Exam Two Study Guide

The yen/dollar exchange rate is ¥120 = $1 in London and ¥123 = $1 in New York at the same time. What is the net profit if a dealer takes $1,000,000 to purchase ¥123,000,000 in New York and engages in arbitrage by selling it in London? -$34,000 -$20,390 -$25,000 -$46,666 -$39,454

$25,000

The euro zone is comprised of the -27 member nations of the European Union. -member nations of the European Union and the applicants to the union. -19 member nations who use the euro as their currency. -member nations of the EU and affiliated countries who have pegged their currencies to the euro. -21 member nations that have their members in the European Parliament.

19 member nations who use the euro as their currency.

_____ are put in place to make it difficult for imports to enter a country. -Free trade policies -Consumer regulations -Subsidies -Administrative trade policies -Open market plans

Administrative trade policies

Brett Thiesen wants to make a political case for regional economic integration to his electorate. Which valid statement can he make in this regard? -Linking neighboring economies increases the potential for violent conflict. -Free trade stimulates economic growth, which creates dynamic gains from trade. -Making neighboring economies increasingly dependent on each other fails to create incentives for political cooperation. -Countries can enhance their political weight in the world by grouping their economies. -Those seeking a united Europe have always had a desire to make another war in Europe imminent.

Countries can enhance their political weight in the world by grouping their economies.

What is a defining characteristic of a free trade area? -Factors of production are allowed to move freely between member nations. -Each member country is allowed to determine its own trade policies with regard to nonmembers. -Member nations are required to have a common currency. -Member nations are required to have a common monetary and fiscal policy. -Member nations are required to have a central political apparatus that coordinates economic, social, and foreign policy.

Each member country is allowed to determine its own trade policies with regard to nonmembers.

The _____ is responsible for proposing European Union legislation, implementing it, and monitoring compliance with European Union laws by member-states. -Council of the European Union -European Commission -European Parliament -Court of Justice -European Community

European Commission

The _____ is considered to be the ultimate controlling authority within the European Union. -Court of Justice -European Commission -European Council -European Parliament -European Community

European Council

Within the EU, it is the responsibility of the _____ to debate legislation and forward it to the council -Court of Justice -prime ministers -European Commission -European Parliament -European Community

European Parliament

Which country has been granted three bailout efforts by the EU in an attempt to prevent a sovereign debt crisis? -Greece -France -Great Britain -Belgium -Portugal

Greece

Which institution helped contain the global financial crisis of 2008-2009 by rescuing Iceland, Ireland, Greece, and Latvia? -GATT -United Nations -World Bank -IMF -WTO

IMF

What is the result of the threat of antidumping action? -It helps the firm raise capital in the primary market. -It limits the ability of a firm to raise prices in response to high demand. -It enhances the firm's ability to disperse its productive activities in an efficient manner. -It limits the ability of a firm to use aggressive pricing to gain market share in a country. -It enhances a firm's competitive advantage to indigenous competitors in that country.

It limits the ability of a firm to use aggressive pricing to gain market share in a country.

The economic prosperity enjoyed by _____ during the 1980s and 1990s strained the world trading system and created the demand for increased protectionist measures. -the United States -India -the Soviet Union -Japan -China

Japan

The foreign exchange trading center in ________ has the highest percentage of activity. -Frankfurt -London -Paris -Hong Kong -Sydney

London

What happens to the value of money when hyperinflation exists? -Money loses value very rapidly. -Foreign currency is valued against the U.S. dollar. -The value of all currency increases faster than gross national income. -There are more goods to purchase and it costs less to buy them. -All currency continues to be valued at the same amount across trade channels.

Money loses value very rapidly.

According to the critics of the International Monetary Fund (IMF), how should moral hazards exhibited by banks be resolved? -The IMF should use a "one-size-fits-all" approach to macroeconomic policy. -The IMF should establish a mechanism for accountability. -The IMF should free all banks from the obligation of financial reporting. -The banks should be forced to pay the price for their rash lending policies. -The IMF should bail out the banks whose loans gave rise to financial crises.

The banks should be forced to pay the price for their rash lending policies.

