro zone for now.

After the creation of a free trade area involving five nations, higher cost external fabric producers were replaced by lower-cost external fabric producers within the free trade area. This is known as

Trade Creation

According to the United Nations, the majority of changes made worldwide between 1992 and 2009 in the laws governing foreign direct investment have created a more favorable environment for FDI.

True

According to the free market view, countries should specialize in the production of those goods and services that they can produce most efficiently.

True

By placing tariffs on imported goods, governments can increase the cost of exporting relative to foreign direct investment and licensing.

True

Greenfield investment involves the establishment of a new operation in a foreign country.

True

Import tariffs protect domestic producers against foreign competitors.

True

Licensing is not a good option if the competitive advantage of a firm is based upon managerial or marketing knowledge that is embedded in the routines of the firm or the skills of its managers, and that is difficult to codify in a "book of blueprints."

True

Performance requirements are controls over the behavior of the MNE's local subsidiary.

True

Since World War II, the United States has been the largest source country for FDI.

True

Subsidies are a trade policy instrument.

True

The indirect employment effects of FDI are often as large as, if not larger than, the direct effects.

True

The stock of foreign direct investment refers to the total accumulated value of foreign-owned assets at a given time.

True

When a firm allows another enterprise to produce its products under license, the licensee bears the costs or risks.

True

How many trade blocs are in Europe?

Two

although a foreign exchange transaction can involve any 2 currencies, most transactions involve _____ on one side

dollars

in the 1990s, most of the borrowing by the companies who invested in Asian countries had been in _____

US dollars

which of the following is one of the most important trading centers in the foreign exchange market

Zurich

a dirty float refers to a situation in which

a country tries to hold its currency against an important reference currency without a formal pegged rate

the Fisher effect states that

a country's "nominal" interest rate is the sum of the required "real" rate of interest and the expected rate of inflation over the period for which the funds are to be lent

_____ limits the ability of the government to print money and, thereby, create inflationary pressures

a currency board system

a currency crisis occurs due to

a currency crisis occurs due to

Economic theories for integration imply that free trade and investment create ___ for participants

a positive-sum game

a currency crisis occurs when

a speculative attack on the exchange value of a currency results in a sharp depreciation in the value of the currency

which of the following observations is true of the Bretton Woods agreement

all countries agreed to fix the value of their currency in terms of gold under the agreement

gold par value refers to the

amount of a currency needed to purchase one ounce of gold

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

another currency at a fixed exchange rate

assume that the law of one price holds. a shirt that retails for $120 in New York sells for 60euro in London. the exchange rate between the British pound and the dollar is 1euro = $1.50. assuming away transportation costs and trade barriers, this creates a profit-making opportunity called _____

arbitrage

assume that the yen/dollar exchange rate quoted in Tokyo at 3:00pm is x120 = $1, and the yen/dollar exchange rate quoated in New York at the same time is x123 = $1. a dealer in New York uses dollars to purchase yen and then immediately sells the yen to buy dollars in Tokyo, thereby making a profit. the dealer has engaged in a(n) _____

arbitrage

most of the loans issued by the IMF

are conditional loans

international development association loans

are funded through subscriptions from wealthy members

supporters of floating exchange rates

argue that floating rates help adjust trade imbalances

which of the following occurs when traders start moving as a herd in the same direction a the same time

bandwagon effect

a _____ refers to a loss of confidence in the banking system that leads to a run on banks as individuals and companies withdraw their deposits

banking crisis

a currency is said to be freely convertible when

both residents and nonresidents are allowed to purchase unlimited amounts of a foreign currency with it.

______ is most likely to occur when the value of the domestic currency is depreciating rapidly because of hyperinflation or when a country's economic prospects are shaky in other respects

capital flight

assume that the interest rate on borrowings, in Japan is 1%, which the interest rate on deposits in Australian banks is 5%. A trader borrows in yen and then converts the money into Australian dollars and deposits it in an Australian bank to make a 4% margin. which type of trade is this an example of

carry trade

which of the following involves borrowing in one currency where interest rates are low, and the using the proceeds to invest in another currency where interest rates are high?

carry trade

the purchasing power parity (PPP) theory argues that the exchange rate will

change if relative prices change

which of the following would a follower of the inefficient market school of thought agree with?

