Ch. 1 - A domestic firm that produces and sells its...

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A domestic firm that produces and sells its products in one country Correct Answer: could face foreign exchange risk. The theory of comparative advantage states that Answer Selected Answer: economic well-being is enhanced if countries produce those goods for which they have comparative advantage and then trade those goods for goods that they do not enjoy a comparative advantage in producing. Since the EU accession, many Hungarians have borrowed in terms of the euro or Swiss franc to purchase houses. However, as the forint (the Hungarian currency) was falling against the euro and Swiss franc, the cost of the mortgage payments in terms of the forint increased sharply, forcing many borrowers to default. This is an example of exposure to Answer Selected Answer: exchange rate risk. A fundamental goal of sound business management is Answer Selected Answer: shareholder wealth maximization. The North American Free Trade Agreement (NAFTA) Answer Selected Answer: is an agreement among the United States, Canada, and Mexico that calls for the phasing out of tariffs and import quotas over a 15-year period. A U.S. investor who is interested in the shares of Nokia Corporation of Finland Answer Selected Answer: will be able to easily investigate the company, due to the ready flow of information over the Internet and the globalization of capital markets. If a country unexpectedly imposes restrictions on imported goods, this trade barrier is an example of Answer Selected Answer: political risk. The euro is Answer Selected Answer:
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the common currency of Europe. The dominant world currency since the end of World War II has been the Answer Selected Answer: U.S. dollar. The European Central Bank is located in Answer Selected Answer: Frankfurt, Germany. The single European currency is called the Answer Selected Answer: euro. A fixed exchange rate regime Answer Selected Answer: can eliminate exchange rate uncertainty. Gresham's law states that Answer Selected Answer: bad money drives good money out of circulation. The euro is Answer Selected Answer: the common currency of Europe. Suppose that the British pound is pegged to gold at £20 per ounce and the U.S. dollar is pegged to gold at $35 per ounce. This implies an exchange rate of $1.75 per pound. If the current market exchange rate is $1.80 per pound, how would you best take advantage of this situation? Start with $350. Buy 10 ounces of gold with dollars at $35 per ounce. Convert the gold to £200 at £20 per ounce. Exchange the £200 for dollars at the current rate of $1.80 per pound to get $360. The key argument(s) in favor of flexible exchange rates rests on Answer Selected Answer: Both A and B are correct. The dominant world currency since the end of World War I has been the
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Answer Selected Answer: U.S. dollar.
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  • Fall '13
  • Exchange Rate, Foreign exchange market, United States dollar

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