: Practice Questions for Exam Preparation
IMPORTANT NOTE ABOUT THIS DOCUMENT This file contains practice questions to test your understanding of the material and to help prepare for exams. As you review the questions, keep the following in
mind: 0 These questions are based on your text, but have not been updated by the
author for several years. As such, some of the material may be outdated or
even incorrect today. 0 I have crossed out some questions that may be out of date. Other questions
that I crossed out may still be relevant, but I am not covering those topics.
Some questions that I crossed out may be current and correct, but will be
covered in a different chapter. 0 I did not read every question in this document. It is likely that some
questions should be omitted, so you need to use your discretion in some
instances. 0 Some of the questions have answers filled in by hand. This was done by
students who borrowed the original book from me in the past. The
handwritten answers may be incorrect? 0 An answer key follows each section of questions. Be warned that in some
rare instances, even the answer key may be incorrect. - Do not rely on this document as your primary source of learning. Inmclass notes are your primary source, followed by the latest edition of the text, with
this study guide as the third source. 1,0. [Pivatizatio ll n l the process by which a ﬁrm provides its technology
exchange for fees or some other speciﬁed beneﬁts an advantage a country possesses in the manufacture of .ijroduct Cycle Theory .
” oods 6 Answers to Key Terms Matching 9‘99???” b 7. h
k 8. j
g 9. e
a 10.i
d 11.f
c I A Deﬁnitional Problems 1. _As for a purely domestic ﬁrm, the goal of a multinational corporation (MNC) is the 2. One of the most prevalent factors conﬂicting with the realization of the goal of an MNC is the
existence of 3. Executive stock options, the threat of hostile takeover, and investor monitoring are all forms
of that can be used to reduce agency problems in MNCs. “n.7— 4. Among the constraints interfering with the realization of the goal of an MNC are , , and constraints. 5. A management style trades off reduced agency costs with potentially poor
decisions by parent company managers. 6. A management style trades potentially good decisions by subsidiary
managers with increased agency costs. 7. The; " states that countries tend to use their advantages to specialize in the
production of goods that can be producedwith relative efﬁciency, while trading for other w- "goods. 8. The . states that factors of production are somewhat immobile, allowing firms g to capitalize on a foreign country’s resources.
9. The, states that ﬁrms ﬁrst become established in their home country and then penetrate foreign markets via geographic and/or product differentiation. 10. The least risky method of conducting international business is probably Multinational Financial Management: An Overview 5 11. obligates a ﬁrm to provide its technology, such as patents, in exchange for fees
or some other speciﬁed beneﬁt. 12. A venture jointly owned and operated by a domestic and a foreign ﬁrm is referred to as a 13. The,.mo primary methods of conducting international business that constitute foreign direct
Westment are and 14. Due to an increased opportunity set, the marginal return on projects for an MNC is generally
1"" than that of a purely domestic ﬁrm. Analogously, due to a larger opportunity
set of funding sources, the cost of capital for an MNC is generally than that
of a purely domestic ﬁrm. 15. If MNCS have more projects to select from and a lower cost of capital than purely domestic
xkfirrhs, their size should be than that of a purely domestic ﬁrm. 16. By expanding internationally, a ﬁrm may be less exposed to ﬂuctuations in the home country
economy. Nevertheless, MNCs occur additional risks in the form of 5 . and _ 1. maximization of shareholder wealth 11. Licensing
2. agency problems 12. joint venture
3. corporate control 13. the acquisition of existing operations;
4. environmental; regulatory; ethical the establishment of new foreign
5. centralized subsidiaries
6. decentralized 14. higher; lower .
7. Theory of Comparative Advantage 15. greater
8. Imperfect Markets Theory 16. exchange rate risk; exposure to foreign
9. Product Cycle Theory economic conditions; political risk
10. international trade (importing and exporting) f’ True/False Problems @ 1. Ely’goal of a multinational corporation (MNC) is the maximization of shareholder wealth. [I 2. If a ﬁrm were/edfnqposed of only one owner who was also the sole manager, the agency problem woﬁld not be completely eliminated.