companies would be better off investing in foreign exchange forecasting services

_____ refers to a range of barter-like agreements by which goods and services can be traded for other goods and services

countertrade

when a country's currency is nonconvertible, a firm may turn to _____

countertrade

which of the following statements is true of the gold standard

currencies were pegged to gold under the gold standard

what are the 2 main functions of the foreign exchange market

currency conversion and providing some insurance against foreign exchange risk

the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates is known as

currency speculation

a(n) ____ is the simultaneous purchase and sale of a given amount of foreign exchange for 2 different value dates

currency swap

which of the following refers to the simultaneous purchase and sale of a given amount of foreign exchange for 2 different value dates

currency swap

_____ are transacted between international businesses and their banks, between banks, and between governments when it is desirable to move out of one currency into another for a limited period without incurring foreign exchange risk

currency swaps

a lag strategy involves

delaying collection of foreign currency receivables if that currency is expected to appreciate

exchange rates are ____ under a pure "free float" system

determined by market forces

when a country tries to hold the value of their currency within some range against an important reference currency such as the US dollar without adopting a formal pegged rate, it is referred to as a _____

dirty float

identify the currency that was convertible to gold under the bretton woods system

dollar

the _____ is a global network of banks, brokers, and foreign exchange dealers connected by electronic communications systems

foreign exchange market

the risk that arises from volatile changes in exchange rates is known as

foreign exchange risk

when two parties agree to exchange currency and execute the deal at some specific time in the future, a _____ occurs

forward exchange

a(n) _______ is quoted for 30 days, 90 days, and 180 days into the future

forward exchange rate

_______ are exchange rates governing some specific future date foreign exchange transactions

forward exchange rates

trade imbalances can be adjusted by using floating exchange rates

free float

______ draws on economic theory to construct sophisticated econometric models for predicting exchange rate movements

fundamental analysis

differences in the spot exchange rate and the 30-day forward rate are normal and reflect the expectations of the foreign exchange market about

future currency movements

the amount of a currency needed to purchase one ounce of gold was referred to as the ______

gold par value

which of the following arguments is in favor of floating exchange rates

governments can restore monetary control by removing the obligation to maintain exchange rate parity

which of the following is the reason why the current foreign-exchange system is sometimes thought of as a managed-float system

governments intervene frequently in the foreign exchange market

under a currency board system

governments lack the ability to set interest rates

a(n) _____ is one in which prices do not reflect all available information

inefficient market

which of the following occurs when the quantity of money in circulation in a country rises faster than the country's stock of goods and services

inflation

the _______ states that, for any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between the 2 countries

international fisher effect

the agreement reached at Bretton Woods established the _____

international monetary fund

the ______ refers to the institutional arrangements that govern exchange rates

international monetary system

the international fisher effect

is not a good predictor of short- run changes in spot exchange rates

which of the following is a disadvantage of using a rigid policy of fixed exchange rates

it is likely to create high unemployment in some cases

identify the correct statement about the PPP theory

it predicts that exchange rates are determined by relative prices

a country's trade balance is in surplus when

its exports are more than its import

the ____ states that in competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency

law of one price

a(n) _____ involves attempting to collect foreign currency receivables early when a foreign currency is expected to depreciate and paying foreign currency payables before they are due when a currency is expected to appreciate

lead strategy

which of the following is a function of world bank

lending money to governments for development

restrictions on external convertibility can

limit domestic companies from investing abroad

currencies of countries with currency boards will become uncompetitive and overvalued if:

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

which of the following is the most important foreign exchange trading center

london

the rise in the value of the dollar between 1985 and 1988

made imports relatively cheap

the value of US dollar increased between 1985 and 1988

made imports relatively cheep

The price of a bouquet of tulips in France is 4 euros. Jenna Algren, a frequent international traveler, found that a similar bouquet of tulips cost only 3 euros in Belgium. This demonstrates that the benefit of adopting the euro as a common currency is that it

makes it easier to compare prices across Europe

which of the following is the exchange rate policy where the government intervenes in the exchange rate system only in a limited way

managed-float

it is difficult if not impossible to get adequate insurance coverage for exchange rates that

might occur several years in the future

inflation occurs when

the quantity of money in circulation rises faster than the stock of goods and services

which of the following is an advantage of using the gold standard

the standard contains a powerful mechanism for achieving balance-of-trade equilibrium by all countries

international businesses use foreign exchange markets for many reasons, which of the following is one of these reasons

to invest for short terms in money markets when they have spare cash

why do governments limit currency convertibility

to preserve foreign exchange reserves

what will happen if a country increases its money supply rapidly under fixed exchange rate regime

trade deficit would widen in that country

which of the following arguments strengthen the idea of floating exchange rates

trade deficits can be corrected through changes in exchange rates

those in favor of floating exchange rate claim that _____

trade imbalances can be adjusted by using floating exchange rates

_____ includes obligations for the purchase or sale of goods and services at previously agreed prices and the borrowing or lending of funds in foreign currencies

transaction exposure

the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values is known as _____

transaction exposure

_____ is the impact of short-run currency exchange rates changes on the reported financial statements of a company

translation exposure

a country that introduces a currency board commits itself to converting its domestic currency on demand into another currency at a fixed exchange rate

true

under a pegged exchange rate regime, a country

will peg the value of its currency to that of a major currency

the international monetary fund has been criticized for exacerbating moral hazard

with its rescue programs

which of the following is a factor that initiated the collapse of the fixed exchange rate system

worsening of US foreign trade position