CBA-396 International Business Test #3 JSU (Lenn Rainwater)

The International Fisher Effect states that 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.

True

The International Monetary Fund's original function was to provide a pool of money from which members could borrow in the short term.

True

The agreement reached at Bretton Woods established the International Monetary Fund (IMF) and the World Bank.

True

The current system of foreign exchange is a mixed system of government intervention and speculative activity.

True

The fixed exchange rate system established at Bretton Woods failed due to speculative pressures on the U.S. dollar.

True

The foreign exchange market converts the currency of one country into that of another country.

True

The implied loss of national sovereignty to the European Central Bank (ECB) underlies the decision by Great Britain, Denmark, and Sweden to stay out of the euro zone for now.

True

The international monetary system refers to the institutional arrangements that govern exchange rates.

True

The value of a currency is determined by the interaction between the demand and supply of that currency relative to the demand and supply of other currencies.

True

To minimize the risk of an unanticipated change in exchange rates, a company can protect itself by entering into a forward exchange contract.

True

Transaction exposure includes obligations for the purchase or sale of goods and services at previously agreed prices and the borrowing or lending of funds in foreign currencies.

True

When Krista traveled from the United States to England, she had to change her money from dollars into pounds. Krista was participating in the currency exchange market.

True

World Bank offers low-interest loans to risky customers whose credit rating is often poor.

True

_____ refers to a range of barter-like agreements by which goods and services can be traded for other goods and services.

Countertrade

The World Bank was established at the at Bretton Woods conference to _____.

Promote general economic development

Political turmoil in several African nations has persistently impeded any meaningful progress in economic integration.

True

Firms outside of trading areas run the risk of being shut out of the single market by the creation of a _____.

"Trade fortress"

Assume that the current exchange rate is €1 = $1.50. If you exchange 1,000 euros for dollars, you will receive _____.

$1,500

A benefit to companies of economic integration is the opportunity to centralize their production and reduce costs.

True

A central reason for the establishment of the EU was the devastation of Western Europe during two world wars and the desire for a lasting peace.

True

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 currency swap deal enables companies to insure themselves against foreign exchange risk.

True

A key benefit resulting from the adoption of the euro is the ability to compare prices across member markets.

True

A regional free trade agreement will benefit the world only when the amount of trade it creates exceeds the amount of trade it diverts.

True

After the agreement reached at Bretton Wood, the dollar was the only currency that could be convertible into gold.

True

Arbitrage opportunities in foreign exchange markets tend to be small and disappear quickly.

True

Charlyce lives in a country where there are no barriers to the trade of goods and services. This is called a free trade area.

True

A country wanted to hold its currency against an important reference currency without a formal pegged rate. This is known as _____.

A dirty float

A(n) _____ involves attempting to collect foreign currency receivables early when a foreign currency is expected to depreciate and paying foreign currency payables before they are due when a currency is expected to appreciate.

A lead strategy

Concerns about national sovereignty in the EU have been a major impediment to economic integration.

True

Coordination and policy harmonization problems are largely a function of the number of countries that seek agreement.

True

Which of the following statements is true of the Bretton Woods agreement?

All countries agreed to fix the value of their currency in terms of gold under the agreement

Assume that the yen/dollar exchange rate quoted in Tokyo at 3:00 p.m. is ¥120 = $1, and the yen/dollar exchange rate quoted in New York at the same time is ¥123 = $1. A dealer in New York uses dollars to purchase yen and then immediately sells the yen to buy dollars in Tokyo, thereby making a profit. The dealer has engaged in _____.

An arbitrage

A country that introduces a currency board commits itself to converting its domestic currency on demand into _____.

Another currency at a fixed exchange rate

Supporters of floating exchange rates _____.

Argue that floating rates help adjust trade imbalances

How has the euro contributed to increasing competition in the European region?

By making price comparisons easy

In early 2006, six CARICOM members and the United States established the _____, which was modeled on the EU's single market.

Caribbean Single Market and Economy

The purchasing power parity (PPP) theory argues that the exchange rate will _____.

Change if relative prices change

The ultimate controlling unit within the EU is the _____.

Council of the European Union

Currency fluctuations can make seemingly profitable trade and investment deals unprofitable and vice versa.

