International Business Chapter 10

A ________ is a monetary regime that is based on an explicit commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate. A) currency option B) currency board C) currency speculation D) currency arbitrage

currency board

Predictable exchange rates reduce the need for ________. A) currency conversion B) currency swap C) currency depreciation D) currency hedging

currency hedging

Which of the following is the intentional lowering of a currency's value by its government? A) revaluation B) devaluation C) currency hedging D) currency arbitrage

devaluation

Which of the following lowers the price of a country's exports on world markets and increases the price of its imports? A) revaluation B) devaluation C) currency hedging D) currency arbitrage

devaluation

The inefficient market view holds that prices of financial instruments ________. A) are dependent on political efficiency B) are not dependent on political efficiency C) do not reflect all publicly available information D) reflect all publicly available information at any given time

do not reflect all publicly available information

When a country's currency is weak, the price of its ________. A) exports and imports declines B) exports on world markets declines and the price of imports increases C) exports and imports increases D) exports on world markets increases and the price of imports declines

exports on world markets declines and the price of imports increases

*not on notes* A country experiencing inflation higher than that of another country should see the value of its currency ________. A) rise to match the real interest rate B) rise to match the nominal interest rate C) rise D) fall

fall

The lowering of taxes in the U.S. by its government is an example of the ________. A) fiscal policy B) monetary policy C) social policy D) foreign affairs policy When a government lowers taxes it is employing ________. A) fiscal policy B) monetary policy C) domestic policy D) the law of one price

fiscal policy

________ involves using taxes and government spending to influence the money supply indirectly. A) Monetary policy B) Domestic policy C) The law of one price D) Fiscal policy

fiscal policy

*not on notes* Under the gold standard, if the U.S. dollar was fixed at $30/oz of gold and Japan was fixed at ¥75/oz of gold, what would be the Yen/dollar exchange rate? A) ¥2.50/$ B) $2.50/¥ C) ¥0.40/$ D) ¥2250/$ The calculation of each currency's par value under the gold standard was based on the concept of ________. A) earnings per share B) interbank interest rates C) purchasing power parity D) inflation rates

A purchasing power parity

Which of the following were advantages of the gold standard? A) Correcting trade imbalances B) Imposing strict monetary policies C) Reducing exchange-rate risk D) All of the above

ALL

If a kilogram of coal costs €1.5 in Germany and $1 in the United States, the law of one price calculates the expected exchange rate between the euro and the dollar to be ________. A) €0.67/$ B) €1.5/$ C) $1.67/€ D) $0.12/€

B

The ________ called for large-scale reduction of the debt owed by poorer nations, the exchange of old loans for new low-interest loans, and the making of debt instruments that would be tradable on world financial markets. A) Brady Plan B) Louvre Accord C) Bretton Woods Agreement D) Smithsonian Agreement

Brady Plan

The World Bank was created by the ________. A) Jamaica Agreement B) Bretton Woods Agreement C) Smithsonian Agreement D) Plaza Accord

Bretton Woods Agreement

Which of the following created a new international monetary system based on the value of the U.S. dollar? A) Plaza Accord B) Bretton Woods Agreement C) Louvre Accord D) Jamaica Agreement

Bretton Woods Agreement

________ was the first nation to implement the gold standard in the early 1700s. A) The United States B) Britain C) France D) Japan The value of a currency expressed in terms of gold is called its ________. A) book value B) net asset value C) par value D) carrying value

Britain par value

?? An exchange rate provides information regarding each of the following EXCEPT ________. A) the buying power of a currency B) whether a certain product will be more or less expensive in another country (as measured in the home currency) C) how much of one currency must be paid to receive a certain amount of another D) whether a certain product will be more or less expensive in another country (as measured in the foreign currency) An exchange rate tells us ________. A) about the buying power of a currency B) whether a certain product will be more or less expensive in another country (as measured in the home currency) C) how much of one currency we must pay to receive a certain amount of another D) all of the above

