INTB Exam 2

Assume that the exchange rate between the euro and the dollar is €1.00 = $1.50. An American tourist in Germany is buying a product whose price is €80. How much in U.S. dollars would the tourist have to pay to buy the product?

$120

Completely determined by supply and demand changes

1- Argument for floating exchange rate

Need to maintain currency within a range of other currencies

10- Argument for target zone

Must play nice with other currencies

2- Argument against target zone

Difficult to get it right

3- Argument against managed-float

Currency value never changes.

4- Argument for fixed exchange rate

Makes it easier to engage in trade

5- Argument for pegged exchange rate

Market-determined, up to a point

6- Argument for managed-float

With volatility and speculation, uncertainty about future rates makes business planning difficult.

7- Argument against floating exchange rate

Governments need to make sure they get the "correct" currency value.

8- Argument against pegged exchange rate

Economic fundamentals are unclear.

9- Argument against fixed exchange rate

________ occurs when two parties agree to exchange currency and execute the deal at some specific date in the future.

A forward exchange

How does the International Monetary Fund (IMF) provide loans to deficit-laden countries?

A pool of gold and currencies contributed by its members provides the resources for lending operations.

Cissen and Napor are two neighboring countries that actively trade goods and services with each other. Under the gold standard, there will be a net flow of gold from Napor to Cissen when

Cissen is in trade surplus with Napor.

Concrete Forms International needs immediate access to steel in order to produce a new product line. It cannot afford to wait and establish a new operation in a foreign country where steel is prevalent, so it decides to purchase an existing company instead. Why did Concrete Forms decide to make this purchase?

Mergers and acquisitions are quicker to execute than greenfield investments.

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

Multipoint competition

The United States returned to the gold standard in 1934 when more dollars were needed to buy an ounce of gold than before. This implied that the dollar

The United States returned to the gold standard in 1934 when more dollars were needed to buy an ounce of gold than before. This implied that the dollar

The movement of traders like a herd, all in the same direction and at the same time, in response to each other's perceived actions, is called

The movement of traders like a herd, all in the same direction and at the same time, in response to each other's perceived actions, is called

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.

The 1944 Bretton Woods conference created two major international institutions that play a role in the international monetary system—the International Monetary Fund (IMF) and the

World Bank.

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

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

One form of FDI is ________, which involves the establishment of a new operation in a foreign country.

a greenfield investment

Rae feels it is best for her company to pay their foreign supplier in Panama this month even though they will receive product for another six months. She recently learned that the currency in Panama is expected to appreciate and, by paying the supplier now, her company will save money. This is an example of

a lead strategy.

The architects of the Bretton Woods agreement built limited flexibility into the fixed exchange rate system in order to

avoid high unemployment.

Since the firm is producing textiles, it can build strategic flexibility and reduce economic exposure by

contracting out manufacturing operations in order to shift production as economic conditions change.

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

currency swap

One reason for the collapse of the gold standard in 1939 was the

cycle of competitive currency devaluations by various countries.

Maintaining strategic flexibility can take the form of ____________________ as a hedge against currency fluctuations.

dispersing production to different locations around the globe

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.

As the only currency that could be converted into gold, the British pound occupied a central place in the fixed exchange rate system up until 1973.

false

Since 1973, exchange rates have become less volatile and more predictable.

false

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

false

The process of exporting grants a foreign entity the right to produce and sell a firm's product.

false

It is one of Garrett's job responsibilities to report the amount of foreign direct investment undertaken by the government over a one-year time period. Garrett reports the ________ of FDI.

flow

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.

Burger King licenses its brand name to foreign firms as long as they agree to run their restaurants on exactly the same lines as Burger King restaurants elsewhere in the world. In return, the foreign firms have to pay Burger King 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

Companies engaged in significant foreign exchange activities need to be aware that the current system is a mixed system combining speculation and

government intervention.

Translation exposure refers to the

impact of currency exchange rate changes on the reported financial statements of a company.

A(n) _____ market is one in which prices do not reflect all available information.

inefficient

According to the _____, 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 two countries.

international Fisher effect

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.

1. A government can increase the supply of money, which makes it easier for individuals and businesses to get credit. This, in turn, can increase the demand for goods and services, which should grow at the same rate to avoid inflation.

long-range predictor

4. Nominal interest rate is the sum of the required "real" rate of interest and the expected rate of inflation during the loan period. A strong relationship exists between nominal interest rates and inflation rates.

long-range predictor

6. If the growth in a country's money supply is faster than the growth in its output, price inflation is fueled.

long-range predictor

SmileBright, a dental products manufacturing company, has a market share of 30 percent in India. Three of its competitors together control 55 percent of the market. Whenever SmileBright raises or lowers the prices of its products, the other three companies quickly imitate its action. What is the market structure of this industry in India?

oligopoly

What type of exchange rate regime is present in Vietnam?

pegged

The objective of establishing the World Bank was to

promote general economic development.

Which political ideology reflects the idea that a multinational enterprise is an instrument of imperialist domination?

radical view

2. Market traders tend to follow the actions of other traders but the individual effects can be hard to predict.

short-term predictor

3. Evidence reveals that various psychological factors play an important role in determining the expectations of market traders.

short-term predictor

5. Expectations of market traders tend to become self-fulfilling prophecies.

short-term predictor

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

spot exchange rate.

Brazilian coffee farmers have benefitted from

the drop in the value of the Brazilian real.

According to ________, location-specific advantages are of considerable importance in explaining both the rationale for and the direction of foreign direct investment.

the eclectic paradigm

World Auto Group, based in California, buys component parts from Indonesia. The Indonesian company must be paid in rupiah. World Auto Group will rely on ________ to convert dollars to rupiah.

the foreign exchange market

The business should use the forward exchange market knowing

the forward exchange market is far from perfect as a predictor of future exchange rates.

The stock of FDI refers to the

total accumulated value of foreign-owned assets at a given time.

A country that follows the pragmatic nationalist view would agree that FDI can benefit a host country through capital, skills, and jobs but these come at a cost.

true

A pegged exchange rate means the value of the currency is fixed relative to a reference currency, and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate.

true

According to internalization theory, one drawback of licensing is that it might result in a firm giving away technological know-how to a competitor.

true

Critics argue that a floating exchange rate system can be affected by uncertainty and the bandwagon effect.

true

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

true

In economic terms, interest rate levels reflect future inflation rates.

true

Inflation occurs when the money supply in a country increases faster than output increases.

true

Under the gold standard, a country in balance-of-trade equilibrium earns income from exports that is equal to the money its residents pay for imports.

true

When the Bretton Woods participants established the International Monetary Fund, nations who chose to borrow from the IMF could borrow a limited amount without adhering to any specific agreements.

true

Assume that the exchange rate between the U.S. dollar and the Japanese yen is $1 = ¥150. A book that retails for $10 in New York should sell for ¥1,500 in Tokyo, if there are no trade barriers and transportation costs, according to the

law of one price.

Many industries, including textiles, are affected by government actions, so the firm should

take an active role in working with governments to produce favorable conditions.