ECON349 Chapter 20

Examining​ onshore-offshore interest differentials A. shows that uncovered interest parity fails. B. shows large unexploited gains available for international arbitrage. C. shows little unexploited​ gain, suggesting international markets are somewhat unified. D. has as of yet been uninformative.

C. shows little unexploited​ gain, suggesting international markets are somewhat unified.

What are​ "Eurobanks"? A. Banks that accept Eurocurrency deposits B. Banks that accept deposits in euros C. Banks located in Europe D. ​European-owned banks in the U.S.

A. Banks that accept Eurocurrency deposits

Which of the following is NOT a type of offshore​ bank? A. Investment bank B. Subsidiary bank C. Agency office D. Foreign branch

A. Investment bank

Which portfolio is better​ diversified, one that contains stock in a dental supply company and a candy company or one that contains stock in a dental supply company and a dairy product​ company? B. One that contains stock in a dental supply company and a candy company. C. Both are equally diversified. D. Uncertain

A. One that contains stock in a dental supply company and a dairy product company.

Which portfolio is better​ diversified, one that contains stock in a dental supply company and a candy company or one that contains stock in a dental supply company and a dairy product​ company? A. One that contains stock in a dental supply company and a dairy product company. B. One that contains stock in a dental supply company and a candy company. C. Both are equally diversified. D. Uncertain

A. One that contains stock in a dental supply company and a dairy product company.

Banks are not happy when regulators force them to raise the ratio of capital to total​ assets: they argue that this reduces their potential profits. When a bank borrows more in order to purchase more risky​ assets, however, the interest rate it must pay on the borrowing should be high enough to compensate the lenders for the risk that the bank cannot repay in full​ - and the higher interest rate reduces bank profits. In light of this​ observation, how should a bank think about funding asset​ purchases? i.e. is it more profitable for the bank to finance its asset purchase by​ borrowing, rather than by issuing additional shares of stock​ (and thereby increasing rather than reducing its ratio of capital to total​ assets)? A. The relative attractiveness of a funding source depends on variables such as the tax treatment of interest on debt versus dividend expenses. B. Equity should generally be a cheaper source of financing since no interest payments must be made on it. C. The profitability of these alternative funding sources are likely to be equivalent. D. Debt should generally be a cheaper source of financing since it does not require dividend payments.

A. The relative attractiveness of a funding source depends on variables such as the tax treatment of interest on debt versus dividend expenses.

After the developing country debt crisis began in 1982​ (see the next​ chapter), U.S. bank regulators imposed tighter supervisory restrictions on the lending policies of American banks and their subsidiaries. Over the​ 1980s, the share of U.S. banks in London banking activity declined. What is the connection between these two​ developments? A. Tighter regulation of U.S. banks made them less competitive relative to foreign banks in London. B. U.S. banks found domestic banking more profitable. C. International banking activities in general becam more unprofitable and riskier over the 1980s. D. Tighter regulation of​ banks, domestic and​ foreign, was widespread and U.S. banks were cautious in expanding international banking business.

A. Tighter regulation of U.S. banks made them less competitive relative to foreign banks in London.

The Basel Committee is the major forum for cooperation among bank regulators from different countries. Its job is to strengthen the​ regulation, supervision and practices of banks worldwide with the purpose of enhancing financial stability. The Basel Accords are A. a set of guidelines on prudential capital​ requirements, risk management and supervision for international banks. B. an agreement for allocating responsibility for supervising multinational banking establishments between parent and host​ countries, including the sharing of information about banks by parent and host regulators and for​ the granting of permission for inspections​ by, or on behalf​ of, parent authorities on the territory of the host authority. C. a set of principles deemed to describe the minimum necessary requirements for effective bank​ supervision, covering licensing of​ banks, supervision​ methods, reporting requirements for​ banks, and​ cross-border banking. D. a forum for monitoring the global financial system and making recommendations for global policy coordination and​ reform, sometimes in cooperation with other international agencies such as the IMF.