In terms of foreign exchange, what is true of leading and lagging strategies? -They primarily protect long-term cash flows from adverse changes in exchange rates. -They are used to minimize economic exposure of companies. -They can help firms minimize their transaction and translation exposure. -They involve accelerating payments from strong-currency to weak-currency countries. -They are limited by governments because they create pressure on strong currencies.

They can help firms minimize their transaction and translation exposure.

How do voluntary export restraints affect the prices of goods? -VERs do not affect the price of goods for consumers. -VERs always reduce the domestic price of an imported good. -VERs always raise the domestic price of an imported good. -Typically, VERs will lower the price of goods while the quota is in place. -VERs will always raise the export price of domestic goods.

VERs always raise the domestic price of an imported good.

One way to describe the free market view is to say that -a country should specialize in the production of a good that it can produce most efficiently. -a country should focus on importing goods that it can also produce if those goods are produced at a higher cost elsewhere. -an MNE is an instrument of imperialist domination. -host-country nations of a company are never given the same consideration as a home-country nation. -less-developed nations are kept relatively backward and dependent on advanced capitalist nations for employment.

a country should specialize in the production of a good that it can produce most efficiently.

If France decides it wants to make it difficult for other countries to export wine to French businesses and creates bottling standards that don't exist anywhere else in the world, it would be implementing _____ policies as a way to restrict these imports. -antidumping -voluntary export restraint -administrative trade -monopolistic competition -tariff rent

administrative trade

Traders at a stock exchange notice that five traders on the floor seem to be selling more yen and purchasing more euros because of an expected decline in the yen. As a result, all other traders started to do the same. This is an example of the ________ that creates a self-fulfilling prophecy when the yen does decline in value. -spot exchange rate -arbitration process -bandwagon effect -difference principle -tragedy of the commons

bandwagon effect

Business executives view foreign direct investment as a way to -erase the fear of protectionist pressures. -circumvent future trade barriers. -promote totalitarian political institutions. -diminish privatization. -shift toward centrally planned command economies.

circumvent future trade barriers.

An example of transaction exposure is when -companies have obligations for the purchase of goods at previously agreed prices. -companies borrow funds in domestic currency. -there is an impact of currency exchange rate changes on the reported financial statements of a company. -there is a long-term effect of changes in exchange rates. -changing exchange rates persists on future prices, sales, and costs

companies have obligations for the purchase of goods at previously agreed prices.

One way a business can deal with nonconvertibility of a currency is to engage in -price discrimination. -countertrade. -arbitrage. -price skimming. -currency speculation.

countertrade.

A developing country might want to commit itself to converting its domestic currency on demand into another currency at a fixed exchange rate. To do this, it should implement a(n) -free-float exchange rate system. -clean-float exchange rate system. -pure-float exchange rate system. -currency board. -gold standard.

currency board.

What event caused many EU countries to wait on adopting the euro as a common currency? -Great Depression -debt crisis of 2010-2012 -9/11 terrorist attacks -fallout from the United Nations -2016 election results

debt crisis of 2010-2012

One aspect of the Bretton Woods agreement was a commitment not to use ________ as a measure to fix the value of currencies. -a planned economy -devaluation -isolationism -government loans -the U.S. dollar

devaluation

A possible effect of FDI in the form of a greenfield investment in a host country is that it -drives down prices and increases the economic welfare of consumers. -raises unemployment levels. -causes firms to fight for scarce capital investments. -leads to an oligopolistic market and unfair pricing. -leads to decreased productivity, product and process innovations, and lesser economic growth.

drives down prices and increases the economic welfare of consumers.

Dumping takes place when foreign producers -attempt hostile takeovers of domestic firms and usurp the available resources for production. -indiscriminately exploit the natural resources of a foreign country to create a later demand that can be met only by imports. -eliminate competition by subsidizing prices in a foreign market with home market profits and eventually raising prices to earn substantial profits. -capture the niche market rather than the masses. -export only a small quantity of their products into an importing country.

eliminate competition by subsidizing prices in a foreign market with home market profits and eventually raising prices to earn substantial profits.

As an incentive to encourage domestic firms to undertake FDI, many advanced countries have -eliminated double taxation of foreign income. -started imposing local content requirements. -imposed higher import tariffs. -abolished the use of custom duties. -eliminated subsidies

eliminated double taxation of foreign income.

