International Financial Management, 8e (Eun)
1) Over half of all dollar bills in circulation are held outside American’s borders.
2) The current account balance, which is the difference between a country’s exports and imports, is
a component of the country’s GNP. Other components of GNP include
A) consumption and investment and government expenditure.
B) consumption and government expenditure and net exports.
C) consumption and net exports and government expenditure.
D) consumption less imports.
3) If the United States imports more than it exports, then this means that
A) the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris
paribus.
B) the demand for dollars is likely to exceed the supply in the foreign exchange market, ceteris
paribus.
C) the U.S. dollar would be under pressure to appreciate against other currencies.
D) the demand for dollars is likely to exceed the supply in the foreign exchange market, ceteris
paribus, and the U.S. dollar would be under pressure to appreciate against other currencies.
4) Balance of payments
A) is defined as the statistical record of a country’s international transactions over a certain period
of time presented in the form of a double-entry bookkeeping.
B) provides detailed information concerning the demand and supply of a country’s currency.
C) can be used to evaluate the performance of a country in international economic competition.
D) all of the options
5) If a country is grappling with a major balance-of-payment difficulty, it may not be able to
expand imports from the outside world. Instead, the country may be tempted to
A) impose measures to restrict imports.
B) impose measures to discourage capital outflows.
C) impose measures to restrict imports and discourage capital outflows.
D) none of the options
6) If the United States imports more than it exports, then
A) the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris
paribus.
B) one can infer that the U.S. dollar would be under pressure to depreciate against other currencies.
C) the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris
paribus, and one can infer that the U.S. dollar would be under pressure to depreciate against other
currencies.
D) none of the options
7) Generally speaking, any transaction that results in a receipt from foreigners
A) will be recorded as a debit, with a negative sign, in the U.S. balance of payments.
B) will be recorded as a debit, with a positive sign, in the U.S. balance of payments.
C) will be recorded as a credit, with a negative sign, in the U.S. balance of payments.
D) will be recorded as a credit, with a positive sign, in the U.S. balance of payments.
8) Generally speaking, any transaction that results in a payment to foreigners
A) will be recorded as a debit, with a negative sign, in the U.S. balance of payments.
B) will be recorded as a debit, with a positive sign, in the U.S. balance of payments.
C) will be recorded as a credit, with a negative sign, in the U.S. balance of payments.
D) will be recorded as a credit, with a positive sign, in the U.S. balance of payments.
9) If Japan exports more than it imports, then
A) the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris
paribus.
B) one can infer that the yen would be likely to appreciate against other currencies.
C) the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris
paribus, and one can infer that the yen would be likely to appreciate against other currencies.
D) none of the options
10) The balance of payments records
A) only international trade, (exports and imports).
B) only cross-border investments (FDI and portfolio investment).
C) not only international trade, (exports and imports) but also cross-border investments.
D) none of the options
11) Credit entries in the U.S. balance of payments
A) result from foreign sales of U.S. goods and services, goodwill, financial claims, and real assets.
B) result from U.S. purchases of foreign goods and services, goodwill, financial claims, and real
assets.
C) give rise to the demand for dollars.
D) give rise to the supply of dollars.
E) result from foreign sales of U.S. goods and services, goodwill, financial claims, and real assets,
and give rise to the demand for dollars.
12) A country experiencing a significant balance-of-payments surplus would be likely to
A) expand imports, offering marketing opportunities for foreign enterprises.
B) refrain from imposing foreign exchange restrictions.
C) expand exports, offering international marketing opportunities for domestic enterprises.
D) expand imports, offering marketing opportunities for foreign enterprises, and refrain from
imposing foreign exchange restrictions.
13) Suppose the McDonalds Corporation imports Canadian beef, paying for it by transferring the
funds to a New York bank account kept by the Canadian beef producer.
A) Payment by McDonalds will be recorded as a debit.
B) The deposit of the funds by the seller will be recorded as a debit.
C) Payment by McDonalds will be recorded as a credit.
D) The deposit of the funds by the buyer will be credit.
14) Since the balance of payments is presented as a system of double-entry bookkeeping,
A) every credit in the account is balanced by a matching debit.