A. a set of guidelines on prudential capital​ requirements, risk management and supervision for international banks.

When a U.S. bank accepts a deposit from one of its foreign​ branches, that deposit is subject to Fed reserve requirements.​ Similarly, reserve requirements are imposed on any loan from a U.S.​ bank's foreign branch to a U.S.​ resident, or on any asset purchase by the branch bank from its U.S. parent. The rationale for these regulations is that A. all U.S. banks are subject to the same reserve requirement that is important for bank solvency. B. foreign banks and U.S. banks have a​ "level playing​ field." C. foreign banks and their branches in U.S. do not have an unfair advantage. D. U.S. banks without foreign branches have more options than those without foreign branches.

A. all U.S. banks are subject to the same reserve requirement that is important for bank solvency.

Which of the following is true regarding the capital market development since the​ 1970s? A. The extent of intertemporal trade was larger than theory predicts. B. The role of emerging markets declined over time. C. The extent of the international portfolio diversification was smaller than theory predicts. D. ​Onshore-offshore interest rate differentials were too large.

C. The extent of the international portfolio diversification was smaller than theory predicts.

Which of the following is true regarding the capital market development since the​ 1970s? A. ​Onshore-offshore interest rate differentials were too large. B. The role of emerging markets declined over time. C. The extent of the international portfolio diversification was smaller than theory predicts. D. The extent of intertemporal trade was larger than theory predicts.

C. The extent of the international portfolio diversification was smaller than theory predicts.

Offshore banking involves a tremendous volume of interbank​ deposits, which implies that problems affecting a single bank can be highly contagious and spread quickly to other banks.​ Regardless, banking regulations like those used in the United States are less effective in an international environment where banks can shift their business among different regulatory jurisdictions. This arises because A. of the absence of deposit insurance and reserve requirements in many​ countries, difficulties in monitoring and enforcing capital requirements and asset restrictions in an international​ setting, and uncertainty over which central bank is responsible for providing assistance as the lender of last resort and which governments have the operational and financial responsibility for a rescue or reorganization. B. while deposit insurance and reserve requirements are adequate​ internationally, and capital requirements and asset restrictions are effectively monitored and enforced​ internationally, there is uncertainty over which central bank is responsible for providing assistance as the lender of last resort and which governments have the operational and financial responsibility for a rescue or reorganization. C. while deposit insurance and reserve requirements are adequate​ internationally, there are difficulties in monitoring and enforcing capital requirements and asset restrictions in an international​ setting, and uncertainty over which central bank is responsible for providing assistance as the lender of last resort and which governments have the operational and financial responsibility for a rescue or reorganization. D. of problems in how the global regulatory​ body, established through international​ cooperation, administers deposit insurance and reserve​ requirements, monitors and enforces capital requirements and asset​ restrictions, and assists banks in the international system respond to operational and financial challenges.

A. of the absence of deposit insurance and reserve requirements in many​ countries, difficulties in monitoring and enforcing capital requirements and asset restrictions in an international​ setting, and uncertainty over which central bank is responsible for providing assistance as the lender of last resort and which governments have the operational and financial responsibility for a rescue or reorganization.

Examining​ onshore-offshore interest differentials A. shows little unexploited​ gain, suggesting international markets are somewhat unified. B. shows large unexploited gains available for international arbitrage. C. shows that uncovered interest parity fails. D. has as of yet been uninformative.

A. shows little unexploited​ gain, suggesting international markets are somewhat unified.

Which type of bet would a risk averse individual​ take? A. ​$100 bet for​ 50% chance at​ $80 and​ 50% chance of​ $130. B. ​$100 bet for​ 50% chance at​ $50 and​ 50% chance at​ $150. C. ​$100 bet for​ 50% chance at​ $190 and​ 50% chance at​ $5. D. None. Risk averse individuals do not take bets.

A. ​$100 bet for​ 50% chance at​ $80 and​ 50% chance of​ $130.

Sometimes it is claimed that the international equality of real interest rates is the most accurate barometer of international financial integration. Do you​ agree? Why or why​ not? A. ​No, there is a real interest parity condition that says the home real interest could differ from the foreign by the expected percentage change in the real exchange rate. B. ​No, there is an interest parity condition that says the home interest could differ from the foreign by the expected percentage change in the exchange rate. C. ​Yes, the equality of real interest rates implies that there are no differences between​ countries' productivity or trends in world demand which leads to expected changes in the real exchange rate over time. D. ​Yes, the equality of real interest rates implies that international capital movement is truly efficient to have the same return in all countries.

