MAN 6606 Ch 9 & 10

PPP theory, according to research, seems to predict exchange rate movements best for countries in which two situations? (Check all that apply.)

- Countries with high inflation rates - Countries with underdeveloped capital markets

Free trade agreements account for nearly ____ of regional economic agreements.

90 percent

The Maastricht Treaty committed EU members to

adopt a common currency by January 1, 1999.

In an efficient market, prices are said to

fully reflect all available information.

There has been a(n) _____ in regional economic integration in the past two decades.

increase

When a country's money supply grows faster than the output of goods and services, this causes

inflation.

Which three nations are a part of ASEAN?

- Indonesia - Singapore - Philippines

Which industry is most affected by stipulations of USMCA?

Automobile

Which institution has a monopoly in proposing European Union legislation?

European Commission

What committed EU members to adopt a common currency by January 1, 1999?

Maastricht Treaty

Which agreement was an attempt at regional economic integration in the United States?

North American Free Trade Agreement

Which group is the overall controlling authority within the European Union (EU) that must approve draft legislation from the European Commission before it becomes EU law?

The European Council

Proponents of NAFTA believed that it would result in

U.S. and Canadian consumers benefiting from lower prices.

What three countries made up NAFTA?

U.S., Canada, and Mexico

The European Stability Mechanism was established by the EU to create _____.

a permanent bailout fund

Residents of the hypothetical nation of Jarna feared that the country's economy was failing. They rushed to convert their domestic currency into U.S. dollars and investors in businesses in Jarna also converted their financial holdings. This mass conversion of currency is known as _____.

capital flight

To protect resources efficiently and ensure that each subunit adopts the correct mix of tactics and strategies, firms should aim for___________ control of exposure

centralized

Jameson Electric Corp. would use the foreign exchange market when it needs to

convert currency.

An argument against regional free trade agreements contends that the benefits have been oversold, but ______ have often been ignored.

costs

There are presently 19 trade blocs in Africa, and many of these blocs have been _____ for years.

dormant

Company A is based in Europe and does a large amount of business in the United States. The company fears that the euro will gain in strength against the dollar, so it sets up a local production facility in the United States. This is a way to reduce ______ exposure.

economic

The adverse consequences of unpredictable changes in exchange rates are called foreign exchange

risk

A(n) ______ exchange rate is the price to exchange one currency for another for immediate delivery.

spot

PPP theory predicts that changes in relative prices will result in

a change in exchange rates.

Forward exchange rates are exchange rates that govern _____ transactions.

future

The effect of currency exchange rate changes on the reported financial statements of companies is referred to as ______ exposure.

translation

The collapse of the Central American Common Market was a result of ______.

war between Honduras and El Salvador

If a basket of goods costs $400 in the United States and 40,000 yen in Japan, PPP theory predicts that the dollar/yen exchange rate should be

$.01 per Japanese yen.

If the exchange rate is 1 British pound to $1.35, an American in London will need ______ to purchase a purse priced at 20 pounds.

$27

An American tourist in Japan is interested in buying a souvenir that costs 1800 yen. How much is this in dollars if the exchange rate is $1 to Y400.

$4.50

Which two reasons are given as to why Europeans decided to establish a single currency?

- A single currency makes it easier to compare prices across Europe. - Businesses would achieve significant savings from having to handle just one currency.

Mercosur is a free trade pact started in 1988 by which two South American economies? (Check all that apply.)

- Argentina - Brazil

Under the Andean Pact, which two members received special concessions based on the size of these countries?

- Bolivia - Ecuador

What are two impediments to establishing economic integration?

- Concerns over national sovereignty - Costs of integration

What are two requirements countries must take to qualify for EU membership?

- Establish stable democratic government - Respect human rights

What two political factors led to the development of the European Union?

- Europe's desire to hold its own on the world's political and economic stage. - The devastation of western Europe during the two world wars.

What are the four main institutions responsible for determining economic policy in the EU?

- European Commission - Court of Justice - European Parliament - Council of the European Union

Which two groups represent major trading blocks in Europe?

- European Union - European Free Trade Association

Which three long-term members of the EU were NOT receptive to the euro as a common currency as set forth by the Maastricht Treaty?

- Great Britain - Denmark - Sweden

What are three advantages of regional market integration that can result in cost savings to a business?

- Harmonized product standards - Free movement of goods across borders - Simplified tax regimes

What are the two schools of thought regarding the prediction of future exchange rates?

- Inefficient market school - Efficient market school

Which two political factors support the idea for economic integration of nations through trade?

- It can enhance the political weight of those countries in the world. - Interdependency among nations decreases the potential for violent conflict.

What are two characteristics of the European Central Bank?

- It is meant to be free from political pressure. - It was established to ensure price stability.

In the campaign to leave the EU, certain groups voted to stay and others voted to leave. What were two characteristics of those who wanted to leave?

