STUDY UNIT FOUR GLOBALIZATION Flashcards Preview

My BEC > STUDY UNIT FOUR GLOBALIZATION > Flashcards

Flashcards in STUDY UNIT FOUR GLOBALIZATION Deck (17):
1

Price levels determine exchange rates.
True
False

False
Your answer is correct.
Exchange rates are determined by relative inflation rates, relative income levels, governmental intervention, relative interest rates, and ease of capital flow.

2

As incomes rise in one country, the prices of foreign currencies rise as well.
True.
False

True.
Your answer is correct.
Citizens with higher incomes look for new consumption opportunities in other countries, driving up the demand for those currencies and shifting the demand curve to the right. Thus, as incomes rise in one country, the prices of foreign currencies rise as well, and the local currency will depreciate.

3

Trade restrictions such as tariffs and import quotas represent
A A subsidy paid by domestic consumers to foreign producers of the duty-burdened commodities.
B An increase in the unit costs of domestic producers who compete with foreign firms.
C A subsidy paid by domestic consumers to domestic producers of the duty-burdened commodities.
D An attempt by the government to bring about a more equitable distribution of income.

C A subsidy paid by domestic consumers to domestic producers of the duty-burdened commodities.
This answer is correct.
Trade restrictions are designed to protect domestic industries that cannot effectively meet foreign competition. Tariffs and quotas therefore cause consumers to pay higher prices and to consume fewer goods and services. In effect, consumers pay a subsidy to domestic producers. The long-term results are a reduction in trade and misallocation of resources to less efficient industries.

4

A firm must pay an invoice denominated in a foreign currency in 30 days. Which one of the following is an appropriate strategy for mitigating the associated exchange rate risk?
A Buy a call option.
B Buy a put option.
C Sell a put option.
D Sell a call option.

A Buy a call option.
This answer is correct.
A call option gives the holder the right to buy (i.e., call for) a specified amount of currency in a future month at a specified price. Call options are used to hedge payables.

5

An importer in Cuba must apply to a Cuban government agency to obtain Mexican pesos to pay for an item it is importing from Mexico. This limitation is an example of which nontariff barrier to trade?
A Foreign-exchange control.
B Countertrade.
C Voluntary export restraint.
D An import license.

A Foreign-exchange control.
This answer is correct.
Exchange controls limit foreign currency transactions and set exchange rates. The purpose is to limit the ability of a firm to pay domestic currency to foreigners.

6


A shift of the demand curve for a country’s currency to the right could be caused by which of the following?
A A fall in the country’s interest rates.
B A foreign government placing restrictions on the importation of the country’s goods.
C A rise in consumer incomes in another country.
D Domestic inflation worsens.

C A rise in consumer incomes in another country.
This answer is correct.
Citizens with higher incomes look for new consumption opportunities in other countries, driving up the demand for those currencies. Thus, as incomes rise in one country, the prices of foreign currencies rise as well.

7

Given a spot exchange rate for the U.S. dollar against the pound sterling of $1.4925 per pound and a 90-day forward rate of $1.4775 per pound,
A The forward dollar is at a premium against the pound.
B The forward dollar is at a discount against the pound.
C The dollar is at a premium against the pound and overvalued in the forward market.
D The dollar is at a discount against the pound and undervalued in the forward market.

A The forward dollar is at a premium against the pound.
This answer is correct.
The exchange rate for the pound sterling is lower in the forward market than the spot market. Thus, the pound sterling is trading at a forward discount relative to the U.S. dollar, which is trading at a forward premium.

8

What is the effect when a foreign competitor’s currency becomes weaker compared to the U.S. dollar?
A The foreign company will have an advantage in the U.S. market.
B The fluctuation in the foreign currency’s exchange rate has no effect on the U.S. company’s sales or cost of goods sold.
C The foreign company will be disadvantaged in the U.S. market.
D It is better for the U.S. company when the value of the U.S. dollar strengthens.

A The foreign company will have an advantage in the U.S. market.
This answer is correct.
If the foreign currency weakens compared with the U.S. dollar, the U.S. dollar will have more buying power in the foreign company’s country. Thus, the foreign company will be able to sell more products than the U.S. company for the same amount of dollars.

9

An Indian company is owed €5 million from a German company payable in 30 days. To mitigate the risk of the euro depreciating against the rupee over the next month, the Indian company has taken out a 30-day loan from an Italian bank and converted it to rupees. The payoff amount of the loan on the due date is €5 million. The hedging tool being used by the Indian company is known as a
A Forward contract.
B Money market hedge.
C Currency option.
D Futures contract.