C C

*not on notes* An economic condition in which a trade deficit causes a permanent negative shift in a country's balance of payments is called ________. A) revaluation B) statistical discrepancy C) the Fisher effect D) fundamental disequilibrium The ________ is an IMF asset whose value is based on a weighted basket of four currencies, including the U.S. dollar, European Union euro, Japanese yen, and British pound. A) special drawing right B) gold standard C) Eurobond D) currency board

D A

*not on notes* The goals of the International Monetary Fund (IMF) include each of the following EXCEPT ________. A) facilitating expansion and balanced growth of international trade B) promoting international monetary cooperation C) making the resources of the fund available to members D) promoting regional economic union The ________ was a 1985 agreement among the G5 nations to act together in forcing down the value of the U.S. dollar. A) Bretton Woods Agreement B) Smithsonian Agreement C) Plaza Accord D) Louvre Accord The ________ was an agreement among the G7 nations that the dollar was appropriately valued and that they would intervene in currency markets to maintain its current market value. A) Bretton Woods Agreement B) Smithsonian Agreement C) Plaza Accord D) Louvre Accord

D C D

Which of the following was created by the Bretton Woods Agreement to enforce the rules of the international monetary system? A) International Bank for Reconstruction and Development B) International Capital Market C) International Monetary Fund D) World Bank

International Monetary Fund

IMF members formalized the existing system of floating exchange rates as the new international monetary system by drafting the so-called ________. A) Bretton Woods Agreement B) Smithsonian Agreement C) Plaza Accord D) Jamaica Agreement

Jamaica Agreement

Which of the following is a reason for the failure of PPP to predict exchange rates accurately? A) PPP takes transportation costs into consideration while predicting exchange rates. B) PPP assumes no barriers to international trade while predicting exchange rates. C) PPP considers the role of people's confidence and beliefs about a nation's economy in exchange rate predictions. D) PPP does not take into account the effect of the market forces of demand and supply Which of these are possible reasons for the failure of purchasing power parity to accurately predict exchange rates? A) Added costs B) Business confidence and psychology C) Trade barriers D) All of the above

PPP assumes no barriers to international trade while predicting exchange rates. D.

Which of the following talks about the relative ability of two countries' currencies to buy the same "basket" of goods in those two countries? A) the Fisher effect B) the law of one price C) purchasing power parity D) cross rates

Purchasing power parity

Managers prefer that exchange rates be ________. A) stable B) freely floating C) volatile D) unpredictable

stable

Which of the following features did Bretton Woods Agreement incorporate in the international monetary system based on the U.S. dollar? A) floating exchange rates B) trade imbalance corrections C) an enforcement mechanism D) a strict ban on devaluation

an enforcement mechanism

A(n) ________ opportunity helps in buying a product in one country and selling it in another country where it has a higher value. A) barter B) buyback C) countertrade D) arbitrage

arbitrage

When the law of one price is violated, a(n) ________ opportunity arises. A) hedging B) speculation C) arbitrage D) power play

arbitrage

If money were free from all controls when transferred internationally, the real rate of interest would ________. A) be the same in all countries B) be the same as the inflation rate C) create arbitrage opportunities across countries D) create arbitrage opportunities in developed countries

be the same in all countries

The gold standard is a ________ because it secured nations' currencies to the value of gold. A) floating exchange-rate system B) fixed exchange-rate system C) linked exchange rate system D) free float system

fixed exchange rate system

An exchange rate system in which the exchange rate for converting one currency into another is set by international governmental agreement is called a ________ system. A) floating exchange-rate B) fixed exchange-rate C) cross rate D) spot rate

fixed exchange- rate

The Bretton Woods Agreement incorporated all of these features EXCEPT ________. A) funds for economic development B) an enforcement mechanism C) floating exchange rates D) built-in flexibility

floating exchange rates

According to the efficient market view, future exchange rates are most accurately forecasted by ________. A) forward exchange rates B) cross rate C) interbank interest rates D) buy rate

forward exchange rates

According to the efficient market view, the best predictor of exchange rates is ________. A) forward exchange rates B) fundamental analysis C) technical analysis D) statistical modeling

forward exchange rates

*not according to notes* Which of the following statements is NOT true? A) Forward exchange rates reflect all relevant publicly available information at any given time. B) Forward exchange rates are perfect predictors of future exchange rates. C) A market is efficient if prices of financial instruments quickly reflect new public information made available to traders. D) There is always a certain amount of deviation between forward and actual exchange rates.

