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