International Finance quiz 1
The entries in the "current account" and the "capital account", combined, can be outlined (in alphabetic order) as: (i) direct investment (ii) factor income (iii) merchandise (iv) official transfer (v) other capital (vi) portfolio investment (vii) private transfer (viii) services Current account includes
(ii), (iii), and (vii)
Country A can produce 10 yards of textiles or 6 pounds of food per unit of input. Compute the opportunity cost of producing one additional unit of food instead of textiles.
1.67 yards of textiles per pound of food Correct
When company ownership is diffuse
a "free rider" problem discourages shareholder activism and few shareholders have a strong enough incentive to incur the costs of monitoring management.
Since the balance of payments is presented as a system of double-entry bookkeeping,
every credit in the account is balanced by a matching debit and every debit in the account is balanced by a matching credit. Correct
Suppose you start with $100 and buy stock for £50 when the exchange rate is £1 = $2. One year later, the stock rises to £60. You are happy with your 20 percent return on the stock, but when you sell the stock and exchange your £60 for dollars, you only get $45 since the pound has fallen to £1 = $0.75. This loss of value is an example of
exchange rate risk.
A country experiencing a significant balance-of-payments surplus would be likely to
expand imports, offering marketing opportunities for foreign enterprises, and refrain from imposing foreign exchange restrictions.
Underlying the theory of comparative advantage are assumptions regarding
free trade between nations and that the factors of production (land, labor, capital, and entrepreneurial ability) are relatively immobile. Correct
The central issue of corporate governance is
how to protect outside investors from the controlling insiders. Correct
A currency depreciation will begin to improve the trade balance immediately
if the demand for imports and exports are elastic.
A country that gives foreign aid to another country can be viewed as
importing goodwill from the latter. Correct
A depreciation will begin to improve the trade balance immediately if
imports and exports are responsive to the exchange rate changes. Correct
If a country is grappling with a major balance-of-payment difficulty, it may not be able to expand imports from the outside world. Instead, the country may be tempted to
impose measures to restrict imports and discourage capital outflows. Correct
The separation of the company's ownership and control,
is especially prevalent in such countries as the United States and the United Kingdom, where corporate ownership is highly diffused. Correct
The factors of production are
land, labor, capital, and entrepreneurial ability. Correct
Invisible trade refers to
legal, consulting, and engineering services. Correct
In David Ricardo's theory of comparative advantage,
liberalization of international trade will enhance the welfare of the world's citizens. Correct
The current account is divided into four finer categories:
merchandise trade, services, factor income, and unilateral transfers. Correct
In a public company with diffused ownership, the board of directors is entrusted with
monitoring the management and safeguarding the interests of shareholders. Correct
Production of goods and services has become globalized to a large extent as a result of
multinational corporations' efforts to source inputs and locate production anywhere where costs are lower and profits higher.
A true MNC, with operations in dozens of different countries
must effectively manage foreign exchange risk.
The balance of payments records
not only international trade, (exports and imports) but also cross-border investments.
If Japan exports more than it imports, then
one can infer that the yen would be likely to appreciate against other currencies. Correct
In the long run, both exports and imports tend to be
responsive to changes in exchange rates. Correct
Credit entries in the U.S. balance of payments
result from foreign sales of U.S. goods and services, goodwill, financial claims, and real assets, and give rise to the demand for dollars. Correct
The investors supply funds to the company but are not involved in the company's daily decision making. As a result, many public companies come to have
strong managers and weak shareholders.
The J-curve effect received wide attention when
the British trade balance worsened after a devaluation of the pound in 1967. Correct
In many countries with concentrated ownership
the conflicts of interest are greater between large controlling shareholders and small outside shareholders than between managers and shareholders. Correct
The public corporation has a key weakness which is
the conflicts of interest between managers and shareholders.
When a country's currency depreciates against the currencies of major trading partners,
the country's exports tend to rise and imports fall. Correct
Corporate governance can be defined as
the economic, legal, and institutional framework in which corporate control and cash flow rights are distributed among shareholders, managers and other stakeholders of the company.
The current account includes
the export and import of goods and services. Correct
The "J-curve effect" shows
the initial deterioration and the eventual improvement of a country's trade balance following a currency depreciation. Correct
In the United States, managers are legally bound by the "duty of loyalty" to
the shareholders
If the United States imports more than it exports, then
the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus, and one can infer that the U.S. dollar would be under pressure to depreciate against other currencies
If the United States imports more than it exports, then this means that
the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus.
In the short run a currency depreciation can make a trade balance worse if
there is no domestic producer of an import. Correct
When individual investors become aware of overseas investment opportunities and are willing to diversify their portfolios internationally,
they benefit from an expanded opportunity set.
Generally speaking, any transaction that results in a receipt from foreigners
will be recorded as a credit, with a positive sign, in the U.S. balance of payments. Correct
Generally speaking, any transaction that results in a payment to foreigners
will be recorded as a debit, with a negative sign, in the U.S. balance of payments.
