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203 Cards in this Set
- Front
- Back
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Comparative advantage was once the cornerstone of international trade theory, but today it is archaic, simplistic, and irrelevant for explaining investment choices made by MNEs. |
False |
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In the American model of corporate governance, the primary goal of management is to: |
maximize shareholder wealth |
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The post WWII international monetary agreement that was developed in 1944 is known as the: |
Bretton Woods Agreement |
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Which of the following is a way in which the euro affects markets? |
A) Countries within the Eurozone enjoy cheaper transaction costs. B) Currency risks and costs related to exchange rate uncertainty are reduced. C) Consumers and business enjoy price transparency and increased price-based competition D) All the above |
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Which of the following international transactions would NOT be counted as a balance of payments transaction? |
A) An American tourist purchases cheese in Milwaukee, Wisconsin. B) The U.S subsidiary of a British firm pays profits (dividends) back to its parent firm in Lonon. C) A Canadian lumber baron purchases a U.S corporate bond through an investment broker in Seattle. D) All of the above are BOP transactions. |
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Which of the following is NOT a part of the Current Account of BOP? |
A) Net export/import of goods B) Balance of trade C) Net portfolio investment D) Net export/ import of services |
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If your company were to import and export textiles, the transactions would be recorded in the current account subcategory of: |
A) services trade. B) income trade. C) goods trade. D) current transfers. |
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Based on the premise that, other things equal, countries would prefer a fixed exchange rate, which of the following statements is NOT true? |
A) Fixed rates provide stability in international prices for the conduct of trade. B) Fixed exchange rate regimes necessitate that central banks maintain large quantities of international reserves for use in the occasional defense of the fixed rate. C) Fixed rates are inherently inflationary in that they require the country to follow loose monetary and fiscal policies. D) Stable prices aid in the growth of international trade and lessen exchange rate risks for businesses. |
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Which of the following is NOT a required convergence criteria to become a full member of the European Economic and Monetary Union (EMU)? |
A) National birthrates must be at 2.0 or lowest per person. B) The fiscal deficit should be no more than 3% of GDP. C) Nominal inflation should be no more than 1.5% above the average inflation rate for the three members with the lowest inflation rates in the previous year. D) Government debt should be no more than 60% of GDP. |
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An era of retrenchment, in which major economic powers returned to policies of isolationism and protectionism, restricting trade and nearly eliminating capital mobility. |
The Interwar Years, 1914-1945 |
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A ________ is a securitized financial instrument that is sold to the market in tranches representing different levels of default risk. |
A) guaranteed security asset (GSA) B) mortgaged backed security (MBS) C) credit default swap (CDS) D) collateralized debt obligation (CDO) |
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The members of the EU do have relative freedom to set their own fiscal policies--government spending, taxation, and the creation of government surpluses or deficits. They are expected to keep deficit spending within limits. |
True |
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Financial Globalization has not resulted in: |
A) continuing imbalances of balance of payments. B) an increase in quantity and speed in the flow of capital across the world. C) capital markets less open and a decrease in the availability of capital for many organizations. D) uniform ways of ownership, control, and governance across the world. |
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BRICs is a term used in international finance to represent assets that are considered to be inexpensive and sturdy, but fundamentally unsound and incapable of coping with the upheavals now apparent in international financial markets. |
False |
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Multinational enterprises (MNEs) are firms, both for profit companies and not-for-profit organizations, that have operations in more than one country, and conduct their business through foreign subsidiaries, branches, or joint ventures with host country firms. |
True |
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Ownership, control, and governance changes radically across the world. The publicly traded company is not the dominant global business organization--the privately held or family-owned business is the prevalent structure--and their goals and measures of performance differ dramatically. |
True |
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A well-established, large U.S.-based MNE will probably NOT be able to overcome which of the following obstacles to maximizing firm value? |
A) an open market place B) high quality strategic management C) access to capital D) none of the above |
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A well-established, large China-based MNE will probably be most adversely affected by which of the following elements of firm value? |
A) an open marketplace B) high-quality strategic management C) access to capital D) access to qualified labor pool |
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A well-established, large, Brazil-based MNE will probably be most adversely affected by which of the following elements of firm value? |
A) an open marketplace B) high-quality strategic managemetn C) access to capital D) access to qualified labor pool |
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A major cost avoided in the eurocurrency markets is the payment of deposit insurance fees, such as: |
A) Federal Deposit Insurance Corporation (FDIC) B) Office of the Comptroller of the Currency (OCC) C) International Monetary Fund (IMF) D) World Bank (WB) |
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The modern eurocurrency market was born shortly after: |