B Money market hedge
This answer is correct.
The least complex tool for hedging exchange rate risk is the money market hedge. A firm with a receivable in a foreign currency can borrow the amount and convert it to its domestic currency now, then pay off the foreign loan when the receivable is collected.
View Subunit 4.3 Outline

10

All of the following are economic costs of protectionism except
A Tariffs can have the perverse effect of enriching the very foreign exporters who are their supposed targets.
B Workers are shifted from relatively efficient export industries to less efficient protected industries.
C Real wages and total world output decline.
D The import licenses that are used to enforce quotas can sometimes be handed out on the basis of political favoritism.

A Tariffs can have the perverse effect of enriching the very foreign exporters who are their supposed targets.
This answer is correct.
An inadvertent benefit sometimes accrues to foreign companies when they are the targets of quotas, but not tariffs.
View Subunit 4.1 Outline

11


A fall in the demand for a country’s currency can be caused by any of the following except:
A The country’s government raises barriers to the cross-border flow of capital.
B The country’s inflation rate decreases.
C A foreign government places restrictions on the importation of the country’s goods.
D Interest rates in the country fall.

B The country’s inflation rate decreases.
This answer is correct.
The currency of a country with a falling inflation rate retains more purchasing power than a currency with high inflation. Demand for a currency with increasing purchasing power will tend to rise.
View Subunit 4.2 Outline

12

If consumers in Japan decide they would like to increase their purchases of consumer products made in the United States, in foreign currency markets there will be a tendency for
A The demand for dollars to increase.
B The Japanese yen to appreciate relative to the U.S. dollar.
C The supply of dollars to decrease.
D The supply of dollars to increase.

A The demand for dollars to increase.
This answer is correct.
The increase in demand for U.S. products will increase the demand for the dollars necessary to pay for those products
View Subunit 4.2 Outline

13

Platinum Co. has a receivable due in 30 days for 30,000 euros. The treasurer is concerned that the value of the euro relative to the dollar will drop before the payment is received. What should Platinum do to reduce this risk?

A. Enter into a forward contract to sell 30,000 euros in 30 days.
B. Buy 30,000 euros now.
C. Enter into an interest rate swap contract for 30 days.
D. Platinum cannot effectively reduce this risk.

A. Enter into a forward contract to sell 30,000 euros in 30 days.
Answer (A) is correct.
Platinum Co. is concerned that the fixed amount of foreign currency it will receive in 30 days will lose purchasing power in the meantime. Thus, Platinum hedges by essentially buying a guarantee that it will be able to receive a definite number of dollars in 30 days in exchange for the euros it is going to receive, regardless of fluctuations in the exchange rate in the meantime.
(4.3.56)

14

An exemption from U.S. antitrust law is provided by

A. Antidumping rules.
B. The Foreign Corrupt Practices Act.
C. The Export Administration Act of 1979.
D. The Export Trading Company Act of 1982.

The Export Trading Company Act of 1982.
Answer (D) is correct.
The Export Trading Company Act of 1982 permits competitors to form export trading companies without regard to U.S. antitrust legislation.
(4.1.18)

15

Trade restrictions such as tariffs and import quotas represent

A. An increase in the unit costs of domestic producers who compete with foreign firms.
B. An attempt by the government to bring about a more equitable distribution of income.
C. A subsidy paid by domestic consumers to domestic producers of the duty-burdened commodities.
D. A subsidy paid by domestic consumers to foreign producers of the duty-burdened commodities.

C. A subsidy paid by domestic consumers to domestic producers of the duty-burdened commodities.
Answer (C) is correct.
Trade restrictions are designed to protect domestic industries that cannot effectively meet foreign competition. Tariffs and quotas therefore cause consumers to pay higher prices and to consume fewer goods and services. In effect, consumers pay a subsidy to domestic producers. The long-term results are a reduction in trade and misallocation of resources to less efficient industries.
(4.1.14)

16

A country’s currency conversion value has recently changed from 1.5 to the U.S. dollar to 1.7 to the U.S. dollar. Which of the following statements about the country is correct?
A Its imports of U.S. goods are more affordable.
B Its exports are less expensive for the United States.
C Its purchases of the U.S. dollar will cost less.
D Its currency has appreciated.

B Its exports are less expensive for the United States.
This answer is correct.
Since the foreign country’s currency has depreciated against the U.S. dollar, U.S. consumers have gained purchasing power, making the foreign country’s goods less expensive for buyers that pay in U.S. dollars.
View Subunit 4.2 Outline

17

An American importer expects to pay a British supplier 500,000 British pounds in 3 months. Which of the following hedges is best for the importer to fix the price in dollars?
A Buying British pound call options.
B Selling British pound put options.
C Selling British pound call options.
D Buying British pound put options.

A Buying British pound call options.
This answer is correct.
The importer wants to hedge the risk that the fixed amount of foreign currency it must pay in 3 months will gain purchasing power during that time. Buying a call option gives the importer the right to buy (call for) the foreign currency in 3 months at a fixed price, regardless of exchange rate fluctuations in the meantime.
View Subunit 4.3 Outline