V” I! 3. If managers of foreign subsidiaries make decisions that maximize the values of their
respective subsidiaries, they automatically maximize the value of the entire corporation. & 4. A centralized management style, where major decisions about a foreign subsidiary are made
by the parent company, results in an automatic increase in agency costs. 5. 19. 20. . , In recent y Chapter 1 A decentralized management style, where subsidiary managers make the relevant decisions
regarding their subsidiary, may result in better decision making, as subsidiary managers are
generally better informed about their subsidiary’s operations. e use of stock to ﬁnance business has on in other re 1 an increasing focus on maximizin ome more co
countries, U.S.-based
institutions rare are typically not monitored by mutual funds and pension funds, as these
1d stock in MNCs. Although MNés may be confronted with additional pollution controls (an environmental
constraint), these are irrelevant, as the MNC is fully reimbursed by the US. government for
any additional costs upon remittance of proper receipts. A given country’s government, if it chooses to, may prevent the remittance of earnings by a
subsidiary to the parent company. In some countries, bribes are commonplace. If a U.S.-based MNC decides to adhere to a strict
code of ethics and not pay bribes, its subsidiary may be at a competitive disadvantage in the foreign country. The Theory of Comparative Advantage begins by assuming that a given ﬁrm ﬁrst becomes
established in its home country and may subsequently penetrate foreign markets via
geographic or product differentiation. Under the Imperfect Markets Theory, it is assumed that factors of production are entirely
mobile, so that ﬁrms can capitalize on a foreign country’s resources. . Under the Theory of Comparative Advantage, trade between countries results from the nonproduction of certain goods in a given country due to inefﬁciency. . Under the Product Cycle Theory, foreign demand can be initially satisfied by exporting. Franchising obligates a ﬁrm to provide its technology (such as copyrights, patents,
trademarks, or trade names) in exchange for fees or some other speciﬁed beneﬁts. In a joint venture, one ﬁrm is obligated to provide another ﬁrm with a specialized sales or
service strategy in exchange for periodic fees. Licensing allows ﬁrms to use their technology in foreign markets without a major investment
in foreign countries. While allowing for the highest degree of control of foreign business, the acquisition of
existing operations in a foreign country and/or the establishment of foreign subsidiaries also
entail the highest degree of risk when compared to the other methods of conducting
international business. International trade is the most common form of direct foreign investment (DFI). Many MNCs use a combination of methods to increase international business. Multinational Financial Management: An Overview 7 21. Purely domestic ﬁrms face a larger opportunity set than MNCs and their projects provide a
lower marginal return than projects faced by MNCs. can choose, an MNC may be able to obtain capital at a lower cost than a purely domestic % 22. Due to the larger opportunity set of funding sources around the world ﬁrom which an MNC
ﬁrm. 2 . The Single European Act of 1987 made regulations more uniform among European countries.
However, the cost of achieving this goal resulted in the imposition of additional taxes on
goods traded between these countries. 24. The recent admission of many Eastern European countries to the EU is relevant because
restrictions on their trade with Western Europe will be reduced. 2 U: The North American Free Trade Agreement (NAFTA) of 1993 eliminated trade barriers
between the United States and Mexico. 2" Although MNCs may need to convert currencies occasionally, they do not face any exchange % 2
1 rate risk, as exchange rates are stable overtime. 2 T" When the parent’s home currency is weak, remitted funds from foreign subsidiaries will
convert to a smaller amount of the home currency. I 28. A purely domestic firm may be affected by exchange rate ﬂuctuations if it faces at least some
foreign competition. 29. Although the exposure of MNCs to ﬂuctuations in the home country’s economy is less than
that of a purely domestic ﬁrm, it is more highly exposed to economic ﬂuctuations of the foreign country in which it operates. 30. One form of an exposure to political risk is terrorism. Answers to T rue/F alse Problems 1. T 16. F
2. F 17. T
3. F 18. T
4. F 19. F
5. T 20. T'
6. T 21. F
7. F 22. T
8. F 23. F
9. T 24. T
10. T 25. T
11. F 26. F
12. F 27. F
13. T 28. T
14. T 29. T
15. F 30. T 8 Chapter 1 Multiple Choice Problems ““I. The goal of a multinational corporation (MNC) is
- a. The minimization of taxes remitted from foreign subsidiaries.
b. The establishment of subsidiaries in any country where operations would provide a return
over and above the cost of capital, even if better projects are available domestically.