A. ​No, there is a real interest parity condition that says the home real interest could differ from the foreign by the expected percentage change in the real exchange rate.

Imagine a world of two countries in which the only causes of fluctuations in stock prices are unexpected shifts in monetary policies. Under which exchange rate regime would the gains from international asset trade be​ greater, fixed or​ floating? A. Fixed exchange rate regime. B. Floating exchange rate regime. C. Both are the same. D. Uncertain

B. Floating exchange rate regime.

The Swiss economist Alexander Swoboda has argued that the Eurodollar​ market's early growth was fueled by the desire of banks outside the United States to appropriate some of the revenue the United States was collecting as issuer of the principal reserve currency.​ (This argument is made in The​ Euro-Dollar Market: An Introduction​, Princeton Essays in International Finance​ 64, International Finance​ Section, Department of​ Economics, Princeton​ University, February​ 1968.) Which of the following is NOT a reasonable interpretation of​ Swoboda's argument? A. Banks outside the United States also had the desire to escape domestic government regulations on financial activity and sometimes taxes by shifting some of of their operations abroad and into foreign currencies. B. The interest foreign central banks were paid on their dollar deposit was significantly lower than the market​ rate, so the U.S. had been collecting an economically significant seignorage as issuer of the reserve currency. C. The main reason for the rapid growth of Eurodollar market has been the growth of international trade and the increasing nature of corporate activity. D. To the extent that foreign central banks held dollars in​ interest-bearing form, the seignorage extracted by the U.S. is not significant.

B. The interest foreign central banks were paid on their dollar deposit was significantly lower than the market​ rate, so the U.S. had been collecting an economically significant seignorage as issuer of the reserve currency.

The Swiss economist Alexander Swoboda has argued that the Eurodollar​ market's early growth was fueled by the desire of banks outside the United States to appropriate some of the revenue the United States was collecting as issuer of the principal reserve currency.​ (This argument is made in The​ Euro-Dollar Market: An Introduction​, Princeton Essays in International Finance​ 64, International Finance​ Section, Department of​ Economics, Princeton​ University, February​ 1968.) Which of the following is NOT a reasonable interpretation of​ Swoboda's argument? A. The main reason for the rapid growth of Eurodollar market has been the growth of international trade and the increasing nature of corporate activity. B. The interest foreign central banks were paid on their dollar deposit was significantly lower than the market​ rate, so the U.S. had been collecting an economically significant seignorage as issuer of the reserve currency. C. To the extent that foreign central banks held dollars in​ interest-bearing form, the seignorage extracted by the U.S. is not significant. D. Banks outside the United States also had the desire to escape domestic government regulations on financial activity and sometimes taxes by shifting some of of their operations abroad and into foreign currencies.

B. The interest foreign central banks were paid on their dollar deposit was significantly lower than the market​ rate, so the U.S. had been collecting an economically significant seignorage as issuer of the reserve currency.

A high correlation of national savings and investment is A. a clear example that intertemporal trade has failed. B. a signal that countries may not be able to lend and borrow as freely as we thought. C. a signal that international capital markets are able to allocate capital where it is needed. D. an example of the fact that the​ Feldstein-Horioka hypothesis is wrong.

B. a signal that countries may not be able to lend and borrow as freely as we thought.

The internationalization of financial institutions and global financial interdependence combined with difficulties in regulating international financial institutions gives rise to a second trilemma in terms of what international policy makers can achieve. This trilemma means that A. all of the following three goals are simultaneously​ feasible: financial​ stability, national control over financial safeguard​ policy, and freedom of international capital movements. B. at most only two of the following three goals are simultaneously​ feasible: financial​ stability, national control over financial safeguard​ policy, and freedom of international capital movements. C. none of the following three goals are simultaneously​ feasible: financial​ stability, national control over financial safeguard​ policy, and freedom of international capital movements. D. only one of the following three goals are simultaneously​ feasible: financial​ stability, national control over financial safeguard​ policy, and freedom of international capital movements.

B. at most only two of the following three goals are simultaneously​ feasible: financial​ stability, national control over financial safeguard​ policy, and freedom of international capital movements.

