BUSHMR 2000 Exam 2
________ occurs when two parties agree to exchange currency and execute the deal at some specific date in the future. A currency swap Carry trade A forward exchange Currency speculation A spot exchange
A forward exchange <-
________ 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. Circular trade Subsidy Barter Countertrade Dumping
Dumping
The ultimate controlling authority with the EU is the European Council. European Commission. Court of Justice.
European Council.
TickTock Inc., an American watchmaker, makes custom watches in California, which it then ships to Brazil for sale there. Based on this information, TickTock Inc. is involved in licensing. Exporting. franchising. outsourcing. using a greenfield investment.
Exporting
A country that relies on the pragmatic nationalist view would say that international production should be distributed among countries according to the theory of comparative advantage. FDI should be allowed so long as the benefits outweigh the costs no country should ever permit foreign corporations to undertake FDI. FDI is a benefit to both the source country and the host country. the multinational enterprise (MNE) is an instrument of imperialist domination.
FDI should be allowed so long as the benefits outweigh the costs
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. stock bundle Flow portfolio ratio
Flow
How did President Trump react to the two multilateral trade agreements, the Trans Pacific Partnership and the Transatlantic Trade and Investment Partnership, that were being pursued by the Obama administration? He pulled the United States out of these negotiations. He attempted to expand these agreements to include other nations. He quickly signed the agreements after taking office. He asked that the United States control more than 50 percent of the involved nations. He agreed that even more multilateral trade agreements should be established.
He pulled the United States out of these negotiations.
How did the Marshall Plan overshadow efforts by the World Bank? It let the United States loan money directly to European nations for rebuilding efforts. It provided low-interest loans to domestic corporations. It created multi-point competition within the agriculture industry. It damaged forward exchange rates, thus making them useless. It increased competition for funds from the IMF.
It let the United States loan money directly to European nations for rebuilding efforts.
Agri-Cor sells farm equipment throughout the euro zone. The company has noticed that some customers travel to countries where equipment sells for less to obtain a better deal. What implication of adopting the euro as a common currency does this situation demonstrate? It makes it easier to compare prices across Europe. It makes Europe an optimal currency area. It leads to higher prices in Europe. It decreases competition in Europe. It increases the profit margins of European producers.
It makes it easier to compare prices across Europe. <-
What is a political argument for regional economic integration? It reduces the potential for violent conflict. It creates opportunities for entrepreneurism. It tends to increase national sovereignty. It stimulates economic growth. It increases trade diversion.
It reduces the potential for violent conflict. <-
The European Community was established by the Maastricht Treaty. Treaty of Lisbon. Treaty of Rome. Single European Act. Treaty of Paris.
Treaty of Rome. <-
Paul Krugman characterizes strategic trade policy as being similar to the infant industry argument. a boost to national income at the expense of other countries. the closest that countries can get to free trade. a way to reduce the possibility of retaliatory actions by other governments. a way to reduce administrative barriers to trade.
a boost to national income at the expense of other countries.
One focus of strategic trade policy is to help domestic companies gain more competition to lower prices. less competition to raise prices. monopoly status. a first-mover advantage. exclusive intellectual property rights.
a first-mover advantage.
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 lag strategy. a lead strategy. buying swaps. a forecast strategy. a spot exchange rate contract.
a lead strategy. <-
Assume the euro/dollar exchange rate quoted in Tokyo at 6 a.m. is €1 = $1.00. If the New York euro/dollar exchange rate at the same time (5 p.m. New York time) is €1 = $1.35, a dealer could make a profit through countertrade. currency swap. arbitrage forward exchange. carry trade.
arbitrage <-
Assume that the interest rate on borrowings in Argentina is 3 percent, but the interest rate on deposits in British banks is 9 percent. A trader borrows 1 million Argentine pesos, then converts the money into British pounds and deposits it in a British bank. What is the trader involved in? countertrade carry trade purchasing power parity forward exchange arbitration
carry trade <-
The executive managers of Drum-de-Drum-drum, a U.S.-based percussion equipment manufacturer, want to reduce the vulnerability of the company to unpredictable exchange rate movements. What would provide the company with a hedge against currency fluctuations? not contracting out manufacturing dispersing production to different locations around the globe restricting manufacturing to one location using the spot exchange rate for international transactions avoiding the use of the forward market and swaps
dispersing production to different locations around the globe
The extent to which a firm's future international earning power is affected by changes in exchange rates is known as economic xposure. carry trade. translation exposure. countertrade. transaction exposure.
economic exposure.
The harmonization of member nations' tax rates is required to form a(n) customs union. free trade area. common market. economic union. planned economy.
economic union.