- c,, The maximization of shareholder wealth.
d. The maximization of social beneﬁts resulting from actions such as the employment of foreign managers. [I 2. Agency costs faced by multinational corporations (MNCs) may be larger than those faced by
purely domestic ﬁrms because ail/Monitoring of managers located in foreign countries is more difﬁcult.
b " oreign subsidiary managers raised in different cultures may not follow uniform goals. cl Cs are relatively large. d. a and b only
c. All of the above- 3. Which of thelfgllgwingis correct regarding the monitoring ofﬂforeign subsidiary managers? a. A centralized managemenWWosts butbéttermdecision making
by subsidiary managers. b. A decentralized management style results in increased agency costs but poor decision making by subsidiary managers.
c. It is generally easier for an MNC to monitor the decisions made by subsidiary managers than manifestingiglftieiitstéas'rﬁay'ae’monnored by the parent’s management. e. Since an'MNC’s fore‘ig—n‘siibsidiaries are separate legal entities, the monitoring of subsidiary
managers is inconsequential. i is for a purely domestic ﬁrm.
n d. ome MNCs allow subsidiary managers to make the key decisions about their respective W 4. Which of the following a form of corporate control that can be used to reduce agency
problems in MNCs? ' " " ' '
a. $6612 options
b. Hostile takeover threat
0. Investor monitoring ﬁx A decentralized management style
c. All of the ab0ve are forms of corporate control that can be used to reduce agency problems in
MNCS (w- 5. Which of the following is not @ioned in the text as a constraint interfering with an MNC’s
goal? mat—ml. . . . . . . ___ 7 _
seawLegal constraints
b. Environmental constraints
6. Regulatory constraints
d. Ethical constraints
6. All of the above are mentioned in the text as constraints interfering with an MNC’s goal Multinational Financial Management: An Overview 6.
g a.
' b. C. Which of the following is not mentioned in the text {sfa theory of international business??-
Theory of Comparative Advantage w 7 Imperfect Markets Theory Product Cycle Theory Globalization of Business Theory 6. g 7.
i av b. C. d. 6.
i s.
a. All of the above are mentioned in the text as theories of international business Which of the following events would coWypamﬁveAﬁvantage? U.S. ﬁrm manufacturing computers imports the needed components from Taiwan. A U.S. ﬁrm manufacturing widgets builds a plant in Mexico to reduce labor costs.
A U.S. fmn manufacturing computers establishes a plant in Germany in order to reduce
transportation costs and to retain its advantage over its German competitors. All of the above
None of the above Which of the following events would conﬁrm the lm erf {Aw-rm
A U.S. ﬁrm manufacturing computers imports the needed components from Taiwan. -- bgﬂh U.S. ﬁrm manufacturing widgets builds a plant in Mexico to reduce labor costs. C. d.
e. i2: b. C. d.
e. t a. A U.S. ﬁrm manufacturing computers establishes a plant in Germany in order to reduce
transportation costs and to retain its advantage over its German competitors. All of the above None of the above A U.S. ﬁrm manufacturing computers imports the nEEdEdWESmponents from Taiwan.
A U.S. firm manufacturing widgets builds a plant in Mexico to reduce labor costs.
U.S. ﬁrm manufacturing computers establishes a plant in Germany in order to reduce
transportation costs and to retain its advantage over its German competitors.
All of the above
None of the above Which of the following events would conﬁrm the Product Cycle Theogﬂﬂ 10. The most risky method(s) by which ﬁrinsconduct international business is (are) Franchismg. he acquisitions of existing operations.
" c/"The establishment of new subsidiaries. d L
e. £13 and c only All of the above M 11. Thgleast riskde by which firms conduct international business is
a .. .. i ,, , .. .. .. b. c.
d.
a e. Franchising.
The acquisitions of existing operations. Hlxlgterﬁtional trade.