The internationalization of financial institutions and global financial interdependence combined with difficulties in regulating international financial institutions gives rise to a second trilemma in terms of what international policy makers can achieve. This trilemma means that A. only one of the following three goals are simultaneously​ feasible: financial​ stability, national control over financial safeguard​ policy, and freedom of international capital movements. B. at most only two of the following three goals are simultaneously​ feasible: financial​ stability, national control over financial safeguard​ policy, and freedom of international capital movements. C. all of the following three goals are simultaneously​ feasible: financial​ stability, national control over financial safeguard​ policy, and freedom of international capital movements. D. none of the following three goals are simultaneously​ feasible: financial​ stability, national control over financial safeguard​ policy, and freedom of international capital movements.

B. at most only two of the following three goals are simultaneously​ feasible: financial​ stability, national control over financial safeguard​ policy, and freedom of international capital movements.

Growing securitization might make it harder for bank supervisors to keep track of risks to the financial system because A. higher securitization in general makes reporting requirements of financial institutions subject to less difficult and hence less effective. B. higher securitization increases the role played by nonbank financial institutions of which bank regulators have less monitoring. C. higher securitization implies that the proportion of the financial market that bank regulators oversee increases as does the difficulties of these regulators to keep track of risks to the financial system. D. higher securitization enables nonbank financial institutions to play a bigger role in the financial system and bank regulators have a wider range of their monitoring activities.

B. higher securitization increases the role played by nonbank financial institutions of which bank regulators have less monitoring.

The text points out that covered interest parity holds quite closely for deposits of different currency denominations issued in a single financial center.​ However, the parity fail to hold when deposits issued in different financial centers are compared. This is mainly due to A. different expected exchange rates among different centers. B. different structures of futures markets among different centers. C. political risk. D. financial risk differentials among different centers.

C. political risk.

Offshore banking involves a tremendous volume of interbank​ deposits, which implies that problems affecting a single bank can be highly contagious and spread quickly to other banks.​ Regardless, banking regulations like those used in the United States are less effective in an international environment where banks can shift their business among different regulatory jurisdictions. This arises because A. while deposit insurance and reserve requirements are adequate​ internationally, and capital requirements and asset restrictions are effectively monitored and enforced​ internationally, there is uncertainty over which central bank is responsible for providing assistance as the lender of last resort and which governments have the operational and financial responsibility for a rescue or reorganization. B. of the absence of deposit insurance and reserve requirements in many​ countries, difficulties in monitoring and enforcing capital requirements and asset restrictions in an international​ setting, and uncertainty over which central bank is responsible for providing assistance as the lender of last resort and which governments have the operational and financial responsibility for a rescue or reorganization. C. of problems in how the global regulatory​ body, established through international​ cooperation, administers deposit insurance and reserve​ requirements, monitors and enforces capital requirements and asset​ restrictions, and assists banks in the international system respond to operational and financial challenges. D. while deposit insurance and reserve requirements are adequate​ internationally, there are difficulties in monitoring and enforcing capital requirements and asset restrictions in an international​ setting, and uncertainty over which central bank is responsible for providing assistance as the lender of last resort and which governments have the operational and financial responsibility for a rescue or reorganization.

B. of the absence of deposit insurance and reserve requirements in many​ countries, difficulties in monitoring and enforcing capital requirements and asset restrictions in an international​ setting, and uncertainty over which central bank is responsible for providing assistance as the lender of last resort and which governments have the operational and financial responsibility for a rescue or reorganization.

The text points out that covered interest parity holds quite closely for deposits of different currency denominations issued in a single financial center.​ However, the parity fail to hold when deposits issued in different financial centers are compared. This is mainly due to A. financial risk differentials among different centers. B. political risk. C. different structures of futures markets among different centers. D. different expected exchange rates among different centers.

B. political risk.

Sometimes it is claimed that the international equality of real interest rates is the most accurate barometer of international financial integration. Do you​ agree? Why or why​ not? A. ​No, there is an interest parity condition that says the home interest could differ from the foreign by the expected percentage change in the exchange rate. B. ​No, there is a real interest parity condition that says the home real interest could differ from the foreign by the expected percentage change in the real exchange rate. C. ​Yes, the equality of real interest rates implies that there are no differences between​ countries' productivity or trends in world demand which leads to expected changes in the real exchange rate over time. D. ​Yes, the equality of real interest rates implies that international capital movement is truly efficient to have the same return in all countries.