A) World War II B) World War I C) Korean War D) Bosnian War |
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The reference rate of interest in the eurocurrency market is the: |
A) London Interbank Offered Rate B) Prima rate C) Federal Funds rate D) Treasury rate |
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Interest spreads in the eurocurrency market as small for many reasons EXCEPT: |
A) Eurocurrency loans are secured loans B) Eurocurrency deposits and loans are made in amounts of $500,000 or more on an unsecured basis C) The eurocurrency is a wholesale market D) Borrowers are usually large corporations or government entities |
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Your authors suggest that one way to characterize the global financial marketplace is through its assets, institutions, and linkages |
True |
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Eurocurrencies are domestic currencies of one country on deposit in a second country |
True |
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A eurodollar deposit is a demand deposit. |
False |
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Eurocurrency markets serve two valuable purposes: 1) Eurocurrency deposits are an efficient and convenient money market device for holding excess corporate liquidity; and 2) the Eurocurrency market is a major source of short-term bank loans to finance corporate working capital needs, including the financing of imports and exports. |
True |
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The key factor attracting both depositors and borrowers to the Eurocurrency loan market is the narrow interest rate spread within that market. |
True |
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The Eurocurrency market continues to thrive because it is a large international money market relatively free from governmental regulation and interference. Recent events may lead to greater regulation. |
True |
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The theory that suggests specialization by country can increase worldwide production is: |
The theory of comparative advantage |
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Which of the following is NOT a reason governments interfere with comparative advantage? |
A) Governments attempt to achieve full employment B) Governments promote economic development C) National self-sufficiency in defense-related industries D) All are reasons governments interfere with comparative advantage |
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Which of the following factors of production DO NOT flow freely between countries? |
A) Raw materials B) Financial capital C) (Non-military) technology D) All of the above factors of production flow freely among countries |
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Which of the following would NOT be a way to implement comparative advantage? |
A) IBM exports computers to Egypt B) Computer hardware is designed in the U.S but manufactured and assembled in Korea C) Water of the greatest purity is obtained from wells in Oregon, bottled, and exported worldwide. D) All of the above are examples of comparative advantage. |
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Of the following, which would not be considered a way that government interferes with comparative advantage? |
A) tariffs B) managerial skills C) quotas D) Other non-tariff restrictions |
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The concept of absolute comparative advantage's origins lie in: |
Adam Smith's work of 1776 |
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The concept of relative comparative advantage's origins lie in: |
"On the Principles of Political Economy and Taxation" book, published in 1817 |
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Comparative advantage is one of the underlying principles driving the growth of the global business |
True |
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The theory of comparative advantage owes it origins to Ben Bernanke as described in his book "The Wealth of Bankers" |
False |
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International trade might have approached the comparative advantage model in the 19th century, and it does so even more today. |
False |
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Comparative advantage shifts over time as less developed countries become more developed and realize their latent opportunities |
True |
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Comparative advantage in the 21st century is based more on services and their cross border facilitation by telecommunications and the Internet |
True |
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Comparative advantage was once the cornerstone of international trade theory, but today it is archaic, simplistic, and irrelevant for explaining investment choices made by MNEs |
False |
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When discussing comparative advantage, it is apparent that today at least 2 of the factors of production, capital and technology, now flow directly and easily between countries, rather than only indirectly through traded goods and services |
True |
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It would be safe to say that modern telecommunications now take business activities to labor rather than moving labor to the places of business. |
True |
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As the general principle of comparative advantage is still valid, complete specialization remains a realistic case |
False |
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Which of the following domestic financial institutions have NOT been modified for use in international financial management? |
A) currency options and futures B) interest rate and currency swaps C) letter of credit D) All of the above are domestic financial instruments that have also been modified for use in international financial markets |
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Which of the following is not always understood by MNE management? |
A) Culture, history, and institutions B) Political risk C) Foreign exchange risk D) Financial instruments |
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MNEs must modify finance theories like cost of capital and capital budgeting because of foreign complexities. |
True |
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Relative to MNEs, purely domestic firms tend to have GREATER political risk. |
False |
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Domestic firms tend to make GREATER use of financial derivatives than MNEs because they can bear the greater risk presented by these financial instruments |
