Chapter 8 Global Business

The law of one price is that: A. only one price can be charged for an item in a contract deal. B. in an efficient market, one price only is the permissible price. C. in an efficient market, like goods will have like prices. D. even in international markets, bait and switch is illegal.

C. in an efficient market, like goods will have like prices

The three major taxes governments use to generate revenue are: A. VAT, income tax, and withholding tax. B. sales tax, VAT, and income tax. C. property tax, VAT, and sales tax. D. income tax, property tax, and sales tax.

A. VAT, income tax, and withholding tax.

Purchasing power parity is a way to compare: A. the purchasing power of several currencies. B. tastes in several different cultures. C. the impact of financial aid in several economies. D. meals in the quick-service restaurant sector—via the Big Mac index.

A. the purchasing power of several currencies.

The forward currency market: A. allows purchasers to lock in purchases of currencies at known rates. B. provides governments a way to manage their currency's value. C. makes trading in several currencies more efficient. D. helps managers manage domestic debt.

A. allows purchasers to lock in purchases of currencies at known rates.

Currency exchange controls are found most frequently in: A. developing countries. B. developed countries. C. countries with pegged exchange rates. D. nondemocratic countries.

A. developing countries.

Taxation is a financial force in that: A. if the firm can achieve a lower tax burden than its competitors, it can generate higher revenues and then lower its prices or pay higher wages and dividends. B. governments, which enact taxes, are formal institutions that enforce tax law via force. C. businesses are compelled by foreign governments to pay taxes. D. it is not controlled by the firm.

A. if the firm can achieve a lower tax burden than its competitors, it can generate higher revenues and then lower its prices or pay higher wages and dividends.

Exchange rate forecasting is: A. important because exchange rates influence all aspects of business. B. important because markets depend on solid information. C. unimportant because exchange rate forecasting does not have a theoretical model. D. unimportant because exchange rate movements do not impact international transactions.

A. important because exchange rates influence all aspects of business.

With increasing inflation, borrowing becomes: A. more attractive because repayment can be made with cheaper money. B. less attractive because repayment is made with dearer money. C. impossible because money has lost its value. D. a mute issue because of liquidity issues.

A. more attractive because repayment can be made with cheaper money.

The international Fisher effect says that interest rate differentials: A. predict exchange rate movement. B. can be used to determine purchasing power parity. C. are an example of the law of one price. D. illustrate Pareto optimality.

A. predict exchange rate movement.

Historically, gold has been used as a way for people to store value because of its: A. purity and scarcity. B. high transportation and security costs. C. lack of interest-earning ability. D. all of the above.

A. purity and scarcity.

In general, with regard to exchange controls, developed countries: A. rarely use them. B. use them only to discourage foreign investment. C. use them when needed to implement monetary policy. D. use them secretly.

A. rarely use them

The balance part of the BOP is explained by: A. the accounts being double-entry, so they are always balanced. B. imbalances showing immediately. C. actions governments take to achieve the balance. D. none of the above.

A. the accounts being double-entry, so they are always balanced.

The three main approaches to exchange rate forecasting are: A. the efficient market approach, the fundamental approach, and the technical approach. B. the efficient market approach, the random walk hypothesis, and the pragmatic approach. C. the random walk hypothesis, the pragmatic approach, and the fundamental approach. D. none of the above.

A. the efficient market approach, the fundamental approach, and the technical approach.

Fixed-rate relationships among currencies could not stay fixed, according to Obstfeld and Rogoff, because: A. the volume of global transactions started to exceed most countries' foreign exchange reserves, so governments couldn't intervene to sustain the value of their currency. B. the complexity of international trade demanded return of the gold standard. C. Walmart and other leading firms argued successfully at the Federal Reserve that fixed rates were too costly to maintain. D. the EU had decided to float the euro.

A. the volume of global transactions started to exceed most countries' foreign exchange reserves, so governments couldn't intervene to sustain the value of their currency.

The balance-of-payments account is a record of: A. the total tangible trade flows of a country over a five-year period. B. a country's transactions with the rest of the world. C. a country's total debt service payments during a one-year period. D. the outstanding balance of a country's debt payments for the fiscal year.

B. a country's transactions with the rest of the world.

In order to strengthen the U.S. dollar, the Federal Reserve might sell yen and buy dollars, in which case the yen functions as: A. a stronger currency than the dollar. B. an intervention currency. C. an arbitrage currency. D. none of the above.

B. an intervention currency.

A purchase of foreign goods from the United States (requiring importing) will: A. be recorded in the BOP as an asset in the current account. B. be recorded in the BOP as a debit in the current account. C. have no record in the BOP because the purchase is made in the United States. D. be recorded in the BOP as a liability in the foreign transfer account.

B. be recorded in the BOP as a debit in the current account.

The Triffin paradox suggests that: A. reserve currencies can never run deficits. B. eventually, reserve currencies will run deficits, which will lead to lack of confidence in the currency. C. the more a currency is held in reserves, the stronger it is. D. the U.S. dollar could never be a reserve currency.