B. ​No, there is a real interest parity condition that says the home real interest could differ from the foreign by the expected percentage change in the real exchange rate.

Banks are not happy when regulators force them to raise the ratio of capital to total​ assets: they argue that this reduces their potential profits. When a bank borrows more in order to purchase more risky​ assets, however, the interest rate it must pay on the borrowing should be high enough to compensate the lenders for the risk that the bank cannot repay in full​ - and the higher interest rate reduces bank profits. In light of this​ observation, is it obvious to you that it is more profitable for the bank to finance its asset purchase by​ borrowing, rather than by issuing additional shares of stock​ (and thereby increasing rather than reducing its ratio of capital to total​ assets)? Would your answer to the question raised above change if the​ bank's creditors expect the government to sometimes step in with a bailout that prevents losses on the​ bank's debt​ liabilities? A. ​No, a bailout only protects the​ bank's management​ and, to a lesser​ extent, its depositors. B. ​Possibly, since the potential for a bailout will lessen the perceived risk for the​ bank's creditors, enabling the bank to secure funding at a lower interest cost. This enhances the profitability of using debt to finance asset purchases. C. ​No, since a bailout​ (real or​ imagined) will equally affect the profitability of both funding sources.

B. ​Possibly, since the potential for a bailout will lessen the perceived risk for the​ bank's creditors, enabling the bank to secure funding at a lower interest cost. This enhances the profitability of using debt to finance asset purchases.

Imagine a world of two countries in which the only causes of fluctuations in stock prices are unexpected shifts in monetary policies. Under which exchange rate regime would the gains from international asset trade be​ greater, fixed or​ floating? A. Floating exchange rate regime. B. Fixed exchange rate regime. C. Both are the same. D. Uncertain

C. Both are the same.

Which of the following is NOT a motive for international asset​ trade? A. Intertemporal trade B. International portfolio diversification C. Capital controls D. Tax avoidance

C. Capital controls

Banks are not happy when regulators force them to raise the ratio of capital to total​ assets: they argue that this reduces their potential profits. When a bank borrows more in order to purchase more risky​ assets, however, the interest rate it must pay on the borrowing should be high enough to compensate the lenders for the risk that the bank cannot repay in full​ - and the higher interest rate reduces bank profits. In light of this​ observation, how should a bank think about funding asset​ purchases? i.e. is it more profitable for the bank to finance its asset purchase by​ borrowing, rather than by issuing additional shares of stock​ (and thereby increasing rather than reducing its ratio of capital to total​ assets)? A. Equity should generally be a cheaper source of financing since no interest payments must be made on it. B. The profitability of these alternative funding sources are likely to be equivalent. C. The relative attractiveness of a funding source depends on variables such as the tax treatment of interest on debt versus dividend expenses. D. Debt should generally be a cheaper source of financing since it does not require dividend payments.

C. The relative attractiveness of a funding source depends on variables such as the tax treatment of interest on debt versus dividend expenses.

After the developing country debt crisis began in 1982​ (see the next​ chapter), U.S. bank regulators imposed tighter supervisory restrictions on the lending policies of American banks and their subsidiaries. Over the​ 1980s, the share of U.S. banks in London banking activity declined. What is the connection between these two​ developments? A. U.S. banks found domestic banking more profitable. B. International banking activities in general becam more unprofitable and riskier over the 1980s. C. Tighter regulation of U.S. banks made them less competitive relative to foreign banks in London. D. Tighter regulation of​ banks, domestic and​ foreign, was widespread and U.S. banks were cautious in expanding international banking business.

C. Tighter regulation of U.S. banks made them less competitive relative to foreign banks in London.

A high correlation of national savings and investment is A. a clear example that intertemporal trade has failed. B. a signal that international capital markets are able to allocate capital where it is needed. C. a signal that countries may not be able to lend and borrow as freely as we thought. D. an example of the fact that the​ Feldstein-Horioka hypothesis is wrong.