B) every debit in the account is balanced by a matching credit.
C) every credit in the account is balanced by a matching debit and every debit in the account is
balanced by a matching credit.
D) none of the options
15) Suppose the InBev Corporation (a non-U.S. MNC) buys the Anheuser-Busch Corporation,
paying the U.S. shareholders cash.
A) Payment by InBev will be recorded as a debit.
B) The deposit of the funds by the sellers will be recorded as a debit.
C) Payment by InBev will be recorded as a credit.
D) The deposit of the funds by the buyer will be credit.
16) The current account includes
A) the export and import of goods and services.
B) all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and
businesses.
C) all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold,
and special drawing rights (SDRs).
D) none of the options
17) A country with a current account surplus
A) acquires IOUs from foreigners, thereby increasing its net foreign wealth.
B) must borrow from foreigners or draw down on its previously accumulated foreign wealth.
C) will experience a reduction in the country’s net foreign wealth.
D) must borrow from foreigners or draw down on its previously accumulated foreign wealth and
will experience a reduction in the country’s net foreign wealth.
18) The capital account includes
A) the export and import of goods and services.
B) all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and
businesses.
C) all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold,
and special drawing rights (SDRs).
D) none of the options
19) The official reserve account includes
A) the export and import of goods and services.
B) all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and
businesses.
C) all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold,
and special drawing rights (SDRs).
D) none of the options
20) A country’s international transactions can be grouped into the following three main types:
A) current account, medium term account, and long term capital account.
B) current account, long term capital account, and official reserve account.
C) current account, capital account, and official reserve account.
D) capital account, official reserve account, trade account.
21) Invisible trade refers to
A) services that avoid tax payments.
B) the underground economy.
C) legal, consulting, and engineering services.
D) tourist expenditures only.
22) A country that gives foreign aid to another country can be viewed as
A) importing goodwill from the latter.
B) exporting goodwill to the latter.
23) In 2012, the United States had a current account deficit. The current account deficit implies
that the United States
A) had a surplus on legal consulting and engineering services.
B) produced more output than it consumed.
C) consumed more output than it produced.
D) none of the options
24) The current account is divided into four finer categories:
A) merchandise trade, services, factor income, and statistical discrepancy.
B) merchandise trade, services, factor income, and unilateral transfers.
C) merchandise trade, services, portfolio investment, and unilateral transfers.
D) merchandise trade, services, factor income, and direct investment.
25) The factors of production are
A) land, labor, capital, and entrepreneurial ability.
B) interest, wages and dividends.
C) payments and receipts of interest, dividends, and other income on foreign investments that were
previously made.
D) none of the options
26) Factor income
A) consists largely of interest, dividends, and other income on foreign investments.
B) is a theoretical construct of the factors of production, land, labor, capital, and entrepreneurial
ability.
C) is generally a very minor part of national income accounting, smaller than the statistical
discrepancy.
D) none of the options
27) The entries in the “current account” and the “capital account”, combined, can be outlined (in
alphabetic order) as:
(i) direct investment
(ii) factor income
(iii) merchandise
(iv) official transfer
(v) other capital
(vi) portfolio investment
(vii) private transfer
(viii) services
Current account includes
A) (i), (ii), and (iii)
B) (ii), (iii), and (vii)
C) (iv), (v), and (vii)
D) (i), (v), and (vi)
28) The entries in the “current account” and the “capital account”, combined, can be outlined (in
alphabetic order) as:
(i) direct investment
(ii) factor income
(iii) merchandise
(iv) official transfer
(v) other capital
(vi) portfolio investment
(vii) private transfer
(viii) services
Capital account includes
A) (i), (ii), and (iii)
B) (ii), (iii), and (vii)
C) (iv), (v), and (vii)
D) (i), (v), and (vi)
29) The “J-curve effect” shows
A) the initial deterioration and the eventual improvement of a country’s trade balance following a
currency depreciation.
B) the initial improvement and the eventual depreciation of a country’s trade balance following a
currency depreciation.
C) the trade balance’s lack of responsiveness to the exchanges rate changes.