False |
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Because countries have different financial regulations and customs, it is common for MNEs to apply their domestic rules and regulations when doing financial business in a foreign country |
False |
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A number of financial instruments that are used in domestic financial management have been modified for use in international financial management. Examples are foreign currency options and futures, interest rate and currency swaps, and letters of credit. |
True |
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Domestic firms do not have foreign exchange risk. |
False |
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In determining why a firm becomes multinational there are many reasons. One reason is that the firm is a market seeker. Which of the following is NOT a reason why market-seeking firms produce in foreign countries? |
A) satisfaction of local demand in the foreign country B) satisfaction of local demand in the domestic markets C) political safety and small likelihood of government expropriation of assets D) All of the above are market-seeking activities |
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_____ investments are designed to promote and enhance the growth and profitability of the firm. ______ investments are designed to deny those same opportunities to the firm's competitors. |
Proactive; Defensive |
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In determining why a firm becomes a multinational there are many reasons. One reason is that the firm is a raw material seeker. Which of the following is NOT a reason why a raw material seeker extract raw materials in foreign countries? |
A) They extract raw materials wherever they can be found to export from the host country B) They extract raw materials wherever they can be found for sale in the host country C) They extract raw materials wherever they can found for further processing in the host country D) All the above |
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For firms competing in a world characterized by oligopolistic competition, strategic motives can be subdivided into proactive and defensive investments. |
True |
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Defensive measures are designed to enhance growth and profitability of the firm itself. |
False |
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In determining why a firm becomes a MNC there are many reasons. One reason is that the firm is a knowledge seeker. They operate in foreign countries to exploit existing technological expertise |
False |
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The 5 strategic motives driving the decision to invest abroad and become an MNE (market seekers, raw material seekers, production efficiency seekers, knowledge seekers, and politcal safety seekers) are mutually exclusive |
False |
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The phase of the globalization process characterized by imports from foreign suppliers and exports to foreign buyers is called the: |
International trade phase |
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The authors describe the multinational phase of globalization for a firm as one characterized by the: |
ownership of assets and enterprises in foreign countries |
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A firm in the International Trade Phase Globalization: |
Bears direct foreign exchange risk |
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Of the following, which was NOT mentioned by the authors as an increase in the demands of financial management services due to increased globalization by the firm? |
A) Evaluation of the credit quality of foreign buyers and sellers B) Foreign consumer method of payment preferences C) Credit risk management D) Evaluation of foreign exchange risk |
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The twin agency problems limiting financial globalization are caused by these 2 groups acting in their own self-interests rather than the interests of the firm. |
C) Corporate insiders and rulers of soverign states |
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Typically, a firm in its domestic stage of globalization has all financial transactions in its domestic currency. |
True |
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Typically, a "greenfield" investment abroad is considered an investment having a greater foreign presence than a joint venture with a foreign firm. |
True |
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The authors argue that financial inefficiency caused by influential insiders may prove to be increasingly troublesome barrier to international finance. |
True |
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The authors describe a process for development of a MNE hat begins with a "purely domestic phase", followed by the "multinational phase", and topping out with he "international trade phase." |
False |
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Today it is widely assumed that there are NO LIMITS to financial globalization |
False |
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The growth in the influence and self-enrichment of organizational insiders is seen as an impediment to the growth of financial globalization in general. |
True |
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The actions of corporate insiders and the actions of rulers of sovereign states are both agency costs that act as an impediment to the growth of globalization. |
False |
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Under the gold standard of currency exchange that existed from 1879-1914, an ounce of gold cost $20.67 and 4.2474 British pounds. Therefore, the exchange rate of the pounds per dollar under this fixed exchange regime was: |
0.2055 pounds per dollar |
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WWI caused the suspension of the gold standard for fixed international exchange rates because the war: |
interrupted the free movement of gold |
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The post WWII international monetary agreement that was developed in 1944 is known as the: |
Bretton Woods Agreement |
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Another name for the International Bank for Reconstruction and Development is: |
The World Bank |
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The International Monetary Fund (IMF) |
A) in recent years has provided large loans to Russia, South Korea, and Brazil B) was created as a result of the Bretton Woods Agreement C) aids countries with balance of payment and exchange rate problems D) all the above |
