IB Exam 2
What are three ongoing priorities for the WTO and agenda items at Doha?
limiting antidumping laws cutting tariff rates on services phasing out agriculture subsidies
According to research, PPP theory is a relatively good predictor of ______ exchange rate movements, but is not as good a predictor of ______ movements.
long run good short run bad
When a country does NOT adopt a formal pegged rate, but tries to keep its currency within some range of a reference currency, a(n) ______ system exists.
managed-float
three industries are frequently targeted by antidumping actions?
metals plastics chemicals
One argument for a floating exchange rate system is that a country regains control of its ______ policy.
monetary
An example of ______ is when banks lend too much money to over-extended companies, expecting bail-out help from their government.
moral hazard
Reciprocal trade agreements between two or more partners are called _____ trade agreements.
multilateral
When neither residents nor nonresidents are allowed to convert a currency to a foreign currency, the currency is considered
nonconvertible
The law of ______ is the economic theory that the price of a given security, asset or commodity must have the same price when exchange rates are taken into consideration.
one price
Today, many nations are _____ new trade policies associated with the WTO.
opposed to
the value of a currency is fixed relative to a reference currency, a ______ exchange rate exists.
pegged
Treaty of Lisbon
power of the European Parliament increased
The forward market tends to cover _____ exchange rate changes.
short term
The impact of psychological factors and investor expectations make it difficult for exchange rate theories to predict ______ changes in exchange rates.
short term
Advocates of a fixed exchange rate contend that a fixed system will limit the destabilizing effects of
speculation
A(n) ______ exchange rate is the price to exchange one currency for another for immediate delivery.
spot
local content requirement
states that some percentage of a good must be produced domestically
free trade theory
strategic trade theory is unworkable
What are four main instruments of trade policy?
tariffs import quotas antidumping duties local content requirements
flow
the amount of FDI attempted over a period of time
A dirty-float system is said to exist in a nation when _____ frequently intervene(s) in the foreign exchange market.
the government
EFTA
the most enduring free trade area in the world, concentrates in the free trade of industrial goods, but not agricultural products.
The Fisher effect equates the nominal interest rate as
the required real interest rate + expected rate of inflation.
At the simplest of levels, exchange rates are determined by _____.
the supply and demand of currencies
Capital flight is most likely to occur when
the value of domestic currency is rapidly depreciating.
Pragmatic nationalism
there are benefits and costs to FDI and that countries attempt to maximize the benefits and minimize the national costs of FDI
The Louvre Accord resulted in an agreement
to support the stability of exchange rates around their current level by intervening when necessary.
balance-of-payments account
track expenditures and receipts from other countries
Some economists argue that regional free trade agreements will provide global benefits only if
trade creation exceeds trade diversion.
The effect of currency exchange rate changes on the reported financial statements of companies is called ______ exposure.
translation
Free trade agreements account for nearly ____ of regional economic agreements.
90%
specific tariff
A tax on imports that is specified as a fixed monetary amount per unit of import
export tariff
A tax that a country imposes on its exports, which makes them more expensive, to keep more product in the country
which countries created the Andean Pact
Bolivia, Chile, Colombia, Ecuador, Peru
In 1944, representatives from 44 countries met in ______ to create a new international monetary system.
Bretton Woods
Which NAFTA country experienced a welfare loss since the program's inception?
Canada
What are two impediments to establishing economic integration?
Costs of integration Concerns over national sovereignty
After joining the EU, which three long-term members did NOT agree to the euro as a common currency as directed by the Maastricht Treaty?
Denmark Sweden Great Britain
The _____ Round started in 2001 and continues today to deal with the issues of agriculture protectionism, protection of intellectual property, and other priorities of the WTO.
Doha
The ______ sets interest rates and monetary policy for the EU.
ECB
two methods a country would use to achieve economic integration
Economic union Common market
TRIPS agreement
Enforcement of intellectual property protection
Which institution has a monopoly in proposing European Union legislation?