C. a signal that countries may not be able to lend and borrow as freely as we thought.

The Basel Committee is the major forum for cooperation among bank regulators from different countries. Its job is to strengthen the​ regulation, supervision and practices of banks worldwide with the purpose of enhancing financial stability. The Basel Accords are A. a set of guidelines on prudential capital​ requirements, risk management and supervision for international banks. B. a set of principles deemed to describe the minimum necessary requirements for effective bank​ supervision, covering licensing of​ banks, supervision​ methods, reporting requirements for​ banks, and​ cross-border banking. C. an agreement for allocating responsibility for supervising multinational banking establishments between parent and host​ countries, including the sharing of information about banks by parent and host regulators and for​ the granting of permission for inspections​ by, or on behalf​ of, parent authorities on the territory of the host authority. D. a forum for monitoring the global financial system and making recommendations for global policy coordination and​ reform, sometimes in cooperation with other international agencies such as the IMF

C. an agreement for allocating responsibility for supervising multinational banking establishments between parent and host​ countries, including the sharing of information about banks by parent and host regulators and for​ the granting of permission for inspections​ by, or on behalf​ of, parent authorities on the territory of the host authority.

The severity and breadth of the​ 2007-2009 global financial and economic recession have led to initiatives to reform both national financial systems and the international system. Subsequent reforms of the U.S. financial system include A. depending more on the Basel multilateral process to overcome domestic political pressures against adequate oversight and control of the financial sector. B. establishing the Financial Stability Forum to monitor the global financial system and make recommendations for global policy coordination and reform. C. enhancing the supervision of financial institutions deemed​ "systemically important," and breaking up institutions that are so big or interconnected as to pose a threat to the economy. D. increasing the capital ratios of banks during lending booms in order to make the system more resilient during​ downturns, at which time capital requirements would be loosened.

C. enhancing the supervision of financial institutions deemed​ "systemically important," and breaking up institutions that are so big or interconnected as to pose a threat to the economy.

The severity and breadth of the​ 2007-2009 global financial and economic recession have led to initiatives to reform both national financial systems and the international system. Subsequent reforms of the U.S. financial system include A. establishing the Financial Stability Forum to monitor the global financial system and make recommendations for global policy coordination and reform. B. increasing the capital ratios of banks during lending booms in order to make the system more resilient during​ downturns, at which time capital requirements would be loosened. C. enhancing the supervision of financial institutions deemed​ "systemically important," and breaking up institutions that are so big or interconnected as to pose a threat to the economy. D. depending more on the Basel multilateral process to overcome domestic political pressures against adequate oversight and control of the financial sector.

C. enhancing the supervision of financial institutions deemed​ "systemically important," and breaking up institutions that are so big or interconnected as to pose a threat to the economy.

Growing securitization might make it harder for bank supervisors to keep track of risks to the financial system because A. higher securitization implies that the proportion of the financial market that bank regulators oversee increases as does the difficulties of these regulators to keep track of risks to the financial system. B. higher securitization in general makes reporting requirements of financial institutions subject to less difficult and hence less effective. C. higher securitization increases the role played by nonbank financial institutions of which bank regulators have less monitoring. D. higher securitization enables nonbank financial institutions to play a bigger role in the financial system and bank regulators have a wider range of their monitoring activities.

C. higher securitization increases the role played by nonbank financial institutions of which bank regulators have less monitoring.

The table to the right shows that between 1993 and​ 2003, Canada erased a net foreign debt equal to more than 40 percent of its GDP. The data reveals that A. Canada ran very big current account surpluses over the decade to accomplish the feat. B. Canada ran reasonably large current account surpluses over the decade and at the same​ time, the depreciation of the Canadian dollar helped the valuation of the assets and liabilities. C. the depreciation of the Canadian dollar against the U.S. dollar was the primary reason behind the valuation effect. D. the appreciation of the Canadian dollar against the U.S. dollar means that foreign assets held by Canada were rising in value in local terms while foreign liabilities were primarily in Canadian dollars.

C. the depreciation of the Canadian dollar against the U.S. dollar was the primary reason behind the valuation effect.

The table to the right shows that between 1993 and​ 2003, Canada erased a net foreign debt equal to more than 40 percent of its GDP. The data reveals that A. Canada ran very big current account surpluses over the decade to accomplish the feat. B. the appreciation of the Canadian dollar against the U.S. dollar means that foreign assets held by Canada were rising in value in local terms while foreign liabilities were primarily in Canadian dollars. C. the depreciation of the Canadian dollar against the U.S. dollar was the primary reason behind the valuation effect. D. Canada ran reasonably large current account surpluses over the decade and at the same​ time, the depreciation of the Canadian dollar helped the valuation of the assets and liabilities.

