Chapter 4 Global Business
12. Together, the dollar, euro, and yen account for around 60 percent of the world economy.
T
12. According to the balance of transfers, the "+" sign refers to _____ and the "-" sign refers to _____. a. payment of foreign aid loans; a payment going abroad as foreign aid b. when foreign services are used; when foreign services are used c. incoming dollars coming in when merchandise is exported; dollars that leave the country to pay for imports d. merchandise imports; incoming dollars e. earnings from overseas investment; payments are sent overseas
A
16. _____ encompasses purchases of fixed assets abroad used in the manufacture and sales of goods and services. a. Foreign direct investment b. A current balance account c. A risk premium d. A balance of transfers e. Net financial derivatives
A
17. Acquisitions of a foreign company, creation of new manufacturing or research facilities abroad, and expansion of an existing plant in a foreign country are all examples of _____. a. foreign direct investment b. a current balance account c. a risk premium d. a balance of transfers e. net financial derivatives
A
2. Which of the following rose substantially in value against most other currencies as well as served as a reserve asset in many countries during the global economic and financial crises of 2008-2009? a. U.S. dollar b. Australian dollar c. Indian Rupee d. Peso e. Yen
A
18. Of the following, which is NOT an example of a foreign direct investment? a. Acquisition of a foreign company b. Creation of new manufacturing facilities abroad c. Creation of new research facilities abroad d. Expansion of an existing plant in a foreign country e. Financial capital flows between countries
E
26. The _____ market trades currencies on a real time basis for immediate delivery. a. exchange b. futures c. independent d. balance e. spot
E
27. A British firm may need dollars to pay for U.S. imports. It can work with banks in London to exchange pounds for dollars to make this payment via electronic transfer. This is an example of a(n) _____ market. a. exchange b. futures c. independent d. balance e. spot
E
29. Insurance that reduces future risk is called a(n) _____. a. exchange rate b. bid-ask spread c. forward rate d. premium e. hedge
E
3. Of the following, which is NOT listed in the text as a reason why currency values can change? a. Different price levels in different countries for the same goods and services b. Price imbalances due to mispricing c. Varying interest rates across countries d. Price imbalances due to differential inflation e. WTO mandates
E
1. One factor affecting change in currency values is different price levels in different countries for the same goods and services.
T
10. The International Monetary Fund (IMF) was established under the Bretton Woods Agreement to help ensure the stability of the international monetary and financial system.
T
13. According to the law of one price, identical goods should sell for the same price in different countries according to the local currencies.
T
15. One forecasting approach is to use a multiple regression model to estimate the relationship between changes in spot rates and fundamental factors.
T
4. The statistical discrepancy line reconciles any remaining imbalance to ensure that all debit and credit entries in the BOP statement sum to zero. This line captures statistical inconsistencies in the recording of the credit and debit entries as well as illegal trade.
T
7. The difference between forward and spot exchange rates reflects expectations by investors about future exchange rate movements.
T
8. If the dollar was expected to appreciate in the 60-day forward market against the Japanese yen, it would be selling at a premium.
T
30. Of the following, which is NOT true about the Bretton Woods System? a. It was established in 1965. b. It established a global currency system based on a gold standard with the U.S. dollar pegged at a fixed rate of exchange to gold in an effort to control inflation. c. The IMF was established under the Bretton Woods Agreement. d. Eventually, major nations met to consider abandoning the Bretton Woods Agreement. e. Under the Smithsonian Agreement, the U.S. devalued the dollar against other countries' currencies.
A
34. In the equation "F=S(1+P)," "F" is defined as what? a. Forward rate b. Spot rate c. Forward premium d. Financial rate e. Future rate
A
6. The net of merchandise exports and merchandise imports is known as the _____. a. trade balance b. services balance c. income balance d. financial account e. net transfers
A
8. According to the services balance, the "+" sign refers to _____ and the "-" sign refers to _____. a. when foreigners use services in a country; when foreign services are used b. when foreign services are used; when foreign services are used c. incoming dollars; merchandise imports d. merchandise imports; incoming dollars e. earnings from overseas investment; payments are sent overseas
A
20. According to the text, _____ countries' exports are growing the fastest. a. North American b. South American c. Asian d. African e. European
C
14. The _____ account consists of domestic-country-owned assets abroad, foreign-owned assets in the domestic country, and net financial derivatives. a. balance b. financial c. risk d. services e. trade
B
19. The _____ reconciles any imbalance between the current account and financial account to ensure that all debit and credit entries in the balance of payments statement sum to zero. a. foreign direct investment b. statistical discrepancy c. security investment d. risk premium e. balance of transfers
B
22. _____ is the largest foreign exchange market. a. Singapore b. London c. Paris d. Tokyo e. San Francisco
B
24. The system in which the country pegs its currency at a fixed rate to a major currency or basket of currencies, while the exchange rate fluctuates within a narrow margin around a central rate is called a(n) _____. a. spot market b. fixed exchange rate system c. independent floating exchange rate system d. managed floating exchange rate system e. foreign exchange market
B
25. The forex market consists of spot, forward, and _____ markets. a. exchange b. futures c. independent d. balance e. foreign
B
28. The difference between bid and ask prices of a currency, or the fee earned by the bank is called the _____. a. exchange rate b. bid-ask spread c. forward rate d. premium e. hedge
B
4. Balance of payments is generally split into two major components with major business implications: 1) the current account, and 2) the _____ account. a. balance b. financial c. services d. income e. trade
B
7. Which of the following represents the top trading partner of the United States? a. Mexico b. Canada c. Germany d. Japan e. France
B
1. Which of the following statements is NOT true about the global economic and financial crises of 2008-2009? a. They were collectively dubbed the "Great Recession." b. They were the worst since the Great Depression of the 1930s. c. They were marked by wealth losses for the middle class only. d. They were marked by failures of banking. e. They were marked by rising unemployment.