European Commission
The most significant trading block in Europe based on economic and political influence is the _____.
European Union
One of the reasons the European Union was originally formed was because
Europeans desired a lasting peace after enduring two devastating world wars.
two alternatives to FDI
Exporting Licensing
two benefits of FDI to a home country
Foreign subsidiary creates demand for home-country exports MNE learns skills from exposure to foreign market
is the acronym for the multilateral agreement established in 1947 aimed at the abolition of quotas and the reduction of tariff duties among the contracting nations.
GATT
two components of strategic trade policy
Governments should intervene to assist firms in overcoming barriers to entry created by foreign firms due to first-mover advantages. Governments should subsidize promising domestic firms in emerging industries.
Under what two conditions would the Bretton Woods system work?
If the US inflation rate remained low If the US did not have a balance-of-payments deficit
Imposing a fixed exchange rate affects countries in which two ways?
It prevents competitive devaluations and brings stability to global trade. It imposes monetary discipline and curtails price inflation.
What are two potential problems with an economic union?
It requires a coordinating bureaucracy. There is a surrender of some national sovereignty.
The ______ Agreement revised the IMF's Articles of Agreement and addressed floating exchange rates.
Jamaica
The most important foreign exchange trading center is ______ with 37% of the activity.
London
What committed EU members to adopt a common currency by January 1, 1999?
Maastricht Treaty
The unpredictability of exchange rate movements in the post-Bretton Woods era has resulted in which two issues?
Made international business planning difficult Added risk to exporting and importing
The trade pact developed in 1988, initially between Argentina and Brazil, is called ______.
Mercosur
Which agreement was an attempt at regional economic integration in the United States?
North American Free Trade Agreement
What two measures can countries employ to restrict foreign direct investment?
Ownership restraints Performance requirements
The Uruguay Round started in 1986 and addressed which issues?
Reducing Tariffs Reducing agricultural subsidies
Which economist was a key figure in the early free trade movement in Great Britain?
Ricardo
The balance of trade is the difference between the monetary value of a nation's exports and imports over a certain period. What occurs when a balance-of-trade equilibrium exists?
The income residents earn from exports equals the money its residents pay to other countries for imports.
In order to preserve protectionism, many countries are looking to which of these loopholes associated with antidumping?
The vague definition of dumping
is the organization that encompasses GATT, GATS and TRIPS.
WTO
PPP theory predicts that changes in relative prices will result in
a change in exchange rates.
subsidy
a payment by the government to a domestic producer to help lower production costs so they are better able to compete with foreign imports.
A currency crisis occurs when
a speculative attack on the currency exchange value creates a sharp depreciation in the value of currency.
customs union
a type of trade bloc which is composed of a free trade area with a common external tariff
Because the IMF does NOT have oversight over its decisions, a criticism of this institution is that it lacks
accountability
The stock of foreign direct investment
accumulated value of foreign-owned assets at a given point in time.
A form of FDI, other than greenfield investments, is to
acquire or merge with an existing company in the foreign country.
Tariff rates on ______ products are generally much higher than tariffs on manufactured products or services
agricultural
common market
an agreement that has no barriers to trade among member countries and allows factor of production (such as labor) to move freely among the members
With a deteriorating balance-of-payments occurring between 1980 and 1985, the US dollar displayed _____.
an unexpected rise
Externalities
are a network of informal contacts that allow companies to benefit from each other's knowledge.
infant industry argument
argument for trade intervention states that developing countries need to support new industries until they are strong enough to compete globally.
administrative trade policy
bureaucratic rules that are almost always deliberately designed to restrict the flow of a particular import into a country.