B. eventually, reserve currencies will run deficits, which will lead to lack of confidence in the currency.

Arbitrage functions to: A. provide French markets access to other EU markets. B. exploit price differences between markets, so as to profit with no risk. C. create wealth through interest rate swaps. D. create increased trading in commodity markets.

B. exploit price differences between markets, so as to profit with no risk.

One attribute of the U.S. tariff schedule is: A. that it is printed in both Arabic and Hebrew. B. how specific it is. C. that its categories are quite general and easy to apply. D. that its harmonized version can be accessed via cell phone and iPad.

B. how specific it is.

Monetary and fiscal policies: A. have nothing to do with exchange rate movement. B. influence interest rates and taxation, and so may influence exchange rates. C. have no predictable influence on inflation. D. have no influence on trade patterns.

B. influence interest rates and taxation, and so may influence exchange rates.

What is appealing about the gold standard is: A. everyone loves gold. B. its simplicity. C. its transportability. D. its carrying costs.

B. its simplicity.

A value-added tax is actually a sales tax that is: A. paid by the firm rather than the consumer. B. paid in stages along the process from raw materials to consumer and then credited after final sale. C. called value added to create a positive spin on taxation. D. voluntarily paid on exports.

B. paid in stages along the process from raw materials to consumer and then credited after final sale.

The Eonomist's Big Mac index (May 2010) suggests that against the dollar, the Chinese yuan is: A. trading fairly, since the Big Mac prices are similar. B. quite undervalued, since the Chinese Big Mac is almost 50 percent less expensive than the U.S.-dollar Big Mac. C. is overvalued, since the Big Mac sells for almost 50 percent less in Chinese currency than in U.S. dollars. D. trading at a historical premium.

B. quite undervalued, since the Chinese Big Mac is almost 50 percent less expensive than the U.S.-dollar Big Mac.

The SDR is: A. a special deposit for corporate reimbursement. B. special drawing rights, an international reserve asset. C. a special deficit refund, made to compensate for currency devaluation. D. a paper credit issued by the Bank for International Settlements.

B. special drawing rights, an international reserve asset.

The inflation rate determines: A. a currency's strengthening. B. the real price of borrowing in capital markets. C. locations for outsourcing. D. import substitution regimes.

B. the real price of borrowing in capital markets.

Financial forces such as inflation and taxation are considered uncontrollable because: A. there is nothing a manager can do to adjust to them, so the recommended approach is to ignore them. B. they are external forces beyond the influence of the firm, around which a manager can manage. C. they are external to the firm and their influence is to be avoided. D. they are unpredictable.

B. they are external forces beyond the influence of the firm, around which a manager can manage.

World interest rates tend to vary across a small range because: A. the IMF has been successful at promoting responsibility in the monetary sector. B. world financial markets are integrated, so we see the law of one price at work. C. bankers have low market appeal, given the financial crisis. D. the BIS has coordinated monetary policy.

B. world financial markets are integrated, so we see the law of one price at work.

Foreign reserves are used to: A. help foreigners who need additional funds. B. provide military support to foreign operations, for example, the French legion and UN peacekeepers. C. cover foreign debt, import purchases, and other demands for foreign currency that banks might encounter. D. support foreign operations that are branches but not subsidiaries.

C. cover foreign debt, import purchases, and other demands for foreign currency that banks might encounter.

Sir Isaac Newton put England on the gold standard when he: A. declared, as master of the English mint, that he would sell gold for 1 pound, 1 shilling, 1 pence, under the law of one price. B. set a market price for gold, the British pound and the U.S. dollar. C. established a fixed equivalency between gold and the British currency. D. brought the matter to Queen Anne, who declared Britain would follow the gold standard.

C. established a fixed equivalency between gold and the British currency.

Market forces that set the relative prices of currencies are: A. not influenced by government policies. B. not influenced by world events. C. influenced by many forces including forces external to business, such as world events. D. A and B.

C. influenced by many forces including forces external to business, such as world events.

The Fisher effect states that the real interest rate: A. is the nominal rate plus the recorded inflation rate. B. is the only measure to use in calculating PPP. C. is the nominal rate minus the expected inflation rate. D. is the difference between the nominal rate and the inflation rate.

C. is the nominal rate minus the expected inflation rate.

Balance-of-payments data: A. reveal a country's assets. B. suggest areas of concern in monetary and fiscal policy. C. reveal demand for a country's currency. D. show how the country's currency arrangement (fixed, pegged, floating) is valued.

C. reveal demand for a country's currency.

If the Japanese yen is strengthening against the U.S. dollar, and the Japanese government wanted to boost exports, the central bank of Japan might well: A. sell U.S. dollars in large amounts in the currency markets. B. buy massive amounts of Japanese yen in the FX markets. C. sell massive amounts of Japanese yen in the FX markets. D. buy massive amounts of other hard currencies, such as the British pound sterling and the euro, to deflect the focus on dollars.

C. sell massive amounts of Japanese yen in the FX markets.

The present floating exchange rate system is not a totally free float because: A. there is an exchange fee of 1.5 to 1.75 percent. B. some governments refuse to allow foreign traders to trade their currency. C. some central banks from time to time intervene in the market to buy or sell large amounts of currency to affect the supply and demand of a particular currency. D. A and B.