The establishment of new subsidiaries. Licensing. g 12. Which of the following does not constitute a form of direct foreign investment? a. -_ ‘ Wﬁv _._ A. Franchising. International trade C. d. e. Joint ventures/
Acquisitions qfiexisting operations
Establishment of negyidreign subsidiaries 10 A 13. a.
b. C. C. 14. a. Chapter 1 obligates a firm to provide a specialized sales or service strategy, support
assistance, and possible an initial investment in exchange for periodic fees.
Franchising
International trade
A,joint venture
icensing
None of the above Which of the following is not mentioned in the text as a reason for the increased Gyms?» r
An increase in GNP of virtually all countries in recent years globalization lamp/An increase in international trade
c1 ,/Growth in direct foreign investment in recent years
d. ,lncreased privatization in recent years .I, as. a. b. MMNCs generally face a larger opportunity set than purely domestic ﬁrms due to possible cost .r" eL. An increased standardization of products and serv1ces across countries in recent years Which of the following is true regarding MNCs generally face a smaller oppoiztﬁnty set than purely domestic ﬁrms because it is more
costly to establish subsidiaries in foreign countries. advantages and/or revenue opportunities. Q/JIVf-NCS may be able to obtain ﬁnancing at a lower cost than purely domestic ﬁrms. d. e. w . b. 17.
are ncreased regulatory uniformitfamong European countries a and c only b31141.me . Which of the following is true regarding MNCs? The marginal return on projects ﬁébdby’MWEsis always lower than the return on projects
faced by purely domestic ﬁrms. The cost of capital faced by MNCs is always larger than that faced by purely domestic ﬁrms.
The cost of capital faced by MNCs is always smaller than that faced by purely domestic
ﬁrms. (ﬂyﬁt’l’though MNCs may have an advantage relative to purely domestic ﬁrms in terms of funding
“A sources, its cost of capital may be higher than that of a purely domestic ﬁrm because foreign projects are riskier than domestic projects.
There are always feasible foreign projects for an MNC. ich of the following is not a provision or result of the Single European Act of .r‘____ h.“_____‘_.___e———«-—-"-—--r-r— . The phasing in of a common currency for all European countries by 1992 01/ The removal of many taxes on goods traded between European countries
dvr’ Firms’ ability to achieve economies of scale
eWAll of the above Multinational Financial Management: An Overview 1 1 18. Which of the following is not mentioned in the text as an additionalfrislgrgsulting from
international business? "M" m a. “Exchange rate ﬂuctuations
‘m-J . . .
bvrPohtical risk
mafinancial risk
dn./ Country risk
e ,- Exposure to foreign economies g 19. Many U.S. ﬁrms view " a” as the country with the highest growth potential. a China b. Japan c. Germany
(1 Mexico e Korea g 20. Which of the following is not an example of hogan MNC can be affected by exchange rate 7M..—..___,,._..-u—v‘“" - . ............. ..-,...i-..,~.-——-w-——-wavv —- ---——_.77 ,--.-,‘,V._...M__ ,___..,,7... MW, ,_,, .
a. fDue to exchange rate ﬂuctuations, the number of units of a ﬁrm’s home currency needed to
V purchase foreign supplies can change even if suppliers have not adjusted their prices.
b. When the home currency strengthens, products denominated in that currency become more
I” expensive to foreign customers, which may reduce foreign demand for the MNC’s products.
9., ' When the home currency weakens, products denominated in that currency become cheaper to
v foreign customers, which may increase foreign demand for the MNC’s products.
'd\ Remitted earnings from the foreign subsidiary of a U.S.-based MNC may increase due to a ' stronger home currency. e. X’Remitted earnings from the foreign subsidiary of a U.S.—based MNC may increase due to a L/ weaker home currency.
.4.
‘ . . . . I .Eliylﬂﬂg ' .. .
