International MkT & MGt Chp 8

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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.

Purchasing Power Parity is a way to compare

A. the purchasing power of several currencies.

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.

World interest rates tend to vary across a small range because

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

The lowest corporate tax rates are found in

Switzerland, Ireland, Singapore, and Russia

Withholding tax is

an indirect tax levied on passive income

Foreign reserves are used to

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

The balance of payments account is divided into the following three major subaccounts

current, capital, and reserves

The current account on the BOP has three subaccounts:

merchandise, services and unilateral transfers

A value added tax is actually a sales tax that is

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

The International Fisher effect says that interest rates differentials

predict exchange rate movement

Historically, gold has been used as a way for people to store values because

purity and scarcity

With increasing inflation, borrowing becomes

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

The US current account deficit can be explained by

B and C B. foreigners wanting to invest in the US C. US citizens importing more than they are exporting

The three major taxes governments uses to generate revenue are

VAT, income tax and withholding tax

The balance of payments account is a record of

a country's transactions with the rest of the world

A purchase of foreign goods within the US will be recorded in the BOP as

a debit in the current account

In an inflationary economy the following conditions may be present

all of the above a. demand exceeds supply b. moeny supply is increasing c, prcies are rising

The foward currency market

allow purchases to lock in purchases or currencies at known rates

In order to strengthen the US dollar, the Federal Reserve might sell yen and buy dollars, in which case yen functions as

an intervention currency

When a government requires a permit to purchase foreign currency, the exchange rates

are set by the government, often above the free market price

Most significantly for the international manager, the balance of payments reveals

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

Currency exchange controls are found most frequently in

developing countries

Sir Isaac Newtown put England on the gold standard when he

established a fixed equivalency between gold and the British currency

The present floating exchange rate system was

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.

Arbitrage functions to

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

One attribute of the US tariff schedule is

how specific it is

Exchange rate forecasting is

important because exchange rates influence all aspects of business.

The law of one price is that

in an efficient market, like goods will have like prices

Monetary and fiscal policies have

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

Market forces that set the relative prices of currencies are:

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

The Fisher effect states that the real interest rate

is the nominal rate minus the expected inflation rate

What is appealing about the gold standard is:

its simplicity

The Economist's Big Mac index (May 2010) suggests that against the US dollar, the Chinese yuan is

quite undervalued, since the Chinese Big Mac is almost 50% less expensive than the US Big mac

In general, with regard to exchange controls, developed countries

rarely use them

Balance of payments data

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 (CBJ) might well"

sell massive amounts of Japanese yen in the FX markets

The present floating exchange rate system is not a totally free float because

some central banks from time to time intervene in the market to buy or sell large amounts

The balance part of the BOP is explained by

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

The three main approaches to exchange rate forecasting are

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

The international fisher effect says that the interest rate differentials in any two currencies reflect

the expected change in their exchange rates

Bretton Woods led to an exchange rate agreement known as the Bretton Woods System or

the gold exchange standard

In 1717, Sir Isaac Newton took Britain from the silver standard (pounds sterling) to

the gold standard, with fixed rates

The inflation rate determines

the real price of borrowing in capital markets

Countries put limitations on the convertibility of their currencies when they are concerned that:

their foreign reserves could be depleted.

Financial forces such as inflation and taxation are considered uncontrollable because

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

The price of gold since about 1200 AD has been

trending upward

A vehicle currency is a currency

used for international trade or investment.

When the law of one price is applied to interest rates, it suggests that:

varying interest rates take into account anticipated differences in inflation rates


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