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One of the innovations introduced by Bretton Woods was the creation of the Special Drawing Right or SDR. The SDR is an international reserve asset created by the: |
International Monetary Fund (IMF) |
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Which of the following led to the eventual demise of the fixed currency exchange rate regime worked out by Bretton Woods? |
A) widely divergent national monetary and fiscal policies among member nations B) differential rates of inflation across member nations C) several unexpected economic shocks to member nations D) all the above |
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Which of the following statements is NOT true? |
A) The Gold Standard Era was characterized by growing openness in trade, but limited capital mobility. B) The time period between World Wars 1 and 2 (the inter war years) witnesses significant reductions in trade barriers and a rapid acceleration in international trade. C) The Bretton Woods Era (post WWII) realized the increasing benefits of open economies. Furthermore, trade was increasingly dominated by capital. D) Since March 1973, exchange rates have come much more volatile and less predictable than previous periods. |
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A review of the evolution of the Global Monetary System shows that capital flows dominate trade in which of the following eras EXCEPT: |
A) Classical Gold Standard B) Fixed Exchange Rates, 1945-1973 C) The Floating Era, 1973-1997 D) The Emerging Era, 1997-Present |
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Under the terms of Bretton Woods, countries tried to maintain the value of their currencies to within 1% of a hybrid security made up of the U.S dollar, British pound, and Japanese Yen. |
False |
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Members of the IMF may settle transactions among themselves by transferring Special Drawing Rights (SDR). |
True |
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Today, the U.S has been ejected from the IMF for refusal to pay annual dues. |
False |
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From the time of its creation through July 2012, the euro peaked vs. the USD in April 2008 at around $1.60/euro |
True |
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Since March 1973, when exchange rates became more volatile and less predictable than during the "fixed" exchange rate period, the nominal exchange rate index of the U.S dollar peaked in 2011 |
False |
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Since 2009 the IMF's exchange rate regime classification system uses a "de facto classification" methodology. Under this system, a country that has given up their own sovereignty over monetary policy is considered to have: |
hard pegs |
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Since 2009 the IMF's exchange rate regime classification system uses a "de facto classification" methodology. Under this system, countries with "fixed exchange rates" are considered to have: |
soft pegs |
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A small economy country whose GDP is heavily dependent on trade with the U.S could use a(n)__________ exchange rate regime to minimize the risk to their economy that could arise due to unfavorable changes in the exchange rate. |
pegged exchange rate with the U.S |
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Since 2009 the IMF's exchange rate regime classification system uses a "de facto classification" methodology. Under this system, currencies that are predominantly market-driven are considered to be: |
floating arrangements |
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Among IMF member countries since 2010 the dominating exchange rate regime has been: |
soft peg |
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The euro is an example of a rigidly fixed system, acting as a single currency for its member countries. However, the euro itself is an independently floating currency against all other currencies. |
True |
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Although the contemporary international monetary system is typically referred to as a "floating regime," it is clearly not the case for the majority of the world's nations. |
True |
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The IMF's methodology for classifying exchange rate regimes today is based on the official policy statement of the respective governments, "de jure" classification |
False |
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Based on the premise that, other things equal, countries would prefer a fixed exchange rate, which of the following statements is NOT true? |
A) Fixed rates provide stability in international prices for the conduct of trade B) Fixed exchange rate regimes necessitate that central banks maintain large quantities of international reserves for use in the occasional defense of the fixed rate C) Fixed rates are inherently inflationary in that they require the country to follow loose monetary and fiscal policies D) Stable prices aid in the growth of international trade and lessen exchange rate risks fo businesses |
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Which of the following is NOT an attribute of the "ideal"currency? |
A) monetary policy B) full financial integration C) exchange rate stability D) All are attributes of an ideal currency |
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The authors discuss the concept of the "Impossible Trinity" or the inability to achieve simultaneously the goals of exchange rate stability, full financial integration, and the monetary independence. If a country chooses to have a pure float exchange rate regime, which 2 of the 3 goals is a country most able to achieve? |
Full financial integration and monetary independence |
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China today is a clear example of a nation that has chosen the following policies EXCEPT: |
A) control and manage the value of its currency B) conduct an independent monetary policy C) full financial integration in an attempt to stimulate its domestic economy D) Restrict the flow of capital into and out of the country |
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According to the terminology associated with changes in currency values, which of the following choices is the case when a currency's value relative to other currencies is changed by a government? |
Devaluation and revaluation |
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Based on the premise that, other things equal, countries would prefer a fixed exchange rate: Variable rates provide stability in international prices for the conduct of trade. |