C. the depreciation of the Canadian dollar against the U.S. dollar was the primary reason behind the valuation effect.

Which of the following is a good description of portfolio​ diversification? A. ​"A bird in the hand is better than two in the​ bush." B. ​"Don't count your chickens before they​ hatch." C. ​"Don't put all your eggs in one​ basket." D. All describe aspects of diversification.

C. ​"Don't put all your eggs in one​ basket."

As noted in the​ textbook, London Eurodollar interest rates exceeded U.S. certificate of deposit rates after the global financial​ crisis, but not before. Why do you think this is the​ case? A. Banking institutions in the U.S. faced somewhat less difficulty obtaining funding than non U.S. institutions. B. The Fed was perceived as a reliable lender of last resort. C. Dollar deposits of London banks were seen by investors as suddenly more risky. D. All of the above. E. A and C only.

D. All of the above.

As noted in the​ textbook, London Eurodollar interest rates exceeded U.S. certificate of deposit rates after the global financial​ crisis, but not before. Why do you think this is the​ case? A. Dollar deposits of London banks were seen by investors as suddenly more risky. B. The Fed was perceived as a reliable lender of last resort. C. Banking institutions in the U.S. faced somewhat less difficulty obtaining funding than non U.S. institutions. D. All of the above. E. A and C only.

D. All of the above.

Which of the following is NOT a motive for international asset​ trade? A. Intertemporal trade B. International portfolio diversification C. Tax avoidance D. Capital controls

D. Capital controls

Which of the following help stop international bank​ runs? A. Well coordinated action by the world central banks organized by the World Bank. B. Clear rules regarding the behavior of foreign branch banks and which central bank is responsible for their behavior. C. International deposit insurance. D. None of the above.

D. None of the above.

When a U.S. bank accepts a deposit from one of its foreign​ branches, that deposit is subject to Fed reserve requirements.​ Similarly, reserve requirements are imposed on any loan from a U.S.​ bank's foreign branch to a U.S.​ resident, or on any asset purchase by the branch bank from its U.S. parent. The rationale for these regulations is that A. U.S. banks without foreign branches have more options than those without foreign branches. B. foreign banks and their branches in U.S. do not have an unfair advantage. C. foreign banks and U.S. banks have a​ "level playing​ field." D. all U.S. banks are subject to the same reserve requirement that is important for bank solvency.

D. all U.S. banks are subject to the same reserve requirement that is important for bank solvency.

Return to the example in the text of the two countries that produce random amounts of kiwi fruit and can trade claims on that fruit. Suppose the two countries also produce raspberries that spoil if shipped between countries and therefore are nontradable. This would ▼ increase decrease not affect the ratio of international asset trade to GNP for both Home and Foreign because of the presence of the nontradable consumption. Local​ raspberry-oriented asset price would be ▼ positively correlated negatively correlated uncorrelated with the price of the berries. Consumers would still want international diversification.

decrease positively corelated

Interpreting​ ratios, one must be cautious about drawing the conclusion that diversification is rising as rapidly as the numbers that are reported rise. Suppose a Brazilian buys a United States international equity​ fund, which places its​ clients' money in​ Brazil's stock market. This would make the U.S. gross foreign assets and liabilities ▼ fall remain the same rise and make the Brazilian assets and liabilities ▼ remain the same rise fall . In this​ case, the international diversification would ▼ rise fall remain the same .

rise rise remain the same

Interpreting​ ratios, one must be cautious about drawing the conclusion that diversification is rising as rapidly as the numbers that are reported rise. Suppose a Brazilian buys a United States international equity​ fund, which places its​ clients' money in​ Brazil's stock market. This would make the U.S. gross foreign assets and liabilities ▼ fall remain the same rise and make the Brazilian assets and liabilities ▼ rise fall remain the same . In this​ case, the international diversification would ▼ rise fall remain the same .

rise rise remain the same