International Finance

International Finance - Practice Questions for Exam...

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Unformatted text preview: 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 As such, some of the material may be outdated or even incorrect today. 0 I have crossed out some questions that may be out of date.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 (copyrights, patents, trademarks, or trade names) in 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.

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International Finance - Practice Questions for Exam...

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