IB EX 3

________ are most likely to discourage global expansion of businesses.

Trade barriers

A pegged exchange rate means the value of the currency is fixed relative to a reference currency, and then the exchange rate between that currency and other currencies is determined by the reference currency exchange

True

A political union creates a central source for coordinating the economic, social, and foreign policy of member states.

True

A strategic alliance is a cooperative agreement between potential or actual competitors.

True

Although a foreign exchange transaction can involve any two currencies, most transactions involve U.S. dollars on one side.

True

Firms that operate internationally are able to realize location economies by dispersing individual value creation activities to locations where they are performed most efficiently and effectively.

True

Strong pressures for cost reductions are a good reason to use a global standardization strategy.

True

The adoption of a common currency, the euro, makes it easier to compare prices across Europe, which has resulted in increased competition.

True

The amount of value a firm creates is measured by the difference between its costs of production and the value that consumers perceive in its products.

True

The process of dollarization occurs when a country abandons its own currency and adopts another currency—typically the U.S. dollar.

True

The spot exchange rate is the rate at which the foreign exchange dealer will convert one currency into another on a particular day.

True

The 1944 Bretton Woods conference created two major international institutions that play a role in the international monetary system—the International Monetary Fund (IMF) and the

World Bank

Economic theories for integration imply that free trade and investment create ________ for participants.

a positive-sum game

Countertrade is defined as

a range of barter-like agreements by which goods and services can be exchanged for other goods and services.

What was the result of President Lyndon B. Johnson's attempts to finance his welfare programs?

a rise in price inflation

Following the global financial crisis in 2008-2009, the economy of Greece fell apart and has struggled to regain strength. What is one reason for the demise of the Greek economy?

adoption of the euro in 2001

One reason for the failure of the purchasing power parity (PPP) theory to predict exchange rates accurately is because it

assumes away transportation costs and trade barriers.

One disadvantage of a strategic alliance is

competitors gain a low-cost route to new technology and markets.

At the beginning of the year, Marissa created three goals for each sales person on her staff and she uses those goals as a way to measure their performance throughout the year. These goals are an example of

controls.

One argument for the idea that customer demands for local customization are on the decline worldwide is that

customer tastes have converged worldwide.

Three Latin American countries enter into an agreement to remove all tariffs and trade barriers between them. They decide on a common external trade policy and charge the same tariffs. Which level of economic integration best describes this arrangement?

customs union

The concept of ________ suggests that when a company has built significant value into its product offerings, trying to increase the value of the products by even a small amount requires a significant financial investment.

diminishing returns

SportLife Drinks, a multinational soft drink brand, has been facing huge economic losses due to unpredictable exchange rate movements. In order to gain considerable immunity against such currency fluctuations, SportLife Drinks should

disperse production to different locations around the globe.

Within a(n) ________, there is a level of economic integration that involves the use of a common currency, harmonization of members' tax rates, and a common monetary and fiscal policy.

economic union

A(n) ________ occurs when two parties agree to exchange currency and execute the deal at some specific date in the future.

forward exchange

According to the efficient market school, ________ do the best job at predicting future spot exchange rates.

forward exchange rates

Last week, Saturn Tide a U.S.-based energy firm, entered into an agreement with another party to exchange currency and execute the deal in eighteen months. What is Saturn Tide using to insure itself against foreign exchange risk?

hedging

Rite-Right Pen Corp., based in Florida, has a manufacturing facility in Thailand where local content rules regulate manufacturing processes. These rules show the effects of

host-government demands.

Regional trade blocs in Africa have been slow to establish mostly because of

ignificant political turmoil.

Great Britain, Denmark, and Sweden have stayed out of the euro zone because of the

implied loss of national sovereignty to the European Central Bank.

In a floating exchange rate, the relative value of a currency

is determined by market forces.

One argument for a fixed exchange rate system is that

it ensures that governments do not expand the monetary supply too rapidly, thus causing high price inflation.

The adoption of the Marshall Plan redirected the efforts of the World Bank and it then turned its focus on

lending money to third-world nations.

A(n) ________ focuses on increasing profitability by customizing the firm's goods or services so that they provide a good match to tastes and preferences in different national markets.

localization strategy

Midwest Sports produces in-house all the products that it sells through its network of stores. It has a function in its value chain that controls sending the physical materials through the value chain, from procurement through production and into distribution. This function is called

logistics.

What is one main impediment to regional economic integration?

loss of national sovereignty

One attribute of a pegged exchange rate is that it leads to

low inflation.

Two neighboring countries have the same wage rates, tax regimes, and business cycles. In addition, the two countries have reacted similarly to past economic shocks. These two countries can adopt a common currency because they form a(n)

optimal currency area.

The currency of the United Arab Emirates is fixed relative to the U.S. dollar: this means that the exchange rate between the United Arab Emirates dirham and other currencies is determined by the dollar exchange rate. This is an example of a ________ exchange rate.

pegged

The European Parliament plays an important role in the European Union and creates a(n) ________ to coordinate the economic, social, and foreign policy of the member states.

political union

Economies of scale are achieved when a company reduces unit costs by

producing a larger volume of product.

One function of the foreign exchange market is to

provide some insurance against foreign exchange risk.

Rhonda tells Kevin that he will receive 0.86 euro for every U.S. dollar he wants to convert. Rhonda is referring to

the exchange rate.

Kristin was shopping in New York last week and saw a Coach purse for $210. When she returned to London, she saw that same purse for £105. She knew that the exchange rate was one pound for every two dollars. Her shopping experience demonstrates

the law of one price.

A firm is most likely to pursue a global standardization strategy when

there are strong pressures for cost reduction.

Why do governments limit convertibility of their currency?

to preserve their foreign exchange reserves

Which situation poses the greatest problem for international businesses in the long run?

volatility of the global exchange rate regime

What caused the Central American Common Market to collapse in 1969?

war between Honduras and El Salvador after a riot at a soccer match between teams from the two countries

Namaste Inc. sells its yoga mats for $50. It costs the company $35 to make the product. Customers value the mats at $60. In this scenario, the consumer surplus is

$10.

Shantal saw a Hermes scarf at the Amsterdam airport when she was catching a flight back home to New York. She noticed that the scarf sold for 100 euros. Assume that the euro/dollar exchange rate is €1 = $1.20. According to the law of one price, at what price would it make sense to buy the scarf in New York?

$120

According to the Fisher effect, if the "real" rate of interest in a country is 3 percent and the expected annual inflation is 8 percent, what would the "nominal" interest rate be?

11 percent

How does the International Monetary Fund (IMF) provide loans to deficit-laden countries?

A pool of gold and currencies contributed by its members provides the resources for lending operations.

The ________ is considered to be the ultimate controlling authority within the European Union.

European Council

Within the EU, it is the responsibility of the ________ to debate legislation and forward it to the council.

European Parliamen

In recent decades there have been fewer trade blocs established to promote regional economic integration.

False

The activities of the International Monetary Fund have declined after the collapse of the Bretton Woods system in 1973.

False

In countries where inflation is expected to be high, interest rates also will be high, because investors want compensation for the decline in the value of their money. This relationship is referred to as the

Fisher effect

How has adoption of the euro affected economic efficiency in European companies?

It has increased competition and produced long-run gains.

What is a result of a banking crisis?

It leads to individuals and companies withdrawing their deposits from banks.

What happens to the value of money when hyperinflation exists?

Money loses value very rapidly.