True

Which of the following is seen to be a consequence of the expansion of the EU from 15 nations to 28 nations?

Delays in decision-making processes

In theory, WTO rules should ensure that a free trade agreement _____.

Does not result in trade diversion

Identify the currency that was convertible to gold under the Bretton Woods system.

Dollar

Although a foreign exchange transaction can involve any two currencies, most transactions involve _____ on one side.

Dollars

What concept is concerned with the long-run effect of changes in exchange rates on future prices, sales, and costs?

Economic exposure

The _____ school of thought argues that forward exchange rates do the best possible job of forecasting future spot rates and therefore investing in forecasting services would be a waste of money.

Efficient market

Countries that require substantial loans from the International Monetary Fund to survive will _____ due to IMF-mandated economic policies.

Endure a sharp contraction of demand in the short term

The emerging role of the _____ in competition policy suggests the EU is increasingly willing and able to intervene and impose conditions on companies proposing mergers and acquisitions.

European Commission

The _____ is primarily a consultative rather than legislative body.

European Parliament

If the law of one price were true for all goods and services, the purchasing power parity (PPP) exchange rate could be found from any individual set of prices.

True

Adopting a pegged exchange rate regime increases the inflationary pressures in a country.

False

An effective business strategy to reduce economic exposure is to contract out high-value-added manufacturing.

False

Because of the fact that everyone benefits from economic integration, it is easy to achieve and sustain.

False

Carry trade is non-speculative in nature.

False

Establishment of the euro created the largest currency zone in the world, replacing the position the U.S. dollar had held for decades.

False

Firms cannot utilize the forward exchange market when they are faced with uncertainty about the future value of currencies.

False

Fixed exchange rates lead to speculation and uncertainty in the value of currencies.

False

Gold was declared as the formal reserve asset in the Jamaica agreement of 1976.

False

Governments allow convertibility to preserve their foreign exchange reserves.

False

If $1 bought more yen with a spot exchange than with a 30-day forward exchange, it indicates the dollar is expected to depreciate against the yen in the next 30 days. When this occurs, we say the dollar is selling at a premium on the 30-day forward market.

False

If the spot exchange rate is £1 = $1.50 when the market opens, and £1 = $1.48 at the end of the day, the pound has appreciated, and the dollar has depreciated.

False

If the spot rate is $1 = 120, and the 30-day forward rate is $1 = ×130, the dollar is selling at a discount in the forward market.

False

Implementing a fixed exchange rate regime increases the price inflation in countries.

False

In 2002, the IMF stepped in to help stabilize the value of the Brazilian currency on foreign exchange markets by lending it foreign currency. This constitutes a foreign debt crisis.

False

In a customs union, trade barriers are eliminated among member countries, and each country maintains its own external trade policies.

False

Market forces have produced a stable dollar exchange rate under a floating exchange rate regime.

False

Moral hazard arises when people behave recklessly without regard for the consequences.

False

Once the barriers to trade and investment are removed, companies are able to realize cost economies by centralizing production in key locations and producing a standardized product for a single multiple-country market.

False

Since its establishment, the euro has had a stable trading history.

False

The Andean Pact is a highly successful common market modeled after the EU.

False

The Council of the European Union is responsible for proposing EU legislation, implementing it, and monitoring compliance with EU laws by member states.

False

The European Union is an example of a perfect economic union.

False

The Single European Act committed EU countries to adopting a common currency by January 1, 1999.

False

The Treaty of Rome, signed in 1957, established the European Free Trade Association.

False

The gold standard called for fixed exchange rates against the U.S. dollar.

False

The impact of currency exchange rates on the reported financial statements of a company is called economic exposure.

False

The judges of the European Court of Justice are required to act as representatives of national interests, rather than as independent officials.

False

The purchasing power parity (PPP) theory is a strong predictor of short-run movements in exchange rates covering time spans of five years or less.

False

There are many impediments to the free flow of goods and services in an efficient market.

False

There is no evidence that psychological factors play an important role in determining the expectations of market traders as to likely future exchange rates.

False

When the foreign exchange market determines the relative value of a currency, we say that the country is adhering to a _____ regime.

Floating exchange rate

A _____ is a situation in which a country cannot service its foreign debt obligations.

Foreign debt crisis

Which of the following is a common criticism against the powerful International Monetary Fund?