W21. Licensmg obligates a ﬁrm togprovide ﬁr r; it: ‘— t , whil franchising obligates a ﬁrm to
provide f ;; act '5 w"? t.rg’ty'«£. 5e "Iii-Hit”. ti a A specialized s ies or service strategy; its technology "A _
b. Its technology; a specialized sales or service strategy ’
c. Its technology; its technology
d
e A specialized sales or service strategy; a specialized sales or service strategy
Its technology; an initial investment . I gen 21], MNCs may be expected to are a iii ii I marginal return on projects than
p e domestic ﬁrms and a i - 4‘ cost ofcapital. 2. er, higher
b. ; lower
c Lowe higher d. iHigher; lower. ._ ... e None of the above 5% 23. Which of the following is not a way in which agency problems can be reduced through
corporate iiiiii i./‘--"‘——'—'m—#-M~—’r—““~ﬁ—~-—--——-~- - dew-~- ---- «em-w- ----—..
at, Executive compensation Threat of hostile takeover
es\_Acquisition of a foreign subsidiary Monitoring by large shareholders
e. None of the above 12 Chapter 1
1. c 13. d
2. e 14. a
3. d 15. e
4. d 16. d
5. a 17. b
6. d 18. c
7. a 19. a
8. b 20. d
9. c 21. b
10. d 22. d
11. c 23. c
12. b in foreign countries that can be business operations :
sting long-term ﬁnancial assets (such as
tween countries that do not affect the Deﬁnitional Problems 1. The is a summary of transactions between domestic and foreign
residents for a speciﬁc country over a speciﬁed period of time. 2. The account and the account are the two primary components
of the balance of payments. 3. Changes in country ownership of long-term and short—term assets are measured in the balance
of payments with the 4. One of the primary components of the current account is the , which is the
difference between merchandise and service exports and imports. t/W- _,
5. rep ts income in the form of intere ta MS received by investors on
foreign i ment in ﬁnancial assets. 6. Among the factors affecting international trade ﬂows are
, and movements. 1M» 7. represents transactions involving long-term ﬁnancial assets (such as
stocks and bonds) between countries that do not affect the transfer of control. 8. represents the investment in ﬁxed assets in foreign countries that can be
used to conduct business operations. 9. Two agreements that inﬂuenced US. trade with other countries are and 18 Chapter 2 10. Exporting of products by one country to other countries at prices below cost is called 11. Since an increase in the demand for funds in a given country will likely affect the supply of
funds in another country, interest rate movements across countries are often
correlated. 12. A is a tax on imports; a places a maximum limit on imports.
13. Although a deﬁcit in the balance of trade wili theoretically be corrected by a of the home currency, more practical considerations, such as price adjustments by foreign
producers, imply that the deﬁcit will probably not be corrected solely by exchange rate adjustments.
/ . .
\é The initial ' of the balance of trade due to a depreCIation of the home currency
and the subseq improvement of the balance of trade as trade patterns adjust is known as the ct.
\
K represent aid, W gifts from one country to another.
16. The encourages increased internationalization of business.
17. The _ is a unit of account established by the IMF and allocated to member countries to supplement currency reserves. tﬂ The \ ’s primary objective is to make loans to countries to
enhance econom velopment; it was established in 1944. 19. Although its country development objectives are similar to that of the World Bank, the
targets its loan policy primarily to less prosperous nations by
extending low-interest-rate loans. 20. The provides assistance to countries experiencing a ﬁnancial crisis
and is also known as a “lender of last resort.” 21. Direct foreign investment by U.S.—based MNCs occurs primarily in the _ and
in
Answers to Deﬂnitional Problems
1. balance of payments 10. dumping
2. current; capital 11. positively
3. capital account 12. tariff; quota
4. balance of trade 13. depreciation
5% new
6. inﬂation; national income; government 45..transfer-payments
restrictions; exchange rate 16. IMF
7. portfolio investment 17. special drawing right (SDR)
8. direct foreign investment lsahiternarim‘ial‘Banirfof'R—ecbimtruction
9. NAFTA (1993); GATT (1993) andﬁevdopnigw Bank) International Flow of Funds l9 19. International Development Association 20. Bank for International Settlements (BIS)
(IDA) 21. United Kingdom; Canada True/False Problems I l. The balance of payments measures all transactions between domestic residents over time.