The Smoot-Hawley Act had a damaging effect on -the balance-of-payment of the United States. -cash flow in the domestic economy of the United States. -prices of natural resources in the United States. -employment abroad. -accrued liabilities of the United States.

employment abroad

Michelin and Goodyear compete against each other not only in the United States, but also all across Europe and Asia. These two tire companies are -a monopoly -engaged in cooperation -a cartel -engaged in multipoint competition -an oligopsony

engaged in multipoint competition

The Smoot-Hawley Act tried to divert consumer demand away from foreign products by -subsidizing domestic businesses -establishing tariff barriers -exporting more products to Europe -demanding local content requirements -creating a trade deal with Canada and Mexico

establishing tariff barriers

In 1975, OPEC did not allow the export of U.S. crude oil in order to drive up the price of oil. This action is an example of a(n) -local content requirement -export ban -trade surplus -subsidy agreement -export tariff

export ban

A computer manufacturing firm from the United States invests in a microprocessor manufacturing plant in Taiwan. This is an example of -an absolute advantage -stock consolidation -foreign direct investment -product differentiation -market segmentation

foreign direct investment

Which term was not defined in the International Monetary Fund's Articles of Agreement but was intended to apply to countries that had suffered permanent adverse shifts in the demand for their products? -competitive disadvantage -capital flight -fundamental disequilibrium -break-even point -diseconomies of scale

fundamental disequilibrium

In terms of the gold standard, the amount of currency needed to purchase one ounce of gold was referred to as the -gold to bond ratio. -gold reserve ratio. -gold mix ratio. -gold par value. -gold net value.

gold par value.

It is most appropriate for a firm to contract out manufacturing when -individual manufacturers have few firm-specific skills that contribute to the value of their product. -the value of the host country currency is expected to appreciate. -supplier switching costs are correspondingly high. -firm-specific technology and expertise add significant value to the product. -the currency used for pricing a product is anticipated to stay weak in the long run.

individual manufacturers have few firm-specific skills that contribute to the value of their product.

Indonesia might have a potential comparative advantage in manufacturing textiles but is unable to compete with established textile manufacturing in Japan, at least for the near future. Indonesia could claim the -economic development argument -comparative advantage theory -national security argument -infant industry argument -mixed economy theory

infant industry argument

Many developing countries have a potential comparative advantage in manufacturing, but new manufacturing industries cannot initially compete with well-established industries in developed countries. This demonstrates the -economic development argument -comparative advantage theory -national security argument -infant industry argument -mixed economy theory

infant industry argument

The management team at Yum BBQ Brands has decided not to license its product because of concerns that this will create opportunities for another company to have access to their secret recipe. For this reason, the company decides that FDI is their best course of action. Which economic theory does their choice represent? -comparative advantage -distribution theory -new trade theory -internalization theory -difference principle

internalization theory

According to internalization theory, one of the drawbacks of licensing is that -it may result in a firm's technological know-how being restricted to a limited knowledge base and stifles any future development. -it does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability. -when a firm allows another enterprise to produce its products under license, the licensee bears the costs or risks. -its use is restricted by the government through the imposition of tariffs and quotas. -it is less cost-effective than FDI.

it does not give a firm the tight control over manufacturing, marketing, and strategy in a foreign country that may be required to maximize its profitability.

Pfingsten & Sons, a leading manufacturer of concrete blocks in the United States, is considering exporting as its FDI strategy. Exporting may not be a good option for Pfingsten & Sons because of the concrete blocks' -unattractiveness in foreign markets. -high value-to-weight ratio. -high cost of manufacture. -low weight-to-value ratio. -low value-to-weight ratio.

low value-to-weight ratio.

One example of a home-country policy for restricting outward FDI is -eliminating double taxation of foreign income. -manipulating tax rules to encourage the firms to invest at home. -withdrawing government-backed insurance programs provided to local investors. -reducing interest rates earned on domestic investments. -prohibiting organizations from entering into an oligopoly.

manipulating tax rules to encourage the firms to invest at home.