Suppose that Great Britain is a major export market for your firm, a U.S.-based MNC. If the British pound depreciates against the U.S. dollar,
your firm may be priced out of the U.K. market, to the extent that your dollar costs stay constant and your pound prices will rise, and to protect U.K. market share, your firm may have to cut the dollar price of your goods to keep the pound price the same. Correct
When the balance-of-payments accounts are recorded correctly, the combined balance of the current account, the capital account, and the reserves account must be
zero. Correct
Country A can produce 10 yards of textiles or 6 pounds of food per unit of input. Country B can produce 8 yards of textiles or 5 pounds of food per unit of input. Which of the following statements is true?
Country A is relatively more efficient than Country B in the production of textiles. Correct
Country A can produce 10 yards of textiles or 6 pounds of food per unit of input. Country B can produce 8 yards of textiles or 5 pounds of food per unit of input.
Country B is relatively more efficient than Country A in the production of food, but Country A has an absolute advantage over Country B in the production of food and textiles.
MNC stands for
Multinational Corporation. Correct
Suppose the InBev Corporation (a non-U.S. MNC) buys the Anheuser-Busch Corporation, paying the U.S. shareholders cash.
Payment by InBev will be recorded as a credit. Correct
Suppose the McDonalds Corporation imports Canadian beef, paying for it by transferring the funds to a New York bank account kept by the Canadian beef producer.
Payment by McDonalds will be recorded as a debit. Correct
The balance of payments identity is given by BCA + BKA + BRA = 0. Rearrange the identity to solve for the statistical discrepancy.
The statistical discrepancy = BCA + BKA + BRA
Assume that the balance-of-payments accounts for a country are recorded correctly. Balance on the current account = BCA = $130 billion Balance on the capital account = BKA = −$86 billion Balance on the reserves account = BRA =? In a pure flexible exchange rate regime, a country's central banks will not need to maintain official reserves. Under this regime
−BCA = BKA. Correct
In what country do the three largest shareholders control, on average, about 60 percent of the shares of a public company?
Italy
The euro is the common currency of Europe. is divisible into 100 cents, just like the U.S. dollar. may eventually have a transaction domain larger than the U.S. dollar. all of the options
All of these options
What major dimension sets apart international finance from domestic finance? Foreign exchange and political risks Market imperfections Expanded opportunity set all of the options Correct
All options are correct
The strongest protection for investors is provided by
English common law countries, such as Canada, the United States, and the U.K. Correct
Free cash flow refers to
a firm's funds in excess of what's needed for undertaking all profitable projects. Correct
Most governments at least try to make it difficult for people to cross their borders illegally. This barrier to the free movement of labor is an example of
a market imperfection. Correct
A country with a current account surplus
acquires IOUs from foreigners, thereby increasing its net foreign wealth. Correct
Balance of payments is defined as the statistical record of a country's international transactions over a certain period of time presented in the form of a double-entry bookkeeping. provides detailed information concerning the demand and supply of a country's currency. can be used to evaluate the performance of a country in international economic competition. all of the options
all of the options
When managerial self-dealings are excessive and left unchecked, they can have serious negative effects on share values. they can impede the proper functions of capital markets. they can impede such measures as GDP growth. all of the options
all of the options
With regard to the capital account, the capital account balance measures the difference between U.S. sales of assets to foreigners and U.S. purchases of foreign assets. U.S. sales (or exports) of assets are recorded as credits, as they result in capital inflow. U.S. purchases (imports) of foreign assets are recorded as debits, as they lead to capital outflow. all of the options
all of the options Correct
The capital account includes
all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses. Correct
The official reserve account includes
all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs). Correct
Nestlé, a well-known Swiss corporation,
at one time placed restrictions on foreign ownership of its stock. When it relaxed these restrictions, there was a major transfer of wealth from foreign shareholders to domestic shareholders. Correct
The Nestlé Corporation, a well-known Swiss MNC, used to issue two different classes of common stock, bearer shares and registered shares, and foreigners were allowed to hold only
bearer shares. Correct
The ultimate guardians of shareholder interest in a corporation are the
boards of directors.
The Japanese automobile company Honda decided to establish production facilities in Ohio, mainly to
circumvent trade barriers.
The theory of comparative advantage
claims that economic well-being is enhanced if each country's citizens produce that which they have a comparative advantage in producing relative to the citizens of other countries, and then trade production. Correct
The key weakness of the public corporation is
conflicts of interest between managers and shareholders. Correct
Factor income
consists largely of interest, dividends, and other income on foreign investments. Correct
In 2012, the United States had a current account deficit. The current account deficit implies that the United States
consumed more output than it produced. Correct
A country's international transactions can be grouped into the following three main types:
current account, capital account, and official reserve account. Correct
