INTB Exam 2

The __________ was created to maintain order in the international monetary system.

International Monetary Fund (IMF)

The eclectic paradigm is based on the idea that intellectual property is of considerable importance in explaining the direction of FDI.

FALSE

When a firm enters into a spot exchange contract, it is taking out insurance against adverse future exchange rate movements.

FALSE

Advocates of the floating rate system argue that

floating rates help adjust trade imbalances.

A country that imports more goods than it exports experiences a

trade deficit

If the firm is facing the threat of trade barriers such as high import tariffs or quotas and the firm has proprietary technology, the firm should consider

foreign direct investment

Dipper Donuts licenses its brand name to foreign firms as long as they agree to run their restaurants on exactly the same lines as Dipper Donuts restaurants elsewhere in the world. In return, the foreign firms have to pay Dipper Donuts a percentage of their profits. This is an example of

franchising.

The __________ view argues that international production should be distributed among countries according to the theory of comparative advantage and countries should specialize in the production of goods they can produce most efficiently.

free market

JCB's joint venture in India with local conglomerate Escorts

is an example of foreign direct investment.

A country that relies on the pragmatic nationalist view would say that

FDI should be allowed so long as the benefits outweigh the costs.

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

Multipoint competition

JCB operates several factories in India employing more than 5,000 workers. Which best characterizes JCB's impact on India?

India benefits from employment effects.

Assume that the exchange rate between the euro and the dollar is €1.00 = $1.50. Jenna is an American tourist in Italy buying a leather wallet whose price is €60. How much in U.S. dollars will Jenna have to pay to buy the product?

$90

For JCB, foreign direct investment in India was initially preferable to exporting because

India had high tariff barriers.

Assume that the euro/dollar exchange rate is €1 = $1.20. If it costs $36 to buy a European product, the stated price of the product would be €36.

FALSE

1944/Established the International Monetary Fund with fixed exchange rates and relied on a strong U.S. dollar.

Bretton Woods

An efficient market exists when countries enact tariff barriers to minimize imports.

FALSE

As the only currency that could be converted into gold, the British pound ultimately weakened the system of fixed exchange rates established at Bretton Woods and caused it to collapse.

FALSE

Pegged exchange rates are most popular in larger, developed nations.

FALSE

According to the __________, there is a strong relationship between inflation rates and interest rates.

Fisher effect

1930s/ European nations transferred their gold to the United States.

Gold Loss

1880/Powerful mechanism for achieving balance-of-trade equilibrium.

Gold Standard

1976/Floating exchange rate declared acceptable and revised International Monetary Fund's Articles of Agreement.

Jamaica Agreement

1973/Ongoing U.S. trade deficits led to fixed rate collapse and renegotiation.

Smithsonian agreement

JCB's joint venture in India with Escorts can best be described as

a greenfield investment.

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

A resource-transfer effect of FDI is that it can result in a positive contribution to a host economy by supplying capital and technology which boost the country's economy.

TRUE

During the Bretton Woods negotiations, there was a consensus among the countries represented that fixed exchange rates were preferred.

TRUE

Spot exchange rates change continually.

TRUE

Supply and demand of one currency relative to another helps determine exchange rates.

TRUE

The Bretton Woods system could work only as long as the U.S. inflation rate remained low and the United States did not run a balance-of-payments deficit.

TRUE

The U.S. dollar, EU euro, Japanese yen, and British pound are all free to float against each other, which means their exchange rates constantly fluctuate.

TRUE

The attractiveness of exporting is reduced when a product can easily be produced in almost any location.

TRUE

The flow of foreign direct investment refers to the amount of FDI undertaken over a given period of time—normally a year.

TRUE

The foreign exchange market is the vehicle used to convert the currency of one country into that of another country.

TRUE

The process of dollarization occurs when a country abandons its own currency and adopts another currency—typically the U.S. dollar.

TRUE

When companies wish to convert currencies, they typically do so through a bank.