False |
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If exchange rates were fixed, investors and traders would be relatively certain about the current and near future exchange value of each currency. |
True |
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According to the terminology associated with changes in currency values, depreciation is a case when a currency's value relative to other currencies is changed by a government. |
False |
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By and large, high capital mobility is forcing emerging market nations to choose between the two extremes of a free floating exchange rate or a hard peg regime. |
True |
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Which of the following is NOT a required convergence criteria to become a full member of the European Economic and Monetary Union (EMU)? |
A) National birthrates must be at 2.0 or lower per person. B) The fiscal deficit should be no more than 3% of GDP. C) Nominal inflation should be no more than 1.5% above the average inflation rate for the 3 members with the lowest inflation rates in the previous year. D) Government debt should be no more than 605 of GDP. |
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What is the single most important mandate of the European Central Bank? |
Promote price stability within the Euopean Union |
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Which of the following is a way in which the euro affects markets? |
A) Countries within the Euro zone enjoy cheaper transaction costs B) Currency risk and costs related to exchange rate uncertainty are reduced C) Consumers and business enjoy price transparency and increased price-based competition D) All the above |
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For the 3 years from early 2002-early 2005, the euro maintained a strong and steady rise in value against the U.S dollar (USD). After a brief respite in 2005, the euro continued its climb against the USD into 2008. Which of the following were NOT a contributing factor in the assessment of the euro and the decline in the dollar? |
A) severe U.S balance of payment deficits B) a general weakening of the dollar after the attacks of 9/11 C) large U.S balance of payment surpluses D) All were contributing factors |
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The countries that use the euro as their currency have: |
Agreed to use a single currency (exchange rate stability), allow for free movement of capital in and out of their economies (financial integration), but give up individual control of their own money supply (monetary independence) |
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The Eurocurrency is fixed against other currencies on the international currency exchange markets, but allows member country currencies to float against each other |
False |
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The European Central Bank is a strong and independent central bank that has completely replaced the individual central banks of the countries that use the euro as currency. |
False |
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The members of the EU do have relative freedom to set their own fiscal policies--government spending, taxation, and the creation of government surpluses or deficits. They are expected to keep deficit spending within limits. |
True |
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Beginning in 1991 Argentina conducted its monetary policy through a currency board. In January 2002, Argentina abandoned the currency board and allowed its currency to float against other currencies. The country took this step because: |
The Argentine government lost the ability to maintain the pegged relationship as in fact investors and traders perceived a lack of equlaity between the Argentine Peso and the USD |
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In January 2002, the Argentine Peso changed in value from 1 Peso/$ to 1.40 Peso/$, thus, the Argentine Peso __________ against the USD |
B) Weakened |
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In January 2000 Ecuador officially replaced its national currency, the Ecuadorian sucre, with the U.S. This practice is known as: |
D) dollarization |
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You have been hired as a consultant to the central bank for a country that has for many years suffered from repeated currency crises and depends heavily on the U.S financial and product markets. Which of the following policies would have the greatest effectiveness for reducing currency volatility of the client country with the U.S? |
Dollarization |
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Which of the following is NOT an argument against dollarization? |
A) it causes a loss of sovereignty over domestic monetary policy. B) it removes currency volatility against the dollar. C) it causes the country to lose the power of seignorage D) The central bank of the dollarized country loses the role of lender of last resort. |
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The ability of a country to profit from its ability to print money is known: |
Seignorage |
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Which of the following factors make it difficult for emerging market economies to choose a specific currency regime? |
A) weak fiscal, financial, and monetary institutions B) the tendency for commerce to allow currency substitution and the denomination of liabilities in dollars C) the emerging market's vulnerability to sudden stoppages of outside capital flows D) all the above |
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A currency board exists when a country's central bank commits to back its money supply entirely with foreign reserves at all times. |
True |
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Dollarization is a common solution for countries suffering from currency revaluation. |
False |
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Of the following, which is NOT a trade-off that must be dealt with in any exchange rate regime? |
A) cooperation vs. independence B) rules vs. discretionary action C) dollars vs. pounds D) All of the above are rate regime trade-offs |
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The following are examples of degrees of internationalization of an international currency EXCEPT: |