forward exchange rates are perfect predictors of future exchange rates

Which of the following forecasting techniques employs statistical models based on key economic indicators to forecast exchange rates? A) financial analysis B) fundamental analysis C) probability bounds analysis D) technical analysis

fundamental analysis

In the earliest days of international trade, ________ was the internationally accepted currency for payment of goods and services. A) British pound B) U.S. dollar C) silver D) gold

gold

The international monetary system in which nations linked the value of their paper currencies to specific values of gold is referred to as the ________. A) bartered system B) floating exchange-rate system C) gold standard D) managed float system

gold standard

For the law of one price to apply, products must be all of the following EXCEPT ________. A) entirely produced within each particular country B) identical in quality in all countries C) identical in content in all countries D) identical in quantity in all countries

identical in quantity in all countries

A company selling in a country with a strong currency while sourcing from a country with a weak currency ________. A) practices unethical conduct B) experiences a trade deficit C) ends up bankrupt D) improves its profits

improves its profits

A government might devalue its currency for any of these reasons EXCEPT to ________. A) give its domestic companies an edge over foreign competition B) increase the price of exports and therefore profits C) improve its balance of payments D) boost exports and improve a trade deficit

increase the price of exports and therefore profits

Devaluation of a nation's currency ________. A) gives foreign companies in the country an edge over domestic companies B) leads to a decline in the supply of goods and services C) increases the price of a country's imports D) increases consumers' buying power

increases the price of a country's imports

Each of the following were advantages of the gold standard EXCEPT ________. A) reducing exchange-rate risk B) imposing strict monetary policies C) correcting trade imbalances D) increasing exchange-rate fluctuation

increasing exchange rate fluctuation

By limiting the growth of a nation's money supply, the gold standard was also effective at controlling ________. A) cross rates B) inflation C) currency reserves D) economic development

inflation

*not on notes* A government buys its own securities on the open market when the ________. A) inflation rate in the country is high B) inflation rate in the country is low C) interest rates in the country are high D) interest rates in the country are low To cool off an inflationary economy, a government might ________. A) lower interest rates B) raise interest rates C) lower foreign exchange rates D) raise foreign exchange rates

inflation rate in the country is high raise interest rates

The principle that a difference in nominal interest rates supported by two countries' currencies will cause an equal but opposite change in their spot exchange rates is called the ________. A) Guidotti-Greenspan rule B) international Fisher effect C) purchasing power parity D) efficient market view principle

international fisher effect

*not on notes* The collection of agreements and institutions that govern exchange rates is the ________. A) Bretton Woods Agreement B) Plaza Accord C) International monetary system D) Floating-exchange rate system Which of the following is true of the techniques used for forecasting exchange rates? A) Very few forecasts are completely accurate because of unexpected events that occur throughout the forecast period. B) The human element involved in forecasting exchange rates perfect the techniques. C) Fundamental analysts estimate the timing, magnitude, and direction of future exchange rate changes using charts and models of past data trends. D) Technical analysts often consider a country's balance-of-payments situation while forecasting exchange rates.

international monetary system A

The law of one price ________. A) works well when using the Triple Whopper Index B) is too simplistic a method for estimating exchange rates C) is too simplistic a method for estimating fast food prices D) works well as long as products are sold using the same marketing strategies

is too simplistic a method for estimating exchange rates

Which of the following is NOT true about inflation? A) It is the result of the supply and demand for a currency. B) It erodes people's purchasing power. C) It raises the prices of goods and services. D) It is controlled by lowering interest rates.