D) none of the options
30) The “J-curve effect”
A) happens most of the time, in the short run.
B) only occurs in about 40 percent of cases, according to a study by Sebastian Edwards.
C) is a long-run phenomenon, not a short-run one.
D) none of the options
31) The J-curve effect received wide attention when
A) the British trade balance worsened after a strengthening of the pound in 1967.
B) the British trade balance worsened after a devaluation of the pound in 1967.
C) the British trade balance improved after a devaluation of the pound in 1967.
D) none of the options
32) A currency depreciation will begin to improve the trade balance immediately
A) if the demand for imports and exports are inelastic.
B) if the demand for imports and exports are elastic.
C) if imports decrease and exports decrease.
D) none of the options
33) When a country’s currency depreciates against the currencies of major trading partners,
A) the country’s exports tend to rise and imports fall.
B) the country’s exports tend to fall and imports rise.
C) the country’s exports tend to rise and imports rise.
D) the country’s exports tend to fall and imports fall.
34) A depreciation will begin to improve the trade balance immediately if
A) imports and exports are responsive to the exchange rate changes.
B) imports and exports are inelastic to the exchange rate changes.
C) consumers exhibit brand loyalty and price inelasticity.
D) imports and exports are inelastic to the exchange rate changes and consumers exhibit brand
loyalty and price inelasticity.
35) In the short run a currency depreciation can make a trade balance worse if
A) there is no domestic producer of an import.
B) there is no domestic buyer for an import.
C) there is no export market for a country’s output.
D) none of the options
36) What is the correct label for the vertical axis in the J-curve?
A) Time
B) Change in the Trade Balance
C) Size of Trade Balance
D) Size of Merchandise Trade Balance
37) In the long run, both exports and imports tend to be
A) unresponsive to changes in exchange rates.
B) responsive to changes in exchange rates.
C) both responsive and unresponsive to changes in exchange rates.
D) none of the options
38) With regard to the capital account,
A) the capital account balance measures the difference between U.S. sales of assets to foreigners
and U.S. purchases of foreign assets.
B) U.S. sales (or exports) of assets are recorded as credits, as they result in capital inflow.
C) U.S. purchases (imports) of foreign assets are recorded as debits, as they lead to capital outflow.
D) all of the options
39) The difference between Foreign Direct Investment and Portfolio Investment is that
A) Portfolio Investment mostly represents the sale and purchase of foreign financial assets such as
stocks and bonds that do not involve a transfer of control.
B) Foreign Direct Investment mostly represents the sale and purchase of foreign financial assets
such as stocks whereas Portfolio Investment mostly involves the sales and purchase of foreign
bonds.
C) Foreign Direct Investment is about buying land and building factories, whereas portfolio
investment is about buying stocks and bonds.
D) all of the options
40) In the latter half of the 1980s, with a strong yen, Japanese firms
A) faced difficulty exporting.
B) could better afford to acquire U.S. assets that had become less expensive in terms of yen.
C) financed a sharp increase in Japanese FDI in the United States.
D) all of the options
41) International portfolio investments have boomed in recent years, as a result of
A) a depreciating U.S. dollar.
B) increased gasoline and other commodity prices.
C) the general relaxation of capital controls and regulation in many countries.
D) none of the options
42) If the interest rate rises in the U.S. while other variables remain constant
A) capital inflows into the U.S. will increase.
B) capital inflows into the U.S. may not materialize.
C) capital will flow out of the U.S.
D) none of the options
43) If for a particular county an increase in the interest rate is more or less matched by an expected
depreciation in the local currency,
A) traders will probably be tempted to find another country to invest in.
B) the interest rate increase per se will not be enough to spark capital flow into the country.
C) traders will probably be tempted to find another country to invest in and the interest rate
increase per se will not be enough to spark capital flow into the country.
D) capital will glow out of the country as the disgruntled citizens riot and go to war with the
neighbors.
44) The capital account measures
A) the sum of U.S. sales of assets to foreigners and U.S. purchases of foreign assets.
B) the difference between U.S. sales of assets to foreigners and U.S. purchases of foreign assets.