A) first degree of internationalization is when an international currency becomes readily accessible for trade B) A second degree of internationalization is when an international currency is used for international investment C) A third degree of internationalization is when an international currency is used for international investment D) A third degree of internationalization is when an international currency takes the role of a reserve currency. |
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All exchange rate regimes must deal with the trade-off between rules and discretion as well as between cooperation and independence |
True |
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Regime structures like the gold standard required no cooperative policies among countries, only the assurance that all would abide by the "rules of the game." |
True |
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Bretton Woods required less in the way of cooperation among countries than did the gold standard. |
False |
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The People's Republic of China has 2 official currencies, the Chinese renminbi (RMB) and the yuan (CNY) |
False |
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Which of the following is NOT a major subaccount of the Balance of Payments? |
A) the financial account B) the account payable C) the capital account D) the current account |
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The BOP as applied to a course in international finance may be defined as: |
The measurement of all international economic transactions between the residents of a country and foreign residents. |
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BOP data may be important for any of the following reasons: |
A) BOP data helps to forecast country's market potential, especially in the short run B) the BOP is an important indicator of a country's foreign exchange rate C) changes in a country's BOP may signal a change in controls over payment of dividends and interest D) All the above |
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A country's experiencing a serious BOP _______ is more likely to _______ exports than otherwise. |
Surplus; contract |
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Which of the following would NOT be considered a typical BOP transaction? |
A) Toyota U.S is a U.S distributor of cars manufactured in Japan by its parent company. B) The U.S subsidiary of European financial giant, Credit Suisse, pays dividends to its parent in Zurich C) A U.S tourist purchases gifts at a musuem in London. D) All are BOP transactions |
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Which of the following is NOT an item to be considered in BOP calculations? |
A) a foreign resident purchases a U.S Treasury Bill B) A U.S-based firm manages the development of an oil filed in Kazakhstan C) A consumer buys a VCR made in Korea from a Florida Walmart store D)A US citizen living in Minnesota travels to Winnipeg, Canada and buys a case of Canadian beer |
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The BOP: |
records all international transactions for a country over a period of time |
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An American tourist purchases a leather jacket while in Italy. Which statement is true? |
A) the leather purchase would be considered an import for the U.S BOP B) This transaction would be properly accounted for in the Current Account of the U.S BOP C) The leather purchase is considered an import of a good, and thus considered part of the balance of trade as well D) all |
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Which of the following statements about the BOP is NOT true?
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A) The BOP is the summary statement of all international transactions between 1 country and all other countries B) The BOP is a flow statement, summarizing all international transactions that occur across the geographic borders over a period of time, typically a year C) Although the BOP must always balance in theory, in practice there are substantial imbalances as a result of statistical errors and misreporting of current account and financial account flow. D) All are true |
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When the world went to a system of floating exchange rates, the BOP became a relic of a system of fixed exchange rates and is no longer watched by economists |
False |
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The BOP should always balance |
False |
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Changes in the BOP may predict the imposition or removal of foreign exchange controls |
True |
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A country experiencing a serious trade deficit is not as likely to expand imports as it would be if running a surplus |
True |
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Understanding BOP account: "follow the cash flow" |
False |
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The BOP must be in balance, but the current account doesn't |
false |
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Expenditures by U.S tourists in foreign countries for foreign goods/services are factored in BOP calculations |
False |
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Like a balance sheet, the BOP adds up the value of all assets and liabilities of a country on a specific date |
False |
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Because current and financial/capital account balances use double-entry bookkeeping it is unusual to find serious discrepancies in the debts and credits |
False |
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Which of the following is NOT a part of the Current Account of BOP? |
A) net foreign direct investment B) net import/export of services C) net portfolio investment D) other Financial items |
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Which of the following is NOT part of the balance of payments account? |
A) the current account B) the financial/capital account C) the official reserves account D) All of the above are BOP accounts. |
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The ________ includes all international economic transactions with income or payment flowsoccurring within the year. |
Current account |
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If your company were to import and export textiles, the transactions would be recorded in thecurrent account subcategory of: |
Goods trade |
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The travel services provided to international travelers by United Airlines would be recorded in |
Services trade |
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Anaconda Copper Inc. created a subsidiary in Chile last year to mine copper ore. Theproportion of net income paid back to the parent company as a dividend would be recorded in thecurrent account subcategory of: |