C
10. According to the trade balance, the "+" sign refers to _____ and the "-" sign refers to _____. a. when foreigners use services in a country; when foreign services are used b. when foreign services are used; when foreign services are used c. incoming dollars coming in when merchandise is exported; dollars that leave the country to pay for imports d. merchandise imports; incoming dollars e. earnings from overseas investment; payments are sent overseas
C
13. Which of the following is NOT true about the current account balance? a. It is the sum of the trade, services, income, and net transfers balance. b. China, France, Japan, and Singapore have consistently had current account surpluses over recent years. c. If foreign capital will not be available to finance the U.S. current account deficit, it can be predicted that the dollar will become stronger. d. The United States has had large account deficits in recent years. e. Countries with current account surpluses generally finance countries with current account deficits.
C
11. The net of transfer payments going overseas and inflows from abroad is called the _____. a. services balance b. income balance c. trade balance d. balance of transfers e. financial account
D
21. The three largest foreign exchange markets are in London, New York, and _____. a. Singapore b. Sydney c. Paris d. Tokyo e. San Francisco
D
23. The values of some currencies (e.g. Indian rupee, Singapore dollar, and Thai baht) are determined by the _____. a. WTO exchange rate b. fixed exchange rate system c. independent floating exchange rate system d. managed floating exchange rate system e. U.S. government
D
32. Together, the dollar, euro, and yen account for around _____ percent of the world economy. a. 20 b. 30 c. 40 d. 60 e. 80
D
5. Which of the following is NOT a subaccount of the current account? a. Trade balance b. Services balance c. Income balance d. Financial account e. Net transfers
D
15. The financial account of the BOP consists of three subaccounts: 1) U.S.-owned assets abroad, 2) foreign-owned assets in the U.S., and 3) _____. a. a foreign direct investment b. a financial account c. a risk premium d. a balance of transfers e. net financial derivatives
E
31. Of the following, which is NOT a key principle of the Jamaica Agreement? a. Members could adopt their own exchange systems. b. A system of global fixed exchange rates would only be implemented if approved by a vote of 85 percent of membership. c. Gold would no longer be a common denominator of the monetary system. d. The SDR created by the IMF was recommended as the primary reserve asset of the international monetary system. e. All countries would adopt the European Exchange Rate Mechanism.
E
33. Which of the following regarding potential problems with an IRP is NOT true? a. Evidence on IRP theories is mixed. b. Herd behavior can cause large purchases or sales of a particular currency that drive values beyond their normal bounds, resulting in problems such as currency crises. c. When interest rates change in the U.S., foreign interest rates should also change under the IRP. However, this may not happen. d. International investors may globally diversify their investments and behave passively toward arbitrage activities. e. There are no problems with IRP.
E
9. According to the income balance, the "+" sign refers to _____ and the "-" sign refers to _____. a. when foreigners use services in a country; when foreign services are used b. when foreign services are used; when foreign services are used c. incoming dollars; merchandise imports d. merchandise imports; incoming dollars e. earnings from overseas investment; payments are sent overseas
E
11. The EMU introduced the euro as a new currency to replace the currencies of the member countries in the Eurozone, which has since grown to 29 members.
F
14. According to the Big Mac Index, the dollar interest rate on U.S. and European bonds should be the same. Otherwise, there would be no arbitrage opportunities for investors.
F
2. In flow of funds analysis, money moving into a country is a debit (negative sign), while money leaving the same country is a credit (plus sign).
F
3. Whether the trade balance is positive (surplus) or negative (deficit) is important because it provides a measure of the financing needs of a particular country. Hence, the trade balance is more important than current account balance.
F
5. In a free-market-oriented foreign exchange market, major currency values are determined by the demand for and supply of currencies; this is called the fixed floating exchange rate system.
F
6. The forex market consists of spot, forward, and discount markets.
F
9. An example of inflation is, if the amount of money in a country doubled, but the production of goods and services stayed the same, the price of all goods and services would decline by about half, assuming that other factors, such as external trade, were constant.
F
