Chapter 12

Question 1

Which of the following statements is true of a dirty float?
Select one:
a. exchange rates fluctuate with occasional central bank intervention
b. beneficial exchange rates are offered in trade with certain nations
c. fixed exchange rates are set and maintained by the World Bank
d. currency values rise and fall according to the U.S. dollar

Answer 1

a. exchange rates fluctuate with occasional central bank intervention

Question 2

Global Finance Meeting (Scenario)

International finance experts are meeting in Tokyo for a weeklong conference to discuss the current state of global finance. At the conference are representatives from a variety of monetary and financial organizations. Expert A often works with international firms arranging capital in the form of shares. Expert B works for the Bank of Nova Scotia in the British Virgin Islands. Expert C advises international firms on corporate mergers.

The employer of Expert B can most likely be categorized as which of the following?
Select one:
a. investment bank
b. private bank 
c. commercial bank
d. offshore bank

Answer 2

d. offshore bank

Question 3

Country X primarily exports coffee beans, and in the last two years the demand for coffee beans has caused economic growth in Country X. To accommodate the economic growth, the central bank of Country X increased the nation’s money supply. Country X is now experiencing inflation of over 200 percent. A group of economic experts, government representatives, and business owners have gathered for a conference in Country X to discuss the situation.

Which of the following should be considered before the government takes any action to correct the high rate of inflation?
Select one:
a. What have been the historical consequences of trade barriers in Country X?
b. What is the current price of coffee in the United States and Europe?
c. What will be the long-term effects of currency depreciation to Country X?
d. What other industries in Country X could replace agriculture?

Answer 3

c. What will be the long-term effects of currency depreciation to Country X?

Question 4

A devaluation is an action taken by the international monetary fund.
Select one:
True
False

Answer 4

False

Question 5

A huge oversupply of easy money in global financial markets can lead to excessive demand in a developed nation’s housing market as well as for basic commodities such as petroleum and food. Such high levels of demand can lead to problems such as banks making risky loans and even high levels of inflation for basic commodities.
Select one:
True
False

Answer 5

True

Question 6

A \_\_\_\_\_\_\_\_ is a facility for trading securities and other financial instruments, including shares issued by companies, trust funds, pension funds, and corporate and government bonds.
Select one:
a. stock exchange 
b. business strategic unit
c. grey market
d. shell corporation

Answer 6

a. stock exchange

Question 7

Which of the following statements about Global Capital Markets is false?
Select one:
a. all these statements are true
b. the globalization of finance is driven by falling barriers to investment and new information and communication technologies
c. when governments do not properly regulated finance and banking financial instability can result
d. capital flows are very volatile
e. the globalization of finance reduces the cost of capital for firms in developing economies

Answer 7

a. all these statements are true

Question 8

Companies have a tendency to prefer handling international business transactions with their own country’s currency rather than with the currency of another country.
Select one:
True
False

Answer 8

True

Question 9

Each of the following factors significantly affects the balance of trade EXCEPT \_\_\_\_\_\_\_\_.
Select one:
a. exchange rate
b. market share 
c. prices of goods
d. trade barriers

Answer 9

b. market share

Question 10

Which of the following is an example of a currency risk?
Select one:
a. purchasing products from a nation with appreciating currency
b. purchasing products from a country with depreciating currency Incorrect
c. selling products to a country with appreciating currency
d. selling products to a nation that has the same currency value as the exporter’s

Answer 10

a. purchasing products from a nation with appreciating currency

Question 11

If an individual buys from a supplier whose currency is depreciating against the individual’s currency, the individual will have to pay a larger amount of his own currency to complete the purchase.
Select one:
True
False

Answer 11

False

Question 12

Which of the following statements is true of the global financial system?
Select one:
a. It consists of the institutional frameworks, rules, and procedures that govern how national currencies are exchanged for one another.
b. It includes key players such as finance ministries and national stock exchanges but excludes commercial banks and central banks.
c. It is built on the activities of firms, banks, and financial institutions engaged in ongoing international financial activity.
d. Since the 1960s, the volume and structure of the global financial system has been reducing.

Answer 12

c. It is built on the activities of firms, banks, and financial institutions engaged in ongoing international financial activity.