Income trade |
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The subcategory that typically dominates the current account is: |
Goods (merchandise) trade |
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In 2010 the United States posted a current account deficit of -$471 billion. The bulk of thenegative value came from: |
A goods trade deficit |
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Over the last two decades the surplus on U.S. services trade has typically been ________ thedeficit on U.S. goods trade. |
Less than |
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The ________ of the balance of payments measures all international economic transactionsof financial assets. |
Capital and financial accounts |
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The financial account consists COMPLETELY of which four components? |
Direct investment, portfolio investment, net financial derivatives, and other asset investment |
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When categorizing investments for the financial account component of the balance ofpayments the ________ is an investment where the investor has no control whereas the________ is an investment where the investor has control over the asset. |
Portfolio investment; Direct investment |
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In general there is consensus that ________ should be free, but there is no such consensusthat ________ should be free. |
international trade; international investment |
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The two major concerns about foreign direct investment are: |
who controls the assets and who receives the profits. |
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Portfolio investment is capital invested in activities that are ________ rather than made for________. |
Profit motivated; control |
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Consider the following: A foreign automobile company builds a manufacturing plant inTennessee and European investors buy U.S. Treasury Bonds. |
The auto manufacturer in engaging in direct investment, and the European investors areengaged in portfolio investing. |
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China is currently experiencing a surplus in its current account and its capital/financialaccounts. Which of the following is NOT a contributing factor for this unusual situation? |
A) The exceptional growth in the Chinese economy contributes to the current account surplus.B) The positive prospects for China's continued growth contribute to the capital/financialaccount surplus. C) China's inevitable acquisition of Taiwan is driving the market for Chinese investment. D) All of the above are contributing factors for China's twins surpluses. |
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If China wished to reduce their accumulation of foreign exchange reserves they could: |
A) allow their currency, the yuan, to float freely in the market place. B) reduce their current account surplus by importing more goods than they export. C) undertake both of the activities identified in choices A and B. D) dig a big hole and bury the reserves. |
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The largest single component of the United States current account is: |
goods (merchandise) imports and exports. |
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In general, as a country's income increases, so does the demand for imports. |
False |
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For at least the last decade, the United States has consistently run a surplus in services tradeincome. |
True |
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Expenditures by U.S. students abroad and foreign students pursuing studies in the UnitedStates would be considered a services trade and part of the U.S. current account. |
True |
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International debt security purchases and sales are defined as portfolio investments forfinancial account purposes because by definition debt securities do not provide the buyer withownership or control. |
True |
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Significant amounts of United States Treasury issues are purchased by foreign investors,therefore the U.S. must earn foreign currency to repay this debt. |
False |
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In the United States and most developed countries, the current account and the combinedfinancial/capital accounts tend to be inversely related in that when one is positive, the other tendsto be negative. |
True |
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The biggest problem that China faces in maintaining a stable value for their currency, theyuan, is their lack of foreign exchange reserves. |
False |
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As of year-end 2010, the United States still held the world's largest foreign exchange reserve,but the total was rapidly being approached by China. |
False |
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China's current political plan includes reducing their foreign exchange reserve balance byallowing the yuan to float freely and by switching their goods balance from one of a net surplusto a net deficit. |
False |
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An excess of merchandise exports over merchandise imports results in a balance of tradedeficit. |
False |
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The transition to floating exchange rate regimes in the 1970s (described in Chapter 3)changed the focus from the total BOP to its various subaccount like the current and financialaccount balances. |
True |
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Under an international regime of fixed exchange rates, countries with a BOP ________ shouldconsider ________ their currency while countries with a BOP ________ should consider________ their currency. |
surplus, revaluing; deficit, devaluing |
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Terms |
C = consumption I = capital investment spending G = government spending X = exports of goods and services M = imports of goods and services BOP = balance of payments GDP = gross domestic product NPV = net present value INF = inflation R = real rate of return |
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The static equation for the nations GDP is: |
GDP = C + I + G + X - M |
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More Terms |