Ohio Manufacturing prefers FDI over licensing to retain control over know-how, manufacturing, and marketing. Ohio Manufacturing's stance constitutes the -comparative advantage theory -distribution theory -new trade approach -market imperfections approach -licensing theory

market imperfections approach

During the 1990s, some Western banks were far too willing to lend large amounts to companies that were already overleveraged. The banks knew the government would save them if these loans were foreclosed. What type of activity does this represent? -cognitive dissonance -conflict of interest -systemic risk -moral hazard -tragedy of the commons

moral hazard

According to the agreement reached between the International Monetary Fund and the South Korean government in 1997, in return for funding, the South Koreans were required to -adopt communist ideologies. -reduce their imports by enforcing restrictive import licensing. -open their economy to greater foreign competition. -oppose the ideologies of the World Trade Organization. -engage in competitive currency devaluation.

open their economy to greater foreign competition.

Greece and Portugal have different wage rates, tax regimes, and business cycles. The two countries have also reacted differently in the past to external economic shocks. The dissimilarities are an example of one of the drawbacks of the euro that economists refer to as the EU not being in a(n) -managed currency zone. -open exchange regime. -optimal currency area. -free trade area. -advanced monetary zone.

optimal currency area.

Foreign managers trained in the latest management techniques can often help to improve the efficiency of operations in a host country, whether those operations are acquired or greenfield developments. This benefit of FDI falls into the category of -employment effects -balance-of-payment effects -effects on competition -resource-transfer effects -autonomy effects

resource-transfer effects

Most developing countries do not have access to the technology available in developed nations, but these developing nations need technology to create new jobs and stimulate the economy. Which aspect of inward FDI do these developing nations rely on to have access to needed technology? -employment effects -balance-of-payment effects -effects on competition -resource-transfer effects -effects on foreign exchange rate

resource-transfer effects

According to purchasing power parity (PPP) theory, the price of a "basket of goods" should be -the sum of the required "real" rate of interest. -unchangeable based on the forward exchange rate. -roughly equivalent in each country in relatively efficient markets. -discounted to reflect trade barriers. -focused strictly on consumer and not industrial goods.

roughly equivalent in each country in relatively efficient markets.

A nation that imposes a fixed charge of $3 per barrel of oil imported into the country is relying on which instrument of trade? -specific tariff -GATT tariff -subsidies -import quotas -antidumping duties

specific tariff

At the end of 2017, companies from one country collectively owned $22 billion in assets in its neighboring country. The $22 billion represents the _____ of FDI. -stock -flow -outflow -trend -exchange

stock

In some years, the U.S. government has paid wheat farmers an additional 50 cents on every bushel of wheat they sell. This money is an example of a(n) -local content tariff -ad valorem tariff -subsidy -import quota -antidumping duty

subsidy

Many economists compare the process of ________ to fortune-telling because there is no rationale for the assumption of predictability. -the efficient market school -fundamental analysis -a planned economy -the inefficient market school -technical analysis

technical analysis

A potential downfall of the Bretton Woods system was that it would not work if -the currency of choice, the U.S. dollar, was under speculative attack. -only one form of currency was used as the basis for exchange. -gold was valued higher than the dollar. -at least ten nations failed to agree to the system. -services were not included in the agreement.

the currency of choice, the U.S. dollar, was under speculative attack.

One of the reasons why protectionist pressures arose around the world during the 1980s was -the different ways many countries found to get around GATT regulations. -the opening up of national markets to cheap products from China. -the fall of the Soviet Union. -the persistent trade lead taken by the United States. -the Japanese failure in industries such as automobiles and semiconductors that strained the world trading system.

the different ways many countries found to get around GATT regulations.

A firm is most likely to favor foreign direct investment over exporting when -the firm wants its technological know-how to be widely disseminated. -the firm wishes to maintain control over its operations and business strategy. -the transportation costs are low. -there are no trade barriers. -the firm wants to customize its products as per the tastes and preferences of foreign consumers.

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

A bound tariff rate is -the lowest rate that can be charged. -equal to the spot exchange rate. -based on the forward exchange rate. -the average tariff rate a country sets within a year. -the highest rate that can be charged.

the highest rate that can be charged.

After the formation of a free trade area for its member countries, the United States found that its high-cost furniture producers in North Carolina were replaced by low-cost producers from another country within the free trade area. This is an example of -value creation. -strategic pricing. -trade creation. -trade diversion. -economic exposure.

trade creation

The euro/dollar exchange rate is €1 = $1.20. According to the law of one price, how much would a camera that retails for $300 in New York sell for in Germany? -€320 -€300 -€250 -€360 -€150

€250