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 mercantilist pragmatic nationalist conservatist Radical
free market
When Norway, Iceland, Liechtenstein, and Switzerland were joined by the EFTA, all barriers to the free flow of goods and services between the countries was removed. Member nations are allowed to determine the level of trade protection for goods coming from all other nations. What level of economic integration does this represent? common market political union free trade area customs union economic union
free trade area
Jacob is the chief financial officer for RinseAll Detergent products. His company is interested in investing in a facility in Indonesia, but he is worried about unpredictable fluctuations in future exchange rates, which could cost his company millions of dollars. One way to ensure against this exchange risk is for Jacob to use forecasting. hedging. currency speculation. countertrade. arbitrage.
hedging. <-
The World Bank's initial mission was to maintain order in the international monetary system. help finance the building of Europe's economy by providing low-interest loans. promote a floating exchange rate system. promote world peace. revive the gold standard system.
help finance the building of Europe's economy by providing low-interest loans.
Italy has a direct restriction on the amount of metal products that may be imported into the country. Which instrument of trade policy does this reflect? voluntary import restraint tariff rate quota export ban import quota quota rent
import quota
A tariff rate quota provides a lower tariff rate to all imports in a specific industry. imports within the quota. only domestic producers. agricultural products. imports that are over the quota.
imports within the quota.
High tariff barriers and subsidies in the agricultural industry ultimately lead to the lack of overproduction of products. an increased volume of agricultural trade. increased prices for consumers. stronger competition from foreign suppliers. lower overall prices for the end-user.
increased prices for consumers.
A(n) _____ market is one in which prices do not reflect all available information. free facilitating inefficient perfect gray
inefficient <-
The ________ argument was proposed by Alexander Hamilton in 1792 and is by far the oldest economic argument for government intervention. infant industry strategic trade policy consumer protection national security Retaliation
infant industry
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. law of one price purchasing power parity theory efficient market hypothesis international Fisher effect theory of demand
international Fisher effect
Internalization theory is used to explain why a company prefers FDI over ________ as a way to enter a foreign market. exporting franchising a greenfield investment licensing acquisitions
licensing
Royal Chocolatier, a British manufacturer of chocolates, granted U.S. company American Candy Inc. the right to produce and sell Royal Chocolatier's products in the United States In return, American Candy Inc. has to pay a royalty fee on every unit sold. According to this information, what is being done by Royal Chocolatier? franchising outsourcing exporting licensing insourcing
licensing
According to the Bretton Woods agreement, the task of the IMF would be to maintain international law and order. promote world peace. establish a universal exchange rate mechanism. promote general economic development. maintain order in the international monetary system.
maintain order in the international monetary system.
TransWare Inc., based in Atlanta, has a plant in Russia that builds road equipment. Each year this plant has been profitable, but TransWare 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? freely convertible carry convertible proconvertible nonconvertible externally convertible
nonconvertible
A(n) ________ refers to the extra profit that producers make when supply is artificially limited by an import quota. profit margin net profit import profit trade surplus quota rent
quota rent
Which political ideology reflects the idea that a multinational enterprise is an instrument of imperialist domination? free market mercantilism pragmatic nationalism radical view planned economy
radical view
The Single European Act was put in place in an attempt to convince Great Britain to remain in the EU. determine the viability of a common currency. expand the role of the EU into northern Africa. remove all impediments to the formation of a single market. create a planned economy.
remove all impediments to the formation of a single market. <-
Ownership restraint is a method of encouraging inward FDI by a host country. restricting inward FDI by a host country. encouraging outward FDI by a home country. restricting outward FDI by a home country. restricting outward FDI by a host country.
restricting inward FDI by a host country.
A firm might justify a preference for licensing over FDI because licensing results in the licensor retaining control over technical know-how. gives the licensor tight control over the operations of the licensee in the foreign nation. allows the firm to take advantage of differences in factor costs across countries. reduces the potential risks of creating a future competitor. results in the licensee bearing the costs and risks.
results in the licensee bearing the costs and risks.
The rate at which a foreign exchange dealer converts one currency into another currency on a particular day is the future exchange rate. forward exchange rate. fixed exchange rate. spot exchange rate. floating exchange rate.
spot exchange rate.
In order to encourage the agricultural industry, the French government provided low-interest loans for the purchase of seeds and fertilizers. The government also gave cash grants and made tax reductions. Which instrument of trade policy is being used by the French government? tariffs voluntary export restraints subsidies local content requirements import quotas
subsidies
In terms of the approaches to exchange rate forecasting, _____ is based on the premise that there are analyzable market trends and waves and that previous trends and waves can be used to predict future trends and waves. chart analysis technical analysis behavioral equilibrium model fundamental analysis portfolio balance model
technical analysis
Under the fixed exchange rate regime established at Bretton Woods, _____ served as the reference point for all other currencies. the British pound gold the Mexican peso silver the U.S. dollar
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. the value of the British pound increased against the Japanese yen. Japan's economy grew. the U.S. inflation rate remained low. Germany's unemployment rate increased.
the U.S. dollar was under speculative attack.