C. some central banks from time to time intervene in the market to buy or sell large amounts of currency to affect the supply and demand of a particular currency.

Bretton Woods led to an exchange rate agreement known as the Bretton Woods System or: A. the floating-rate system. B. the India Accord system. C. the gold exchange standard. D. the French rate system.

C. the gold exchange standard.

In 1717, Sir Isaac Newton took Britain from the silver standard (pounds sterling) to: A. floating exchange rates. B. fixed exchange rates, using silver. C. the gold standard, with fixed rates. D. pegged rates.

C. the gold standard, with fixed rates.

The inflation rate determines: A. the capital structure of the firm. B. the growth rate of sales. C. the real cost of borrowing in capital markets. D. the equilibrium point.

C. the real cost of borrowing in capital markets.

Countries put limitations on the convertibility of their currency when they are concerned that: A. there is too much domestic spending. B. foreigners will hold control of their monetary policy. C. their foreign reserves could be depleted. D. there is not enough domestic spending.

C. their foreign reserves could be depleted.

Hawalas make currency exchange and: A. avoid the international currency exchange markets. B. offer their clients nearly untraceable transactions. C. transfer funds through the established banking system. D. A and B.

D. A and B.

The U.S. current account deficit can be explained by: A. citizens of other nations wanting to hold dollars because the dollar is a stable currency. B. foreigners wanting to invest in the United States. C. U.S. citizens importing more than they are exporting. D. B and C.

D. B and C.

The largest international reserve accounts are held by: A. Hong Kong and Singapore. B. the United States, Mexico, and Canada (NAFTA). C. the EU. D. China and Japan.

D. China and Japan.

Who took the United States off the gold system? A. President Eisenhower B. President Kennedy C. the Supreme Court D. President Nixon

D. President Nixon

The lowest corporate tax rates are found in: A. the United States, Brazil, India, and France. B. Brazil, China, Australia, and Japan. C. Peru, Australia, Italy, and Luxembourg. D. Switzerland, Ireland, Singapore, and Russia.

D. Switzerland, Ireland, Singapore, and Russia.

In an inflationary economy the following conditions may be present: A. demand exceeds supply. B. money supply is increasing. C. prices are rising. D. all of the above.

D. all of the above.

Withholding tax is: A. an indirect tax paid by employers before employees receive salaries. B. a direct tax levied on earned income. C. a 30 percent tax levied on foreign residents. D. an indirect tax levied on passive income.

D. an indirect tax levied on passive income.

When a government requires a permit to purchase foreign currency, the exchange rates: A. are market-driven. B. can be negotiated by the firm. C. are unpredictable. D. are set by the government, often above the free market rate.

D. are set by the government, often above the free market rate.

The balance-of-payments account is divided into the following three major subaccounts: A. trade, capital, and debt. B. cash flow, assets, and reserves. C. services, cash flow, and debt. D. current, capital, and reserves.

D. current, capital, and reserves.

Most significantly for the international manager, the balance of payments reveals: A. demand for a firm's products. B. a firm's financial position. C. a country's export patterns. D. demand for a country's currency and potential changes in its economic environment.

D. demand for a country's currency and potential changes in its economic environment.

The present floating exchange rate system was: A. designed by the IMF and implemented flawlessly in 1973. B. established by the major trading nations in 19721 after Nixon closed the gold window. C. implemented in tandem with a reintroduction of the gold standard. D. established after several trials in which central bankers set rates incorrectly and speculators corrected them in the markets, and it was formalized after the fact in the IMF's Jamaica Agreement.

D. established after several trials in which central bankers set rates incorrectly and speculators corrected them in the markets, and it was formalized after the fact in the IMF's Jamaica Agreement.

The current account on the BOP has three subaccounts: A. export, import, and capital. B. tangible exports, tariff revenues, and capital. C. fixed assets, current liabilities, and long-term debt. D. merchandise, services, and unilateral transfers.

D. merchandise, services, and unilateral transfers.

The international Fisher effect says that the interest rate differentials in any two currencies reflect: A. the ratio of their inflation rates minus COL B. arbitrary differences in the two economies. C. PPP differences in the two economies. D. the expected change in their exchange rates.

D. the expected change in their exchange rates.

The price of gold since about 1200 A.D. has been: A. trending downward. B. flat, keeping its value. C. wildly fluctuating. D. trending upward.

D. trending upward.

A vehicle currency is a currency: A. used to trade in the transportation sector and is usually the dollar, euro, or yen. B. whose value lies in its function in transfer pricing. C. specifically used in arbitrage deals as a trading medium only. D. used for international trade or investment.

D. used for international trade or investment.

When the law of one price is applied to interest rates, it suggests that: A. interest rates do not differ much across national borders. B. inflation is not affected by interest rates. C. inflation and interest rates do not follow the law of one price. D. varying interest rates take into account anticipated differences in inflation rates.

D. varying interest rates take into account anticipated differences in inflation rates.