TRUE

Which of the following has contributed to the problems Vietnam is facing with its coffee revenues?

Vietnam's currency is pegged to the dollar.

Which of the following statements is true of how the strong U.S. dollar has affected the global coffee market?

Vietnamese coffee farmers are reducing coffee production and investing in alternative crops.

Which of the following would be most beneficial for Vietnam's coffee growers?

a depreciation in the value of the U.S. dollar

As part of its 2016 agreement to borrow $12 billion from the International Monetary Fund (IMF), Egypt agreed to

allow its currency to float against other currencies.

Freeman Fabricators International purchased securities on the London Stock Exchange and then immediately resold them on the New York Stock Exchange at a higher price. The profits from this transaction were used to buy new equipment for the company. This company engaged in

arbitrage.

A country is said to be in __________ when the income its residents earn from exports is equal to the money its residents pay to other countries for imports.

balance-of-trade equilibrium

The crisis in Egypt that required the country to take a $12 billion loan from the International Monetary Fund (IMF) in 2016 can best be described as a(n)

currency crisis.

A(n) __________ refers to the simultaneous purchase and sale of a given amount of foreign exchange for two different value dates.

currency swap

When a nation puts government-backed insurance programs in place to cover major types of foreign investment risk, it has the effect of

encouraging outward FDI by a home country.

If your household goods can be efficiently produced through economies of scale, it would be a good idea to use a(n) _______ strategy.

exporting

The effect of bulky or heavy products on transportation costs can make _______ an inappropriate strategy.

exporting

If your proprietary know-how of "green" processes is difficult to transfer to other firms, the most effective approach would be

exporting or foreign direct investment.

The exchange rate for converting the U.S. dollar into other currencies is continuously adjusted depending on the laws of supply and demand. This illustrates a __________ exchange rate.

floating

As an investor studying the gold standard, Kareem knows that he would need more than 1,500 euros to purchase one ounce of gold. These euros represent the

gold par value.

Shreya is the chief financial officer for Home Safe Security Inc. Her company is interested in investing in a facility in Indonesia, but she is worried about unpredictable fluctuations in future exchange rates, which could cost her company millions of dollars. One way to ensure against this exchange risk is for Shreya to use

hedging.

Assume that the exchange rate between the U.S. dollar and the Japanese yen is $1 = ¥150. A pair of shoes that retail for $100 in New York should sell for ¥15,000 in Tokyo, if there are no trade barriers and transportation costs, according to the

law of one price.

Internalization theory is used to explain why a company prefers FDI over __________ as a way to enter a foreign market.

licensing

If a firm's know-how, skills, and capabilities can be protected by contract, and if tight control over foreign operations is not vital to remain competitive, and there are reasons to believe that additional costs through transportation or tariffs would be high, the most effective approach would be

licensing.

A(n) __________ system refers to one in which a country's currency is nominally allowed to float freely against other currencies but in which the government will intervene, buying and selling currency, if it believes that the currency has deviated too far from its fair value.

managed-float

Hudson Oil and Gas Inc., based in Houston, has a plant in Norway that builds cargo ships used to transport the company's products around the world. Each year this plant has been profitable, but Hudson Inc. is not able to convert the profits into U.S. dollars and take them out of the country. What type of convertibility does this represent?

nonconvertible

Prior to intervention by the International Monetary Fund (IMF) in 2016, Egypt followed a __________ exchange rate policy.

pegged

What type of exchange rate regime is present in Vietnam?

pegged

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

spot exchange rate.

Under the fixed exchange rate regime established at Bretton Woods, __________ served as the reference point for all other currencies.

the U.S. dollar

A weakness of the Bretton Woods system was that it could not work if

the U.S. dollar was under speculative attack.

A dirty-float system differs from a clean-float system because in a dirty-float

the central bank will intervene to maintain the value of the currency.

Brazilian coffee farmers have benefitted from

the drop in the value of the Brazilian real.