2. The primary component of the capital account is the balance of trade. 3. A balance of trade surplus indicates an excess of merchandise imports over merchandise
exports. 4. Portfolio investment represents transactions involving long-term ﬁnancial assets (such as
stocks and bonds) between countries that affect the transfer of con_trgl.. ,- 5. In general, direct foreign investment measures the expansion by firms in foreign operations,
while the portfolio investment and other capital measure the net ﬂow of funds due to ﬁnancial
asset transactions between individual or institutional investors. 6. The balance of payments can indicate the volume of transactions between speciﬁc countries
and may even signal potential shifts in speciﬁc exchange rates. 7. An American tourist visiting Germany and spending money there (for lodging, food, etc.)
will reduce the US. current account deﬁcit and reduce Germany’s Current account balance. 8. A balance of trade deﬁcit indicates an excess of imports over exports. targets for US, xports.
/ 10. According/to your text, Canada, China, Mexico, and Japan are the major sources of imports
for the US. According to)\0{ét, Western Europe, Asia (excluding Japan) and Mexico are the primary 11. The capital account reﬂects changes in country ownership of long-term (but not short-term)
assets. ' ' The standardization of product speciﬁcations throughout Europe during the 1990s removed a
- very large trade barrier. ' ' 13. Most people agree that governments should be allowed to use subtle trade restrictions against
foreign ﬁrms. 7 y 14. Outsourcing allows MNCs to reduce costs but shifts jobs to other countries. W 15. New members of the European Union are subject to reduced trade barrier on EU-related
trade. However, they are also subject to the EU tariffs on products that enter the EU. 16. Interest rates, national income levels, and government restrictions are some factors affecting
international trade ﬂows. 20 Chapter 2 17. An increase in the U.S. inﬂation rate relative to Japan would increasc the U.S. current
account balance, as foreign importers would ﬁnd U.S. goods more attractive (cheaper) than
their own products. 18. A reduction in the U.S. national income level and increased U.S. tariffs and quotas would
result in a reduction in the U.S. current account deﬁcit; both of these factors would
theoretically affect the level of imports. 19. A weakening of the U.S. dollar with respect to the British pound would likely reduce U.S.
exports to Britain and increase U.S. imports from Britain. 20. A balance of trade deﬁcit is always a problem. 21. Theoretically, we should never observe a current account deﬁcit or surplus, as exchange rates
will adjust to an equilibrium level that would result in a current account balance of zero. 22. Among the reasons why we observe current account deﬁcits despite exchange rate
movements are price adjustments by foreign exporters to offset exchange rate movements and increased foreign government restrictions. 23. An expected strengthening of a country’s home currency will attract more capital from
foreign investors and thus improve the country’s capital account balance. IMF’s compensatory ﬁnancing facility (CFF), a country must show that its
ems are temporary and must be willing to work with the IMF in resolving the . In order to se
ﬁnancial pr 25. Among the agencies providing to loans to foreign governments are the International
Monetary Fund (iMF), the World Bank, and the International Financial Corporation. . The World Bank t ds loans only to developed nations, while the International
Development Asso 'ation (IDA) extends loans only to developing nations. 2 A special drawing ' ht (SDR) is an actual currency used by Germany, France, Japan, and
Britain to counter the instability in these currencies. 283/1", he World Bank frequently enters into cofinancing agreements. Under these agreements,
/ ﬁnancing is provided by the World Bank and/or ofﬁcial aid agencies, export credit agencies, or commercial banks. ' 29. The was Trade Organization provides a forum for multilateral trade negotiations and settles
k disputes related to the GATT accord. Answers to T rue/False Problems 1 F 6. T
2 F 7. F
3. F 8. T
4. F 9. F
5. T 10. T International Flow of Funds 21 11.. F _ 21. T
12. T 22. F
13. F 23. T
14. T 24. T
15. T 25. F
16. T 26. F
17. F 27. F
18. T 28. T
19. F 29. T
20. F Multiple Choice Problems 1. A summary of transactions between domestic and foreign residents for a speciﬁc country "1 over a speciﬁed period of time is the
@ Balance of trade.
Balance on goods and services.
Balance of payments.
Current account. ' ’ Capital account. Ftp—953‘s» ’ is the difference between exports and imports.
ance of trade Balance on goods and services Balance of payments Current account Capital account a 9990‘ . Which of the following is not a factor that may affect direct foreign investment?