Earnings from a foreign subsidiary to the parent company are recorded as ______ on the balance-of-payments accounts.
capital outflow
Economic exposure is concerned with the affect of ______ on a firm's international earning power
changes in exchange rates
The European Parliament must approve all members of the European ______ before this body can begin its work.
commission
greenfield investments
company establishes operations in a foreign country
foreign exchange market
convert currency
When a country's currency is nonconvertible, a company may engage in ______, where goods and services will be traded for other goods and services.
countertrade
A(n) ______ is a monetary authority which converts domestic currency on demand into another currency at a fixed exchange rate.
currency board
Tracking exports and imports of goods and services is measured by the
current account
Ad valorem tariff
customs duty is calculated as a percentage of the value of the product
A government would be concerned when the country is running a ______ on the current account of their balance of payments.
deficit
How do members of the European Parliament gain their seat?
directly elected by the citizens
What is the key way a company can reduce economic exposure?
distribute production facilities and assets to various locations
To encourage FDI, many countries have eliminated ______ of foreign income.
double taxation
Regional _____ integration creates agreements among countries in a specific geographic area in order to reduce and eventually remove tariff and nontariff barriers to the free flow of goods.
economic
Strategic trade policy suggests a(n) ______ justification for government intervention in trade.
economic
The extent to which a firm's future international earning power will be affected by exchange rate changes is called ______ exposure.
economic
Free trade
economic policy of not discriminating against exports to or imports from foreign countries
A(n) ______ union adds more economic integration to a common market by requiring a common currency, a common monetary and fiscal policy, and harmonization of tax rates.
economic union
An economist who believes that the foreign exchange market is effective at setting forward rates is a part of the _____ market school. efficient
efficient
A customs union is put in place for what two reasons?
eliminate trade barriers between member countries establish a common external trade policy
The WTO is more successful than GATT because the WTO has
enforcement mechanisms
A customs union is put in place for what two reasons?
establish a common external trade policy eliminate trade barriers between member countries
The international monetary system establishes the rules and regulations that govern ______.
exchange rates
In recent years, the IMF's activities have ______.
expanded
dumping
export a product to another country at a price either below the price charged in its home market or below its cost of production
A(n) ______ convertible currency allows only nonresidents to convert it into a foreign currency without any limitations.
externally
A ______ exchange rate is a country's exchange rate regime under which the values of a set of currencies are fixed against each other at some mutually agreed-on exchange rate.
fixed
cabotage
foreign truckers who pick up and deliver goods within another member's state borders
A lack of barriers to the trade of goods and services among member countries are found in a(n)
free trade area
The least integrated form of economic integration is a
free trade area.
When a country allows both residents and nonresidents to purchase unlimited amounts of a foreign currency, the country's currency is
freely convertible
The method of forecasting that draws on economic theory to construct sophisticated models is called the ______ approach.
fundamental
Which approach to forecasting draws on economic theory to develop models that predict exchange rate movements?
fundamental
Forward exchange rates are exchange rates that govern _____ transactions.
future
optimal currency area
geographic area in which a single currency would create the greatest economic benefit
What are two elements of the Jamaica Agreement?
gold was abandoned as a reserve asset floating exchange rates were acceptable
According to the text, what two things have been key in determining the value of the dollar since 1973?
government intervention
Trade creation
high-cost domestic producers being replaced by low-cost producers within the free trade area
Krugman argument
if each country seeks to follow a strategic trade policy to protect its interests, this may lead to a trade war
There has been a(n) _____ in regional economic integration in the past two decades.
increase
During the 1980s and early 1990s, protectionism around the world
increased
The use of currency management instruments such as swaps and the forward market have ______ since 1973.
increased
The ______ market school believes that forward exchange rates are NOT the best predictors of future spot exchange rates.
inefficient
One main reason why the IFE is NOT good at explaining short-term exchange rate movements is the impact of ______ in determining the expectations of market traders.
investor psychology
Internalization theory is used to explain why a firm would prefer foreign direct investment over
licensing
voluntary export restraint
limit on the quantity of some category of goods that can be exported to a specified country
