International Business: The Challenges of Globalization, 9e (Wild)
Chapter 10 International Monetary System
1) When the value of a country’s currency declines, the price of its ________.
A) exports and imports on world markets declines
B) exports and imports on world markets increases
C) exports on world markets declines and the price of its imports increases
D) exports on world markets increases and the price of its imports declines
2) A company selling in a country with a strong currency while sourcing from a country with a
weak currency ________.
A) practices unethical conduct
B) experiences a trade deficit
C) ends up bankrupt
D) improves its profits
3) When the Brazilian Real changes from 1000 Real per U.S. Dollar to 1500 Real per U.S.
Dollar, the Real is ________.
A) devalued
B) revalued
C) unchanged, unless the government intervenes
D) accelerated
4) In a freely fluctuating exchange-rate system, if the inflation in Country A rises in relation to
inflation in Country B, what will the currency in country A do in relation to the currency in
country B?
A) It will strengthen.
B) It will weaken.
C) It will remain the same.
D) It will lead to deflation.
5) ________ is an activity under the monetary policy of a nation.
A) Increasing taxes
B) Lowering taxes
C) Increasing government spending
D) Selling government securities
6) The major objective of the European Central Bank is to ________.
A) set monetary policy for EU countries that adopt the euro
B) ensure that EU interest rates are equal to U.S. rates
C) control taxes as a means of monitoring EU debt
D) reduce spending by EU countries
7) The lowering of taxes in the U.S. by its government is an example of the ________.
A) fiscal policy
B) monetary policy
C) social policy
D) foreign affairs policy
8) To cool off an inflationary economy, a government might ________.
A) lower interest rates
B) raise interest rates
C) lower foreign exchange rates
D) raise foreign exchange rates
9) The exchange rate at the beginning of a year between the Indian Rupee (R) and the U.S. dollar
is R43.125/$. The annual inflation rates in India and in the United States are 19 percent and 3
percent respectively. What would be the new exchange rate at the end of the year?
A) R49.8224/$
B) R37.327/$
C) R0.0267/$
D) $37.327/R
10) The inefficient market view holds that prices of financial instruments ________.
A) are dependent on political efficiency
B) are not dependent on political efficiency
C) do not reflect all publicly available information
D) reflect all publicly available information at any given time
11) Which of the following forecasting techniques employs statistical models based on key
economic indicators to forecast exchange rates?
A) financial analysis
B) fundamental analysis
C) probability bounds analysis
D) technical analysis
12) Which of the following forecasting techniques employs charts of past trends in currency
prices and other factors to forecast exchange rates?
A) financial analysis
B) fundamental analysis
C) value chain analysis
D) technical analysis
13) Sam already knows that the ________ tells us the value of one country’s currency we must
pay to receive a certain amount of another.
A) exchange rate
B) par value
C) law of one price
D) purchasing power parity theory
14) Sam’s mentor at the firm told him that the ________ stipulates that an identical product must
have an identical price in all countries when the price is expressed in a common currency.
A) exchange price
B) law of one price
C) fixed exchange-rate system
D) floating exchange-rate system
15) A company exports will decline as the value of their currency gets stronger.
16) Translating subsidiary earnings from a strong host currency into a weak home currency
increases stated earnings in the home currency.
17) The intentional lowering of the value of a currency by a nation’s government is called
devaluation.
18) Devaluation increases the price of a country’s exports in the global market and increases the
price of its imports.
19) Currency devaluation decreases the consumers’ buying power in the country whose currency
is being devalued.
20) In order to capture the gains from currency translation, managers prefer exchange rates that
are stable.
21) As the unpredictability of exchange rates increases, so does the cost of insuring against the
accompanying risk.
22) Fluctuating exchange rates increase the need for currency hedging.
23) Inflation is a result of the supply and demand for a currency.
24) Full employment or low unemployment rates can lead to higher inflation.
25) Inflation in an economy can be controlled by increasing the interest rates.
26) Briefly describe how exchange rates influence business activities.
27) Explain how exchange rates adjust to inflation.
28) Discuss the role of business confidence and psychology in currency values.
29) Explain how movement in a currency’s exchange rate affects the activities of both domestic
and international companies. Discuss how companies can export successfully despite having a
strong currency.
30) Explain the concept of devaluation, and explain the effect devaluation has on the price of a
country’s imports. Discuss how international companies can adjust to a weak currency.
31) Devaluation of a nation’s currency ________.
A) gives foreign companies in the country an edge over domestic companies
B) leads to a decline in the supply of goods and services
C) lowers the price of a country’s exports
D) increases consumers’ buying power
32) The lowering of the value of a currency by a nation’s government is called ________.
A) devaluation
B) securitization
C) fundamental disequilibrium
D) currency hedging
33) Which of the following lowers the price of a country’s exports on world markets and
increases the price of its imports?
A) revaluation
B) devaluation
C) currency hedging
D) currency arbitrage
34) Predictable exchange rates reduce the need for ________.
A) currency conversion
B) currency swap
C) currency depreciation
D) currency hedging
35) Which of the following stipulates that an identical product must have an identical price in all
countries when the price is expressed in a common currency?
A) purchasing power parity
B) the law of one price
C) the comparative advantage theory
D) the efficient market view
36) If a kilogram of coal costs €1.5 in Germany and $1 in the United States, the law of one price
calculates the expected exchange rate between the euro and the dollar to be ________.
A) €0.67/$
B) €1.5/$
C) $1.67/€
D) $0.12/€
37) When the law of one price is violated, a(n) ________ opportunity arises.