it is controlled by lowering interest rates

Using gold as a medium of exchange in international trade was advantageous for all of the following reasons EXCEPT ________. A) its limited supply made it a commodity in high demand B) it was a good medium of exchange for both small and large purchases C) its weight made transporting it inexpensive D) it could be traded and stored for hundreds of years

its weight made transporting it inexpensive

Purchasing power parity is better at predicting ________ exchange rates. A) European B) short-term C) spot D) long-term

long- term

Devaluation of a currency results in all of the following EXCEPT ________. A) lowers profit margins for domestic companies B) lowers the price of a country's exports C) increases the price of a country's imports D) reduces consumers' buying power

lowers profit margins for domestic companies

Today's international monetary system is considered to be a ________ system. A) fixed exchange B) free float C) managed float D) linked exchange rate

managed float

A system in which currencies float against one another, with governments intervening to stabilize their currencies at particular target exchange rates is called a ________. A) managed float system B) linked exchange rate system C) free float system D) fixed exchange-rate system

managed float system

Which of these include activities that directly affect a nation's interest rates or money supply? A) Monetary policy B) Government spending C) Purchasing power parity D) Fiscal policy

monetary plicy

The French government buying its own securities on the open market is part of the ________ of France. A) fiscal policy B) monetary policy C) industrial policy D) investment policy

monetary policy

When a government buys its own securities on the open market, ________. A) tax rates decline B) the money supply increases C) the nation's productivity increases D) it encourages FDI outflow

money supply increases

Which of the following represents the Fisher effect? A) Cross Rate = Real Interest Rate + Nominal Interest Rate B) Real Interest Rate = Nominal Interest Rate + Spot Rate C) Nominal Interest Rate = Real Interest Rate + Inflation Rate D) Real Interest Rate = Nominal Interest Rate + Unemployment Rate

nominal interest rate= real interest rate + inflation rate

The international monetary system created by the Bretton Woods Agreement collapsed because ________. A) of its heavy dependence on the stability of the dollar B) it was not accepted by a majority of the world's nations C) it did not have the funds necessary for its functioning D) it favored only the developed countries and was of no help to struggling nations

of its heavy dependence on the stability of the dollar

The efficient market view holds that ________. A) companies can search for new pieces of information to improve forecasting B) forward exchange rates provide the least accurate forecasts of future exchange rates C) companies must spend time and money collecting and examining information believed to affect future exchange rates D) prices of financial instruments reflect all publicly available information at any given time

prices of financial instruments reflect all publicly available information at any given time

Which of the following was an advantage of the gold standard? A) It retained trade imbalances. B) It abolished monetary policies on all countries. C) It reduced the risk in exchange rates. D) It increased exchange-rate fluctuations.

reduced the risk in exchange rates

Translating subsidiary earnings from a weak host country currency into a strong home currency ________. A) reduces the amount of these earnings when stated in the home currency B) increases stated earnings in the home country C) reduces stated earnings in the host country D) increases the amount of these earnings when stated in the home currency

reduces the amount of those earnings when stated in the home currency

A nation's government intentionally raising its currency's value is called ________. A) revaluation B) fundamental disequilibrium C) devaluation D) convertible restriction

revaluation

________ is an activity under the monetary policy of a nation. A) Increasing taxes B) Lowering taxes C) Increasing government spending D) Selling government securities

selling government securities

is an example of monetary policy. A) Increasing taxes B) Lowering taxes C) Increasing government spending D) Selling government securities

selling government securities

Inflation ________. A) occurs when money is injected into an economy that is experiencing greater output B) is the result of supply and demand for a currency C) increases people's purchasing power D) can be controlled through currency movements

supply and demand for a currency

Which of the following forecasting techniques employs charts of past trends in currency prices and other factors to forecast exchange rates? A) financial analysis B) fundamental analysis C) value chain analysis D) technical analysis

technical analysis

The principle that nominal interest rate is the sum of the real interest rate and the expected rate of inflation over a specific period of time is called ________. A) the law of one price B) purchasing power parity C) the comparative advantage theory D) the Fisher effect

the fisher effect

Which of the following stipulates that an identical product must have an identical price in all countries when the price is expressed in a common currency? A) purchasing power parity B) the law of one price C) the comparative advantage theory D) the efficient market view

the law of one price

*not on notes* Which of the following was a disadvantage of using gold as a medium of exchange in international trade? A) The weight of gold made transporting it expensive. B) Gold was not in high demand. C) The gold standard imposed lenient monetary policies on countries that participated in the system. D) The gold standard increased the risk in exchange rates as it maintained highly flexible exchange rates between currencies.

the weight of gold made transporting it expensive