. [gauges in restrictions
.FfPrivatization Potential economic growth
. Tax rates . All of the above are factors that may affect direct foreign investment. accrue: (D g)
4., represent(s) income received by investors on foreign investments in
v ﬁnancial assets (securities). a. Portfolio income ' b. Direct foreign income c. ’pﬁilateral transfers \da/ Factor income“, e. None of the above ll 22 Chapter 2 5.. Included in the capital account are a. Short-term ﬁnancial assets only. b. Long-term ﬁnancial assets only. c. Long-term and short-term direct foreign investment and trading of securities.
d. Short-term direct foreign investment. e. Long~term direct foreign investment. 6. The current account balance is not directly affected by
a. Interest rates. b. Inﬂation. 0. National income. cl. Government restrictions. e. Exchange rate movements. 7. Whictf‘of the following will probably not result in an increase in a country’s current account
'"“"balg1_c§v (assumiﬁg”e”VEFy’fﬁTh7g‘Else'eonstant)? ' ' ' " ' ' " ak/A decrease in the country’s rate of inﬂation b. ﬂecrease in the country’s national income level c. @n’ increase in government restrictions in the form of tariffs or quotas d. -‘ An appreciation of the country’s currency c. All of the above will result in an increased current account balance. BWible reason why a weak home currency will not act to offset a current account deﬁcit is that
a. Foreign exporters would increase their prices to compensate for the appreciation in their currency. b. rrencies of some other countries may have also weakened, and the United States will
import from those countries instead. c. International trade patterns are prearranged and can be immediately adjusted. d. Intracompany trade is negligible and comprises only 540% of all international trade. e. Whenever a currency weakens, the US. government will intervene to bring the exchange rate into pie-established limits. 9. . ich of the following factors does probably not directly affect a country’s capital account
andﬂé comgomglﬂ ‘ r ' r . - ” ‘ -- - .. . .. - .. MW. a. Inﬂation b. Jm’erest rates c. V\liﬂithholding taxes on foreign income d. .Exchange rate movements e. All of the above will directly affect a country’s capital account. International Flow of Funds 23
If A ,‘ ﬂAll of the following are government actions to correctapurregtﬁgzhgggpmtgeﬁejt, except \ ETKI _.,_,.__m,__..——v> ifhe countrY’s‘cenﬁ'al'bank reduces the money supply to reduce the level of inﬂation.
The country's central bank intervenes in the currency market to increase the value of its
currency. of he country’s government imposes a quota on imports from its major trading partners (assume no retaliation). dyx'The country’s government imposes a tariff on imports from its major trading partners 8. (assume no retaliation). ,Due to favorable economic developments, the country’s government increases the country’s V minimum wage beyond the expected level of inﬂation. _ 11, uCanada and Megicom MWT primary purchasers of US. exports is (are)
_, Wa. Latin America, Asia, and Canada. b. c. d. 6.“. Canada, Western Europe, and Eastern Europe. Japan.
Western Europe, Eastern Europe, and Asia. “7 w. imports come primarily from a. Latin America, Asia, and Canada. l V. a $( b. Canada, Western Europe, and Eastern Europe.
c. Japan.
(1. Western Europe, Eastern Europe, and Asia (excluding Japan).
e. ﬁanada, China, Mexico, and Japan.
._/ Wm”
,M
13. The , an accord among 117 nations, called for lower tariffs around the
"'“fworld. 9999‘s IQVWlich of the following is not a “subtle” trade restriction Country X may use "f/fw‘ I .. -_.... _._... ___.__ _.___..__._._.._...............___
a.
b:-
c?’
d. 6. General Agreement on Tariffsan Trade (GATT)__.._H
North American "F rec Trade Agreement (NAFTA)
Single European Act of 1987 European Union Accord None of the above / against Country ~._._- M” The government of Country X eliminates environmental restrictions. .LlThe government of Country X subsidizes ﬁrms in its country to facilitate dumping.