A) dumping
B) countertrade
C) arbitrage
D) devaluation
38) A(n) ________ opportunity helps in buying a product in one country and selling it in another
country where it has a higher value.
A) barter
B) buyback
C) countertrade
D) arbitrage
39) Which of the following talks about the relative ability of two countries’ currencies to buy the
same “basket” of goods in those two countries?
A) the Fisher effect
B) the law of one price
C) purchasing power parity
D) cross rates
40) A government buys its own securities on the open market when the ________.
A) inflation rate in the country is high
B) inflation rate in the country is low
C) interest rates in the country are high
D) interest rates in the country are low
41) Which of the following states that the country with the higher interest rate should have the
higher inflation?
A) the Fisher Effect
B) the International Fisher Effect
C) the Interest Rate Inflation Theory
D) the Forward rate theory
42) Which of the following represents the Fisher effect?
A) Cross Rate = Real Interest Rate + Nominal Interest Rate
B) Real Interest Rate = Nominal Interest Rate + Spot Rate
C) Nominal Interest Rate = Real Interest Rate + Inflation Rate
D) Real Interest Rate = Nominal Interest Rate + Unemployment Rate
43) If money were free from all controls when transferred internationally, the real rate of interest
would ________.
A) be the same in all countries
B) be the same as the inflation rate
C) create arbitrage opportunities across countries
D) create arbitrage opportunities in developed countries
44) The International Fisher Effect implies that ________.
A) the country with the higher interest rate should have lower inflation
B) the currency of the country with the lower interest rate will strengthen in the future
C) the currency of the country with the higher interest rate will strengthen in the future
D) interest rates and inflation are not linked at all
45) The ________ theory seeks to define the relationship between currencies based on relative
inflation.
A) inflation growth rate
B) revaluation
C) purchasing power parity
D) interest rate
46) According to purchasing power parity theory, if Brazilian inflation was 6 percent and
inflation in Argentina was 12 percent, the Brazilian real would be expected to ________.
A) rise by the difference in inflation rates
B) fall by the difference in inflation rates
C) rise by 4.5 percent
D) stay the same
47) According to the efficient market view, future exchange rates are most accurately forecasted
by ________.
A) forward exchange rates
B) cross rate
C) interbank interest rates
D) buy rate
48) The efficient market view holds that ________.
A) companies can search for new pieces of information to improve forecasting
B) forward exchange rates provide the least accurate forecasts of future exchange rates
C) companies must spend time and money collecting and examining information believed to
affect future exchange rates
D) prices of financial instruments reflect all publicly available information at any given time
49) Which of the following is true of the techniques used for forecasting exchange rates?
A) Very few forecasts are completely accurate because of unexpected events that occur
throughout the forecast period.
B) The human element involved in forecasting exchange rates perfect the techniques.
C) Fundamental analysts estimate the timing, magnitude, and direction of future exchange rate
changes using charts and models of past data trends.
D) Technical analysts often consider a country’s balance-of-payments situation while forecasting
exchange rates.
50) An exchange-rate system in which the exchange rate for converting one currency into
another is set by international governmental agreement is called a ________ system.
A) floating exchange-rate
B) fixed exchange-rate
C) cross rate
D) spot rate
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Scenario: Color-Me-Green Inc.
Color-Me-Green Inc., a U.S.-based clothing merchant, has started doing business internationally.
Having subsidiaries in several countries, the company must integrate financial information from
all its subsidiaries with the U.S. home office at the end of the year.
51) Suppose Country A has a currency called the Pulse (P). At the beginning of the year, the
exchange rate between the Pulse and the U.S. dollar was P150/$. The inflation rate in Country A
is running at an annual rate of 250 percent, whereas inflation in the U.S. is running at 2 percent.
Which of the following would most likely be the new exchange rate that Color-Me-Green can
expect at the end of the year?
A) P525/$
B) P514.70/$
C) P43.71/$
D) $43.71/P
52) In Country B, Color-Me-Green is faced with a tight labor market and a low unemployment
rate. This low unemployment rate will most likely result in ________.
A) lower interest rates
B) lower wages for workers
C) higher purchasing power
D) higher rate of inflation
53) In an attempt to raise money in Country B, Color-Me-Green was quoted an interest rate of 14
percent by a local bank. This quoted rate is called the ________ rate.
A) cross
B) artificial
C) nominal
D) exchange
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Scenario: Sam Dearing, Budding International Financier
Sam Dearing is a summer intern in the arbitrage department at a prestigious Wall Street firm.
Sam is hoping to be offered a full-time position at the firm after he graduates from college, and
therefore, Sam knows that he must demonstrate a strong understanding of how exchange rates
work.
54) Sam has been studying the price of wheat across markets. If a kilogram of wheat costs €1.5
in France and $1 in the United States, the law of one price would tell us ________.
A) the expected exchange rate between the euro and the dollar is €1.5/$
B) wheat is overpriced in France
C) wheat is underpriced in France
D) an arbitrage opportunity does not exist in the international wheat market
55) Suppose Sam then noticed that the actual euro/dollar exchange rate on currency markets is
€1.2/$, and that a kilogram of wheat still costs $1 in the U.S. and €1.5 in France. Sam then
knows that ________.
A) the expected exchange rate between the euro and the dollar is €1.5/$
B) wheat is priced higher in France
C) wheat is priced lower in France
D) an arbitrage opportunity does not exist in the international wheat market
56) It the actual euro/dollar exchange rate on currency markets is €1.2/$, and a kilogram of
wheat still costs $1 in the U.S. and €1.5 in France, Sam also knows that the price of a kilogram
of wheat in France is ________.
A) $1.25
B) $.80
C) €.80
D) €1.2