(X-M) = Current Account Balance (CI-CO) = Capital Account Balance (FI-FO) = Financial Account Balance (I-S) = Investment-Saving Balance FXB = Reserve Balance BOP = balance of payments GDP = gross domestic product C = consumption I = capital investment spending G = government spending |
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The static equation for the BOP is: |
BOP = (X-M) + (CI-CO) + (FI-FO) + FXB |
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Imports have the potential to lower a country's inflation rate because of each of the followingEXCEPT: |
A) the import of lower priced goods limits what domestic competitors can charge for goods. B) the import of lower priced services limits what domestic competitors can charge for services. C) the higher prices of foreign goods spurs domestic competitors to cut prices. D) all of the above |
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Under a fixed exchange rate system, the government bears the responsibility to ensure that theBOP is near zero. If the sum of the current and capital accounts do not approximate zero, thegovernment is expected to intervene in the foreign exchange market by buying or selling officialforeign exchange reserves. If the sum of the first two accounts is GREATER THAN ZERO, a________ demand for the domestic currency exists in the world. To preserve the fixed exchangerate, the government must then intervene in the foreign exchange market and ________ domesticcurrency for foreign currencies or gold so as to bring the BOP back near zero. |
surplus; sell |
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Under a fixed exchange rate system, the government bears the responsibility to ensure that theBOP is near zero. If the sum of the current and capital accounts do not approximate zero, thegovernment is expected to intervene in the foreign exchange market by buying or selling officialforeign exchange reserves. If the sum of the first two accounts is LESS THAN ZERO, a________ demand for the domestic currency exists in the world. To preserve the fixed exchangerate, the government must then intervene in the foreign exchange market and ________ domesticcurrency for foreign currencies or gold so as to bring the BOP back near zero. |
deficit; buy |
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An increase in GDP should lead to a decrease in imports. |
False |
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The effect of an imbalance in the BOP is the same for countries on a fixed exchange rateregime as for those on a floating exchange rate regime. |
False |
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Under a floating exchange rate system, the government bears the responsibility to ensure thatthe BOP is near zero. |
False |
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A country with a managed float that wishes to WEAKEN its currency may choose to raisedomestic interest rates to attract additional capital from abroad. |
False |
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A country's overall level of interest rates should have an impact on the financial account ofthe BOP. Relatively low real interest rates should normally stimulate an outflow of capitalseeking higher interest rates in other country currencies. |
True |
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Imports have the potential to lower a country's inflation rate. In particular, imports ofHIGHER-priced goods and services place a limit on what domestic competitors charge forcomparable goods and services. |
False |
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Of the following, which is NOT a part of J-Curve adjustment path? |
A) the currency contract period B) the exchange rate pass-through period C) the quantity adjustment period D) Each of the above is part of the J-Curve adjustment path. |
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Which of the following is NOT likely to occur in the quantity adjustment phase of the J-Curveadjustment path? |
A) Imports become relatively more expensive. B) Exports become relatively less expensive. C) The balance of trade gets worse. D) All of the above are true. |
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When a currency is devalued the immediate impact may be an increase in a country's tradedeficit. However, this situation tends to correct itself in 2 to 5 weeks. |
False |
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The immediate impact of a devaluation of the domestic currency is to decrease the value of the spot exchange rate S$/fc. |
False |
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The authors identify four distinct periods of capital mobility since 1860. Which do they termas a "period of global economic destruction"? |
A) 1860 - 1914 B) 1914 - 1945 C) 1945 - 1971 D) 1971 - 2007 |
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________ is the cross-border purchase of assets that are then managed in a way that hides themovement of money and its ownership. |
Money laundering |
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This was an era dominated by industrialized nation economies that were dependent on goldconvertibility to maintain confidence in the system. |
The Gold Standard, 1860-1914 |
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This dollar-based fixed exchange rate system gave rise to a long period of economic recoveryand growing openness of both international trade and capital flows in and out of more and morecountries. |
The Bretton Woods Era, 1945-1971 |
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An era of retrenchment, in which major economic powers returned to policies of isolationismand protectionism, restricting trade and nearly eliminating capital mobility. |
The Interwar Years , 1914-1945 |
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A ________ is any restriction that limits or alters the rate or direction of capital movementinto or out of a country. |
Capital control |
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Long-term capital flows reflect the following factors EXCEPT: |
A) short term interest rate differentials B) fundamental economic expectations C) growth prospects D) perceptions of political stability |
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Capital controls may take a variety of forms EXCEPT: |
A) currency boards B) taxes C) quotas D) prohibitions |
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The Bretton Woods era realized a great expansion of international trade in goods and services. |
True |
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Longer-term capital flows reflect short-term interest rate differentials and exchange rate |
False |
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One of the motivations for capital controls is to insulate an economy from foreign political risks. |
False |