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 Sullivan principle. capital flight. the bandwagon effect. the Fisher effect. the spot effect.
the bandwagon effect. <-
A currency is considered freely convertible when both residents and nonresidents are allowed to purchase a limited amount of a foreign currency with it. only residents may convert it into a foreign currency without any limitations. only nonresidents may convert it into a foreign currency without any limitations. neither residents nor nonresidents are allowed to convert it into a foreign currency. the country's government allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with it.
the country's government allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with it.
According to ________, location-specific advantages are of considerable importance in explaining both the rationale for and the direction of foreign direct investment. the infant industry argument Knickerbocker's theory the eclectic paradigm internalization theory market imperfections theory
the eclectic paradigm
One of the main benefits that FDI provides to the home country is the home country's balance of payments benefits from the inward flow of foreign earnings. FDI benefits the home country by substituting domestic production. FDI increases employment in the home country in the short run. the balance of payments position improves from the initial capital outflow required to finance the FDI. the demand for exports from the home country will reduce in the long run.
the home country's balance of payments benefits from the inward flow of foreign earnings.
Licensing is a good option to enter a foreign market when transportation costs are minor. the technical know to be shared is extremely valuable. tight control of the foreign operation is not required. the competitive advantage of a firm is based upon managerial knowledge that is embedded in the routines of the firm. trade barriers between countries are trivial in nature.
tight control of the foreign operation is not required.
The stock of FDI refers to the total accumulated value of foreign-owned assets at a given time. the net position of FDI flows after comparing inflows and outflows during a period. the outflows of FDI from a country. amount of FDI undertaken over a given time period. the inflows of FDI into a country.
total accumulated value of foreign-owned assets at a given time.
Two eastern European countries formed a free trade agreement. As a result, one of the countries that used to produce its own plastic bottles at a higher cost now imports them from the other country at a lower cost. This is an example of trade diversion. dumping. retaliatory trade action. trade creation. a political union.
trade creation.
Gear Electronics used to buy all of its component parts from a local plant in Cleveland, Ohio, but this year it has decided to buy the parts from a lower-cost facility located in Tijuana, Mexico. This is an example of retaliatory trade action. trade diversion. dumping strategic pricing. trade creation.
trade creation. <-
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. fiscal fault trade imbalance balance-of-trade equilibrium a trade surplus a recession
balance-of-trade equilibrium
In countries that adopt a _____ exchange rate system, the values of currencies are set against each other at some mutually agreed-on exchange rate. clean float floating fixed dirty-float pegged
fixed
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. flexible pegged dirty-float fixed floating
floating
Advocates of the floating rate system argue that floating rates boost exports. floating rates help adjust trade imbalances. there is no connection between the floating rate system and trade balance. floating rates boost imports. floating rates help keep inflation rates close to zero.
floating rates help adjust trade imbalances.
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 exporting. strategic alliance. franchising. a greenfield investment. offshoring.
franchising
Carlos is the manager of an American company. He expects the value of the British pound to appreciate in the near future and so delays the collection of payments from British customers until the next month. Which tactic is Carlos using to minimize the foreign exchange exposure? spot exchange rate contracts buying swaps lead strategy lag strategy forecast strategy
lag strategy <-
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. Sullivan principle. bandwagon effect. inefficient market theory. international Fisher effect.
law of one price.
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 $75 $33 $150 $60
$120 <-
The Bretton Woods agreement created which two multinational institutions? United Nations and the World Bank World Trade Organization and the International Monetary Fund World Bank and the G20 International Monetary Fund and the World Bank United Nations and the World Trade Organization
International Monetary Fund and the World Bank
How did the Smoot-Hawley Act affect employment? It created more jobs domestically and abroad. It decreased the overall wage rate. It boosted job rates around the world. It did not have any effect on employment. It had a damaging effect on employment abroad.
It had a damaging effect on employment abroad.
________ is a pact among Argentina, Brazil, Paraguay, and Uruguay to establish a free trade area. Central America Free Trade Agreement Andean Community Central American Common Market CARICOM Mercosur
Mercosur
Which organization was created to implement the GATT agreement? World Trade Organization United Nations World Bank International Monetary Fund Department of Justice
World Trade Organization
The investment manager at AllRight Time Inc. reminds the board that the foreign exchange market is a mixed system. The investment manager wants the board to realize that rates are driven by dynamic competitive forces. supply and demand. the interplay of big business and Western practices. a combination of government intervention and speculative activity. the globalization of developing nations.
a combination of government intervention and speculative activity.
In a floating exchange rate system, a current account deficit is likely to be corrected by a depreciation in its exchange rate. an appreciation of the home currency. a prolonged period of hyperinflation. an expansion of domestic money supply. a decrease in domestic tax rates.
a depreciation in its exchange rate.