- Less educated - Older

Which two Mexico-based industries were granted special protection from foreign direct investment under NAFTA?

- Railway - Energy

What are three moderately decent predictors of long-term changes in exchange rates?

- Relative inflation rates - Relative monetary growth - Nominal interest rate differentials

What are the two main functions of the foreign exchange market?

- currency conversion - provide insurance against foreign exchange risk

Two strategies that can be used to reduce translation and transaction exposure are:

- lag strategy - lead strategy

What are three forms of economic integration?

- political union - economic union - common market - customs union - free trade area

Before the United Kingdom decided to exit the EU, how many total countries were involved by 2014?

28

The United States-Mexico-Canada Agreement renegotiated NAFTA and requires automakers to produce _____ of a vehicle's content in North America to qualify for zero tariffs.

75 percent

In 1969, which countries created the Andean Pact that was modeled on the EU, but was not as successful in achieving regional groups objectives?

Bolivia, Chile, Colombia, Ecuador, Peru

Which type of control of exposure is MOST effective at protecting resources efficiently and ensuring that each subunit adopts the correct mix of tactics and strategies?

Centralized

The European Parliament must approve all members of the European ______ before this body can begin its work.

Commission

What is the key way a company can reduce economic exposure?

Distribute production facilities and assets to various locations

The ______ sets interest rates and monetary policy for the EU.

ECB

As the most enduring free trade area in the world, ______ concentrates on the free trade of industrial goods, but not agricultural products.

EFTA

Which of these trade unions is made up of European countries that decided NOT to be part of the European Community and emphasized free trade in industrial goods?

European Free Trade Association

Because of its economic and political influence, the _____ is considered the most significant trading block in Europe.

European Union

One of the reasons the European Union was originally formed was because

Europeans desired a lasting peace after enduring two devastating world wars.

True or False: Critics say that the EU is an optimal currency area which is why it is difficult to adopt a single currency.

False

True or False: The introduction of the euro created greater competitive pressure in the European automobile industry which has resulted in higher prices for the consumer.

False

True or False: The political structure responsible for economic policies in the EU consists of a single office known as the Court of Justice.

False

True or False: While the NAFTA agreement provided many protections, it failed to include protections for intellectual property.

False

True or false: Government intervention in the foreign exchange markets does NOT affect the ability of PPP in predicting exchange rate movements.

False

What is the transaction called where two parties agree to exchange currency at some specific date in the future?

Forward exchange

What is the least integrated form of economic integration?

Free trade area

Which approach to forecasting draws on economic theory to develop models that predict exchange rate movements?

Fundamental

In 2010, the IMF agreed to bailout _____ because of fears the country might default on its sovereign debt.

Greece

Which school of thought on exchange rate forecasting does NOT believe that forward exchange rates are the best predictors of future spot exchange rates?

Inefficient

What causes inflation to occur in a country?

Inflation occurs when the money supply in a country out paces the level of production of goods and services.

The most important foreign exchange trading center is ______ with 43 percent of the activity.

London

The five most important foreign exchange trading centers in terms of level of activity are

London, New York, Zurich, Tokyo, and Hong Kong.

The trade pact developed in 1988, initially between Argentina and Brazil, is called ______.

Mercosur

Proponents of NAFTA argued many would benefit from the movement of low-skilled, labor-intensive production to ______, which might have a competitive advantage in this area.

Mexico

______ is considered the most successful attempt at regional economic integration.

The EU

________ exposure is the risk, faced by companies involved in international trade, that currency exchange rates will change after the companies have already entered into financial obligations. Such exposure to fluctuating exchange rates can lead to major losses for firms.

Transaction

_____ exposure refers to the present measurement of past events using currency exchange rate changes on a company's financial statements.

Translation

True or false: Empirical evidence suggests that the International Fisher effect does NOT explain short-term exchange rate movements well.

True

True or false: One political reason for economic integration is the potential to minimize violent conflict between nations.

True

True or false: Spot against forward is a common type of currency swap.

True

Which statement best describes the response by EU members to the introduction of the euro as a common currency?

While many members accepted the euro, several long-term members did not.

According to PPP theory, a country with a high inflation rate will see ______ in its currency exchange rate.

a depreciation

When an optimal currency area exists, similar underlying structures of economic activity make it more feasible to adopt _____.

a single currency

If the demand for the yen outstrips its availability and if the supply of the dollar outweighs the demand, the yen will ___________ against the dollar.

appreciate

Economic exposure is concerned with the affect of ______ on a firm's international earning power.

changes in exchange rates

The euro was established because a _____ currency would make it easier for Europeans to compare prices.

common

A foreign exchange market is where one country's ______ is converted into that of another country.

currency

An investment made to profit from future currency movements is called

currency speculation.