“The government of Country X provides tax breaks to ﬁrms in speciﬁc industries.-
Thegovemrnent of Country X imposes a tariff on goods imported from Country Y. _.Thé government of Country X allows its ﬁrms to offer bribes to large customers when ‘ I pursuing business deals. ix 15. Which of the following statements is not true? a. b. c.
d. e. Exporters may complain that they are being mistreated because the currency of their country
is too weak. Outsourcing affects the balance of trade because it means that a service is purchased in
another country. Sometimes, trade policies are used to punish countries for various actions. Tariffs imposed by the EU have caused some friction between EU countries that commonly
import products and other EU countries. All of the above are true. 24 Chapter 2 J”
J” 16. ich of the following would increase the current account of country X? Country Y is
\w' country X’s sole trading partner.
3. Inﬂation increases in countries X and Y by comparable amounts.
b. Country X’s and Country Y’s currencies depreciate by the same amount.
c. Country X imposes tariffs on imports from Country Y, and Country Y retaliates by imposing an identical tax on X's exports. d- . Mentalbankaqfcquntryx andﬁ‘lPl‘WXmitigathemnney supply to increase interest ‘ rateswx—{j' WW" " e. Co‘untry X imposes a quota on imports, and Country Y retaliates by imposing an identical
ota on X’s exports. represent aid, grants, and gifts from one country to another. ___._q./__Mm,..___
a _§_Il§f§£_9.§l.y_m¢£ti§w
b. tor income
c. The balance of trade d. The balance of payments
e. The capital account LES/ﬁnch of the following is not a goal of the International Monetary Fund (TALE)?
@ aL_,,To"promote cooperation among countries on international monetary issues b. ‘ﬁpromote stability in exchange rates
c. To enhance a country’s long-term economic growth via the extension of structural adjustment loans d. ~26 promote free trade
e. yromote free mobility of capital funds across countries 19- , .y at}; Cs.
Th Asian governments. c. The Federal Reserve. “ d. ‘m
g e. The Bank of England. % 20. Like the International Monetary Fund (IMF ), the is composed of a
collection of nations as members. However, unlike the IMF, it uses the private rather than the government sector to achieve its objectives.
World Bank International Financial Corporation (IFC)
World Trade Organization (WTO)
International Development Association (IDA)
Bank for International Settlements (BIS) a.
b.
c.
d.
e. A ording to the “J curve effect,“ a weakening of the US. dollar relative to its trading
rtners' currencies would result in an initial in the current account balance, [lowed by a subsequent in the current account balance.
De rease; increase Incr se', decrease c. Deere e; decrease
d. Increa 'increase International Flow of Funds 25 l l
w 22. ﬂhe World Ban‘ltfs Multilateral Investment Guarantee Agency (MIGA)
a. Offers various forms of export insurance.
. Offers various forms of import insurance. c.
d. e. g 23. 99-??? . Also known as the “central banks’ central bank,” the , Offers various forms of exchange rate risk insurance.
Provides loans to developing countries. Offers varioumrﬁ"of political risk insurance. The orgWrsettlesﬁadedtsputﬁ'félﬁtEdﬂtoAthe'ﬁeneral "Agreementon‘Tariffs— and
Trade (GATT) passpraisthe. World‘s‘aﬁk." .
International Financial Corporation (IFC).
World Trade 0r ' w International Development Association (IDA).
Bank for International Settlements (BIS). attempts to facilitate
cooperation amoﬁ'g‘i?k§b;"""‘"’ "..iesiIWItTh7-’regard to international transactions and provides assistance
to countriescnpetiencing a‘ﬁnancial crisis. World Bank International Financial Corporation (IFC) World Trade Organization International Development Association (IDA) r Intemati0na1§snlsnsnts(BIS), . Which of the following would not result in a current account deﬁcit? High inflation/ k Low national income
c. Low or no restrictions on imports d.
e. A strong local currency”
A strong demand for imports and a weaW demand for exports cording to the text, which of the following countries invests the most in the US. in the
orm of direct foreign’inyestment?u_ ' .. -M” itemﬁgdom Answers to Multiple Choice Problems “99°HP‘WP'PPE‘ 5’ 11.
12.
13.
14.
15.
16.
17.
18.
19.
20. U‘mwgmomomo
Umommmgmon 26 21. a
22. e
23. c 24. e
25. b
26. a Chapter 2 ...
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This note was uploaded on 02/26/2012 for the course FIN 308 taught by Professor Ratner during the Fall '11 term at Rider.
- Fall '11
- Ratner
- International Finance
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