C) the difference between U.S. sales of manufactured goods to foreigners and U.S. purchases of
foreign products.
D) none of the options
45) When Honda, a Japanese auto maker, built a factory in Ohio,
A) it was engaged in foreign direct investment.
B) it was engaged in portfolio investment.
C) it was engaged in a cross-border acquisition.
D) none of the options.
46) Government controlled investment funds, known as sovereign wealth funds,
A) are playing a less-important role in international finance following the end of the fixed
exchange rate era.
B) are mostly domiciled in Asian and Middle Eastern countries.
C) are usually responsible for converting trade surpluses and oil revenues into foreign exchange
reserves.
D) none of the options
47) Foreign direct investment (FDI) occurs
A) when an investor acquires a measure of control of a foreign business.
B) when there is an acquisition, by a foreign entity in the U.S., of 10 percent or more of the voting
shares of a business.
C) with sales and purchases of foreign stocks and bonds that do not involve a transfer of control.
D) when an investor acquires a measure of control of a foreign business and when there is an
acquisition, by a foreign entity in the U.S., of 10 percent or more of the voting shares of a business.
48) The capital account may be divided into three categories—
A) cross-border mergers and acquisitions, portfolio investment, and other investment.
B) direct investment, portfolio investment, and cross-border mergers and acquisitions.
C) direct investment, mergers and acquisitions, and other investment.
D) direct investment, portfolio investment, and other investment.
49) When Nestlé, a Swiss firm, bought the American firm Carnation, it was engaged in foreign
direct investment. If Nestlé had only bought a non-controlling number of shares of the firm,
A) Nestlé would have been engaged in portfolio investment.
B) Nestlé would have been engaged in a cross-border acquisition.
C) it would depend if they bought the shares from an American or a Canadian.
D) none of the options
50) Transactions in currency, bank deposits and so forth
A) tend to be insensitive to both changes in relative interest rates and the anticipated change in
exchange rate.
B) tend to be sensitive to both changes in relative interest rates and the anticipated change in
exchange rate.
C) tend to be sensitive to changes in relative interest rates but insensitive to the anticipated change
in exchange rate.
D) tend to be insensitive to changes in relative interest rates but sensitive to the anticipated change
in exchange rate.
51) Since security returns tend to have low correlations among countries,
A) investors can reduce risk more effectively if they diversify their portfolio holdings
internationally rather than purely domestically.
B) investors who have a domestically diversified portfolio, with exposures across industry types
will not gain much from diversifying abroad.
C) investors who diversify internationally will likely underperform investors who keep all their
investments in one country.
D) none of the options
52) The world’s largest debtor nation and creditor nation, respectively, are
A) Japan and the U.S.
B) The U.S. and Japan.
C) The U.S. and Canada.
D) Great Britain and Mexico.
53) Statistical discrepancy, which, by definition, represents errors and omissions,
A) cannot be calculated directly.
B) is calculated by taking into account the balance-of-payments identity.
C) probably has some elements that are honest mistakes, it can’t all be money laundering and
drugs.
D) all of the options
54) The statistical discrepancy in the balance-of-payments accounts
A) arise since recordings of payments and receipts are done at different times, in different places,
possibly using different methods.
B) arise because some transactions (illegal transactions) occur “off the books.”
C) represents omitted and misreported transactions.
D) all of the options
55) Which of the following is most indicative of the pressure that a country’s currency faces for
depreciation or appreciation?
A) The current account
B) The capital account
C) The statistical discrepancies
D) The official settlement balance
56) The United States is considered
A) a net creditor nation.
B) a net debtor nation.
57) Regarding the statistical discrepancy in the balance-of-payments accounts,
A) there is some evidence that financial transactions may be mainly responsible for the
discrepancy.
B) the sum of the balance on the capital account and the statistical discrepancy is very close to the
balance of the current account in magnitude.
C) it tends to be positive one year and negative in others, so it’s safe to ignore it.
D) there is some evidence that financial transactions may be mainly responsible for the
discrepancy, and the sum of the balance on the capital account and the statistical discrepancy is
very close to the balance of the current account in magnitude.