Question 13

Which of the following is an example of a country that has experienced dollarization?
Select one:
a. Ecuador
b. Japan 
c. France
d. Brazil

Answer 13

Ecuador

Question 14

Which of the following terms refers to the difference between the total amount of money flowing into and out of a nation over the course of a year?
Select one:
a. momentum trading
b. trade surplus
c. exchange rate system
d. balance of payments

Answer 14

d. balance of payments

Question 15

The largest proportion of government debt results from national pension and healthcare programs.
Select one:
True
False

Answer 15

True

Question 16

\_\_\_\_\_\_\_\_ are mangers of pensions and mutual funds, as well as insurance companies who have assumed an enormous role in driving capital markets around the world.
Select one:
a. Entrepreneurs
b. Institutional investors 
c. Angel investors
d. Venture capitalists

Answer 16

b. Institutional investors

Question 17

All else being equal, the greater the supply of a currency, the lower its price; the lower the supply of a currency, the higher its price.
Select one:
True
False

Answer 17

True

Question 18

Global Finance Meeting (Scenario)

International finance experts are meeting in Tokyo for a weeklong conference to discuss the current state of global finance. At the conference are representatives from a variety of monetary and financial organizations. Expert A often works with international firms arranging capital in the form of shares. Expert B works for the Bank of Nova Scotia in the British Virgin Islands. Expert C advises international firms on corporate mergers.

The employer of Expert B can most likely be categorized as which of the following?
Select one:
a. investment bank
b. private bank
c. commercial bank 
d. offshore bank

Answer 18

d. offshore bank

Question 19

The most universally accepted currencies for international business transactions are the European euro, the U.S. dollar, and the Japanese yen, which are all considered hard currencies.
Select one:
True
False

Answer 19

True

Question 20

High Inflation (Scenario)

Country X primarily exports coffee beans, and in the last two years the demand for coffee beans has caused economic growth in Country X. To accommodate the economic growth, the central bank of Country X increased the nation’s money supply. Country X is now experiencing inflation of over 200 percent. A group of economic experts, government representatives, and business owners have gathered for a conference in Country X to discuss the situation.

Which of the following questions would be more important to evaluate in determining the reason behind the inflation in Country X?
Select one:
a. Has momentum trading of agricultural commodities been occurring in Country X?
b. What is the exchange rate between Country X currency and the euro?
c. How quickly was the money supply increased by the central bank of Country X?
d. How many pounds of coffee beans are being imported annually to Country X?

Answer 20

c. How quickly was the money supply increased by the central bank of Country X?

Question 21

The monetary authority in each country that regulates the money supply, issues currency, and manages the exchange rate of the nation’s currency relative to other currencies is called the World Bank.
Select one:
True
False

Answer 21

False

Question 22

Which of the following is the most likely underlying reason for the demise of the Bretton Woods system?
Select one:
a. U.S. trade deficits 
b. creation of the EU
c. gold depreciation
d. WTO restrictions

Answer 22

a. U.S. trade deficits

Question 23

All else being equal, the greater the demand for a currency, the lower its price; the lower the demand for a currency, the higher its price.
Select one:
True
False

Answer 23

False

Question 24

A huge oversupply of easy money in global financial markets can lead to excessive demand in a developed nation’s housing market as well as for basic commodities such as petroleum and food. Such high levels of demand can lead to problems such as banks making risky loans and even high levels of inflation for basic commodities.
Select one:
True
False

Answer 24

True

Question 25

The U.S. dollar is an example of \_\_\_\_\_\_\_\_.
Select one:
a. soft currency
b. convertible currency 
c. nonconvertible currency
d. private currency

Answer 25

b. convertible currency

Question 26

Which of the following is an effect caused by capital flight?
Select one:
a. It increases the need for domestic investment holdings.
b. It decreases the ability of the nation to service debt and pay for imports.
c. It reduces harmful currency restrictions.
d. It decreases the nation’s supply of hard currencies.

Answer 26

b. It decreases the ability of the nation to service debt and pay for imports.

Question 27

Which of the following statements about Global Capital Markets is false?
Select one:
a. all these statements are true
b. the globalization of finance is driven by falling barriers to investment and new information and communication technologies
c. capital flows are very volatile
d. the globalization of finance reduces the cost of capital for firms in developing economies
e. when governments do not properly regulated finance and banking financial instability can result

Answer 27

a. all these statements are true

Question 28

A French company sells goods to a foreign customer whose currency is depreciating against the euro. Which of the following will the company most likely experience when completing the sale?
Select one:
a. The company will receive fewer euros if the sales price was expressed in the buyer’s currency.
b. The company will receive more euros if the sales price was expressed in the buyer’s currency.
c. The company will receive fewer euros if the sales price was expressed in euros originally.
d. The company will receive more euros if the sales price was expressed in euros originally.