Feldman Technology Group has international holdings in India. The company often needs to fund large orders for parts in India with the knowledge that an Indian importer will soon buy completed product from Feldman. These transactions require large sums of capital in both dollars and rupee and as a way to move from one currency to another without incurring foreign exchange risk, the company should use a(n) _____.

currency swap

The value of a currency is determined by the ______ of that currency relative to other currencies.

demand and supply

Theoretically, a country in which price inflation is running wild should expect to see its currency Blank______ against that of countries in which inflation rates are lower

depreciate

Regional _____ integration creates agreements among countries in a specific geographic area in order to reduce and eventually remove tariff and nontariff barriers to the free flow of goods.

economic

The extent to which a firm's future international earning power will be affected by exchange rate changes is called ______ exposure.

economic

An economist who believes that the foreign exchange market is effective at setting forward rates is a part of the _____ market school.

efficient

The goal of NAFTA was to

eliminate tariffs on trade between the nations.

A tactic that reduces translation and economic exposure is

entering into forward exchange rate contracts.

The extent to which income from individual transactions is affected by fluctuations in foreign exchange values is known as transaction ______.

exposure

A(n) ______ convertible currency allows only nonresidents to convert it into a foreign currency without any limitations.

externally

When only nonresidents can convert a currency into a foreign currency with no limitations, the currency is considered

externally convertible.

Economic theories advocate for _______________ trade and investment that will allow participating countries to gain economically.

free

The Association of Southeast Asian Nations was formed with the intent to foster _____.

free trade

A lack of barriers to the trade of goods and services among member countries is found in a(n)

free trade area

Some countries' governments do not put any limits on the purchase of foreign currency for residents and nonresidents. These country's have a _____ currency.

freely convertible

When a country allows both residents and nonresidents to purchase unlimited amounts of a foreign currency, the country's currency is

freely convertible.

The method of forecasting that draws on economic theory to construct sophisticated models is called the ______ approach.

fundamental

During the campaign for leaving the EU, one of the recent claims said that leaving the EU would allow the British to take back control of _____.

immigration

The ______ market school believes that forward exchange rates are NOT the best predictors of future spot exchange rates.

inefficient

A(n) ______ is based on the theory that prices don't reveal all available information and more is needed to predict future spot exchange rates.

inefficient market

The Fisher effect predicts that there is a strong relationship between ______ and interest rates.

inflation rates

One main reason why the IFE is NOT good at explaining short-term exchange rate movements is the impact of ______ in determining the expectations of market traders.

investor psychology

According to research, PPP theory is a relatively good predictor of ______ exchange rate movements, but is not as good a predictor of ______ movements.

long-run; short-run

The creation of a single market creates _____ costs of doing business.

lower

Based on the objectives of the Single European Act, the principle of _____ states that a product standard developed in one EC country should be accepted in another.

mutual recognition

A(n) ______ currency is one that neither residents nor nonresidents are allowed to convert into a foreign currency.

nonconvertible

When neither residents nor nonresidents are allowed to convert a currency to a foreign currency, the currency is considered

nonconvertible

The law of ______ is the economic theory that the price of a given security, asset, or commodity must have the same price when exchange rates are taken into consideration.

one price

African countries have attempted to form a continental trade agreement, but have been stymied by significant ______ turmoil.

political

Based on economic theories, free trade is viewed as a ______ as all participating nations stand to gain.

positive-sum game

When the growth in a country's money supply is faster than the growth in its output of goods, ______ tends to increase.

price inflation

The Single European Act abolished restrictions on cabotage, which is the

right of foreign truckers to pick up and deliver goods within another member state's borders.

The impact of psychological factors and investor expectations makes it difficult for exchange rate theories to predict ______ changes in exchange rates.

short-term

The number of votes a country gets in the European Council is related to the

size of the country.

Currency ______ involves buying, selling, and holding currencies in order to make a profit from favorable fluctuations in exchange rates.

speculation

A key impediment to economic integration is that although a majority of citizens may benefit from free trade, certain groups may lose their jobs to low-cost and low-skilled labor in other countries as was the experience of some U.S. and Canadian workers in the ______ industry following the establishment of NAFTA.

textile

The Economist magazine version of the PPP uses ______ as a proxy for a "basket of goods."

the Big Mac

Costa Rica, El Salvador, Guatemala, and other countries formed a common market in the early 1960s that was called

the Central American Common Market.

According to _____, identical products sold in different countries must sell for the same price in competitive markets when their price is expressed in terms of the same currency.

the law of one price

The Fisher effect equates the nominal interest rate as

the required real interest rate + expected rate of inflation.

At the simplest of levels, exchange rates are determined by _____.

the supply and demand of currencies

Capital flight is most likely to occur when

the value of the domestic currency is depreciating rapidly because of hyperinflation

Some economists argue that regional free trade agreements will provide global benefits only if

trade creation exceeds trade diversion.

When a government intervenes in cross-border trade by implementing a trade barrier, it ______ the link between relative price changes and changes in exchange rates predicted by PPP theory.

weakens