A(n) ________ has no barriers to trade among member countries, includes a common external trade policy, and allows factors of production to move freely among members, but does not have a common currency. common market economic union free trade area customs union political union
common market
An American company sold heavy building materials to the government of Taiwan. Instead of receiving U.S. dollars, the company agreed to take payment in the form of Taiwanese goods. This is an example of short selling. countertrade. capital flight. a carry trade. arbitrage.
countertrade. <-
One example of a(n) ________ effect of foreign direct investment is when a foreign MNE employs a number of host-country citizens. indirect first-mover advantage monopoly direct late-mover advantage
direct
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. fixed float dirty-float floating exchange rate pegged exchange rate clean float
dirty-float <-
As an investor studying the gold standard, Kyle knows that he would need 44 euros to purchase one ounce of gold. These 44 euros represent the gold par value. gold mix ratio. balance-of-trade equilibrium. gold reserve ratio. gold margin.
gold par value.
One reason the British electorate voted to exit the European Union is because of an increase in ________ within Europe. human rights violations immigration entrepreneurism agriculture prices commodities
immigration
An implication of trade barriers for business practice is that they reduce the cost of importing products to a country. put a foreign firm at a competitive advantage to indigenous competitors in that country. allow for efficient allocation of production functions. limit a firm's ability to serve a country from locations outside of that country. encourage governments to engage in foreign direct investment.
limit a firm's ability to serve a country from locations outside of that country.
When the management team reviewed its government contract on office furnishings, they noticed that in order to bid on the project, at least 44 percent of the value of the office furniture had to be produced in the United States. This stipulation is an example of a(n) antidumping policy. voluntary export restraint. administrative trade policy. local content requirement. ad valorem tariff.
local content requirement.
When companies behave recklessly because they know they will be saved if things go wrong, it is called a prisoner's dilemma. lemon law. moral hazard. currency crisis. dirty float.
moral hazard.
The currency of Panama, the balboa, is fixed relative to the U.S. dollar. As a result, the U.S. dollar exchange rate determines the exchange rate between the Panama balboa and other currencies. This is an example of a _____ exchange rate. dirty-float flexible floating pegged fixed
pegged
A country in a state of fundamental disequilibrium suffers from a lack of competition to help balance pricing. incomplete trade agreements. a trade war. permanent adverse shifts in the demand for their products. overproduction of goods.
permanent adverse shifts in the demand for their products.
A country that wants to create the highest level of economic integration would enter into a(n) common market. free trade area. economic union. political union. customs union.
political union. <-
A foreign government was not enforcing its intellectual property rights, which resulted in massive copyright infringements. In turn, this was costing U.S. companies millions of dollars in lost sales revenues. To force the country to play by the rules, the United States threatened to impose trade sanctions on a range of imports from the country's businesses. The underlying motive for intervention by the U.S government was to protect national security. to further support foreign policy objectives. retaliation. to increase the trade surplus of the United States. to protect human rights.
retaliation
A tax of 32 cents is levied for each pair of eyeglasses imported into a nation. This is an example of a(n) quota rent. specific tariff. ad valorem tariff. import quota. local content requirement.
specific tariff.
When a country adopts a strict currency board system, it means that the government has the ability to print money. the government lacks the ability to set interest rates. demand and supply create exchange rates. the currency board can always issue additional domestic notes and coins. exchange rates are based on domestic reserves.
the government lacks the ability to set interest rates.
The creation of a single market increases price competition for business. In other words, it creates a(n) opportunity. threat. strength. dynamism. Weakness.
threat. <-
A country that imports more goods than it exports experiences a first-mover advantage. current account surplus. trade deficit. factor endowment. late-mover advantage.
trade deficit.
Foreign producers agree to ________ imposed by an exporting country because they fear more damaging punitive tariffs or import quotas might follow if they do not. voluntary export restraints tariff rate quotas quota rents export bans Dumping
voluntary export restraints
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? A greenfield investment will provide quickest access to the steel forms. FDI flows are similar between developed and developing nations. Mergers and acquisitions are quicker to execute than greenfield investments The higher percentage of mergers and acquisitions in developing nations compared to developed nations indicate the low valuation of target firms in developing countries. It is easier and less risky for a firm to build up through a greenfield investment rather than through acquisitions.
Mergers and acquisitions are quicker to execute than greenfield investments
Kendall Wood Products Corp. 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 machinery for the mill. This company engaged in a currency swap. a carry trade. an option. countertrade. arbitrage.
NOT a currency swap.
Subsidies and quotas are examples of ________ barriers a county might impose. antidumping tariff Nontariff content requirements export restraint
Nontariff
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? fair market monopoly Oligopoly perfect competition pure competition
Oligopoly