IMF lacks any real mechanism for accountability

The _____ states that, 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

Interest rates adjust automatically under a strict currency board system.

True

How does the NAFTA seem to increase the international competitiveness of U.S. and Canadian firms?

It allows them to take advantage of lower labor costs in Mexico

Which of the following was the outcome of the Treaty of Lisbon signed in 2007?

It increased the power of the European Parliament

Which of the following is a disadvantage of using a rigid policy of fixed exchange rates?

It is likely to create high unemployment in some cases

Which of the following observations pertaining to the EU's Court of Justice is correct?

It is the supreme appeals court for EU law

Identify the correct statement about the PPP theory.

It predicts that exchange rates are determined by relative prices

Which of the following observations is true of the euro?

It required participating countries to give up control over monetary policy

Why doesn't Great Britain use the euro as its national currency?

It would have to relinquish control of its monetary policy to the EU

What was the main objection raised by those in the United States and Canada who opposed the ratification of the NAFTA?

Job losses

The _____ states that in competitive markets free of transportation costs and barriers to trade, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency.

Law of one price

Currencies of countries with currency boards will become uncompetitive and overvalued if _____.

Local inflation rates remain higher than the inflation rate in the country to which the currency is pegged

Which of the following is seen as a benefit of the euro?

Lower foreign exchange and hedging costs

Which of the following established the second largest currency zone in the world?

Maastricht Treaty

Which of the following is seen as a disadvantage of the euro?

National authorities losing control over monetary policy

To ensure that a free trade agreement does not result in trade diversion, which of the following has to come within the scope of the WTO?

Non-tariff barriers

Purchasing power parity theory states that given relatively efficient markets, the price of a "basket of goods" should be _____.

Roughly equivalent in each country

The International Fisher Effect has _____.

Not proven to be a good predictor of short-run changes in spot exchange rates

Suppose the price of a Big Mac in New York is $3.00 and the price of a Big Mac in Paris is equivalent to $3.75 at the prevailing euro/dollar exchange rate. Using the concept of purchasing power parity, the euro is _____.

Overvalued by 25 percent against the dollar

A _____ means the value of a currency is fixed relative to a reference currency.

Pegged exchange rate

International Monetary Fund members were _____ in the Jamaica agreement.

Permitted to sell their own gold reserves at the market price

Assuming the 30-day forward exchange rate was $1 = 130 and the spot exchange rate was $1 = ×120, the dollar is selling at a _____ on the 30-day forward market.

Premium

Which of the following, adopted by the member nations of the European Community in 1987, committed member countries to work toward the establishment of a single market by December 31, 1992?

Single European Act

In 1990, Bolivia, Peru, Ecuador, Colombia, and Venezuela relaunched _____.

The Andean Pact

Parla liked to gamble, so she sometimes moved her funds from dollars to euros in the hope that she would make money based on the exchange rates. This demonstrates a carry trade.

True

Which of the following is a concern of some economists regarding regional integration?

The benefits of regional integration may have been oversold, while the costs have been ignored

An American company today invests some of its spare cash in a Hungarian money market account that will earn 8 percent for two months. Which of the following, if it happens during the next two months, would imply that the company will earn less than 8 percent on its investment?

The dollar appreciates against the Hungarian forint

Inflation occurs when _____.

The quantity of money in circulation rises faster than the stock of goods and services

Which of the following is an advantage of using the gold standard?

The standard contains a powerful mechanism for achieving balance-of-trade equilibrium by all countries

Which of the following is a reason Turkey is not yet a member of the EU?

There are concerns over human rights issues in the country

Moral hazard arises when people behave recklessly because _____.

They know they will be saved if things go wrong

Which of the following arguments strengthen the idea of floating exchange rates?

Trade deficits can be corrected through changes in exchange rates

Which of the following occurs when lower-cost external suppliers are replaced by higher-cost suppliers within the free trade area?

Trade diversion

The extent to which the income from individual transactions is affected by fluctuations in foreign exchange values is known as _____ exposure.

Transaction

Which of the following explains why economic integration has never been easy to achieve or sustain, despite the strong economic and political arguments in support?

While a nation as a whole may benefit significantly, certain groups may lose

The International Monetary Fund has been criticized for exacerbating moral hazard _____.

With its rescue programs