Answer 28

a. The company will receive fewer euros if the sales price was expressed in the buyer’s currency.

Question 29

Which of the following statements is true regarding the value of national currencies?
Select one:
a. They cannot be quantified.
b. They remain highly stable.
c. They fluctuate constantly. 
d. They change occasionally.

Answer 29

c. They fluctuate constantly.

Question 30

If an individual buys from a supplier whose currency is depreciating against the individual’s currency, the individual will have to pay a larger amount of his own currency to complete the purchase.
Select one:
True
False

Answer 30

False

Question 31

Which of the following statements about Global Capital Markets is false?
Select one:
a. capital flows are very volatile
b. the globalization of finance is driven by falling barriers to investment and new information and communication technologies
c. all these statements are true
d. the globalization of finance reduces the cost of capital for firms in developing economies
e. when governments do not properly regulated finance and banking financial instability can result

Answer 31

c. all these statements are true

Question 32

The most universally accepted currencies for international business transactions are the European euro, the U.S. dollar, and the Japanese yen, which are all considered hard currencies.
Select one:
True
False

Answer 32

True

Question 33

Plas-Tex Exporting (Scenario)

Plas-Tex Plastic Company manufactures plastic storage containers of all different sizes. Plas-Tex has been exporting more storage containers to Europe recently because of the depreciation of the U.S. dollar relative to the euro. Plas-Tex CEO, Wayne Chisholm, has prepared a report for the annual shareholders meeting in which he outlines his manufacturing and sales recommendations for the upcoming year.

Which of the following should be considered closely before Chisholm recommends increasing production to take advantage of the current exchange rate?
Select one:
a. What is the expected outcome of Plas-Tex negotiations with an Asian manufacturer?
b. How much revenue did Plas-Tex generate from European sales last year?
c. What will be the effect on Plas-Tex if the euro depreciates more than the U.S. dollar?
d. What has been the historic impact of capital flight on Plas-Tex revenues?

Answer 33

c. What will be the effect on Plas-Tex if the euro depreciates more than the U.S. dollar?

Question 34

Which of the following statements is most likely to be true regarding a currency’s price if the supply of the currency increases?
Select one:
a. The price of the currency fluctuates randomly.
b. The price of the currency remains constant.
c. The price of the currency lowers.
d. The price of the currency increases.

Answer 34

c. The price of the currency lowers.

Question 35

The integration of international financial and monetary activity can be attributed to the growing role of single-currency systems, such as the euro.
Select one:
True
False

Answer 35

True

Question 36

Which of the following is the most likely underlying reason for the demise of the Bretton Woods system?
Select one:
a. U.S. trade deficits 
b. creation of the EU
c. gold depreciation
d. WTO restrictions

Answer 36

a. U.S. trade deficits

Question 37

If last year one dollar equaled one euro, and then the exchange rate shifted so that today one dollar equals two euros, which of the following would most likely NOT occur?
Select one:
a. European firms would pay more for raw materials imported from the United States.
b. European consumers would purchase fewer U.S. products and services.
c. Fewer Europeans would travel to the U.S. or study at U.S. universities.
d. European firms would lower their prices on goods made with U.S. parts.

Answer 37

d. European firms would lower their prices on goods made with U.S. parts.

Question 38

The International Monetary Fund was created through the Bretton Woods Agreement as a way to monitor the foreign exchange systems and lend money to developing economies.
Select one:
True
False

Answer 38

True

Question 39

All else being equal, the greater the supply of a currency, the lower its price; the lower the supply of a currency, the higher its price.
Select one:
True
False

Answer 39

True

Question 40

Which of the following is a characteristic of momentum trading?/
Select one:
a. Investors buy stocks as prices fall.
b. Investors sell stocks when others sell.
c. Investors buy stocks as prices rise.
d. Investors buy and sell stocks spontaneously.

Answer 40

c. Investors buy stocks as prices rise.

Question 41

A huge oversupply of easy money in global financial markets can lead to excessive demand in a developed nation’s housing market as well as for basic commodities such as petroleum and food. Such high levels of demand can lead to problems such as banks making risky loans and even high levels of inflation for basic commodities.
Select one:
True
False

Answer 41

True