International Business: The Challenges of Globalization, 7e (Wild)
Chapter 10 International Money System
1) A company can improve its profits by selling in a country with a strong currency and sourcing
from a country with a weak currency.
2) Translating subsidiary earnings from a strong host currency into a weak home currency
increases stated earnings in the home currency.
3) The intentional lowering of the value of a currency by a nation’s government is called
revaluation.
4) Devaluation lowers the price of a country’s exports in the global market and increases the
price of its imports.
5) Currency devaluation increases consumers’ buying power.
6) In order to capture the gains from currency translation, managers prefer exchange rates that
are volatile and unpredictable.
7) As the unpredictability of exchange rates increases, so does the cost of insuring against the
accompanying risk.
8) Predictable exchange rates increase the need for currency hedging.
9) If the law of one price is applied and upheld, an arbitrage opportunity arises.
10) It is the nature of arbitrage to even out excessive fluctuation by destroying its own
profitability.
11) Purchasing power parity does not hold for single products, it is meaningful only when
applied to a basket of goods.
12) Inflation is a result of the supply and demand for a currency.
13) Low unemployment rates can lead to higher inflation.
14) Inflation in an economy can be controlled by lowering the interest rates.
15) According to Fisher effect, real interest rate is the sum of the nominal interest rate and the
expected rate of inflation over a specific period.
16) Investor confidence in the value of a currency plays an important role in determining its
exchange rate.
17) A market is efficient if the prices of financial instruments quickly reflect new public
information made available to traders.
18) According to the efficient market view for forecasting exchange rates, forward exchange
rates are perfect predictors of future exchange rates.
19) Fundamental analyses used for forecasting exchange rates estimate the timing, magnitude,
and direction of future exchange rate changes.
20) Technical analysis employs charts of past trends in currency prices and other factors to
forecast exchange rates.
21) The value of a currency expressed in dollars is called its par value.
22) The primary disadvantage of the gold standard was that it increased exchange-rate risk.
23) The Bretton Woods Agreement was an accord among nations to create a new international
monetary system based on the value of the U.S. dollar.
24) To provide funding for countries’ efforts toward economic development, the Bretton Woods
Agreement created the International Bank for Reconstruction and Development.
25) The IMF asset whose value is based on a “weighted basket” of four currencies is called a
special drawing right.
26) Today’s international monetary system remains in large part a managed float system.
27) A government with a currency board is legally bound to hold an amount of foreign currency
that is at least equal to the amount of domestic currency.
28) The European monetary system is still in practice today.
29) When a country’s currency is weak, 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
30) 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
31) Which of the following is the intentional lowering of a currency’s value by its government?
A) revaluation
B) devaluation
C) currency hedging
D) currency arbitrage
32) 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) increases the price of a country’s imports
D) increases consumers’ buying power
33) The intentional raising of the value of a currency by a nation’s government is called
________.
A) revaluation
B) securitization
C) fundamental disequilibrium
D) currency hedging
34) 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
35) Predictable exchange rates reduce the need for ________.
A) currency conversion
B) currency swap
C) currency depreciation
D) currency hedging
36) 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
37) 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) $0.12/€
38) When the law of one price is violated, a(n) ________ opportunity arises.
A) dumping
B) countertrade
C) arbitrage
D) devaluation
39) A(n) ________ opportunity helps in buying a product in one country and selling it in another
country where it has a higher value.
A) barter
B) buyback
C) countertrade
D) arbitrage
40) Which of the following talks about the relative ability of two countries’ currencies to buy the
same “basket” of goods in those two countries?
A) the Fisher effect
B) the law of one price
C) purchasing power parity
D) cross rates
41) Which of the following is true of inflation?
A) It occurs when money is injected into an economy that is experiencing greater output.
B) It is the result of supply and demand for a currency.
C) It increases people’s purchasing power.
D) It is not particularly affected by the unemployment in a country.
42) A government buys its own securities on the open market when the ________.
A) inflation rate in the country is high
B) inflation rate in the country is low
C) interest rates in the country are high
D) interest rates in the country are low
43) ________ is an activity under the monetary policy of a nation.
A) Increasing taxes
B) Lowering taxes
C) Increasing government spending
D) Selling government securities
44) The French government buying its own securities on the open market is part of the ________
of France.
A) fiscal policy
B) monetary policy
C) industrial policy
D) investment policy
45) The lowering of taxes in the U.S. by its government is an example of the ________.
A) fiscal policy
B) monetary policy
C) social policy
D) foreign affairs policy
46) To cool off an inflationary economy, a government might ________.
A) lower interest rates
B) raise interest rates
C) lower foreign exchange rates
D) raise foreign exchange rates
47) The exchange rate at the beginning of a year between the Indian Rupee (R) and the U.S.
dollar is R43.125/$. 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
48) The principle that nominal interest rate is the sum of the real interest rate and the expected
rate of inflation over a specific period of time is called ________.
A) the law of one price
B) purchasing power parity
C) the comparative advantage theory
D) the Fisher effect
49) 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
50) 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
51) The principle that a difference in nominal interest rates supported by two countries’
currencies will cause an equal but opposite change in their spot exchange rates is called the
________.
A) Guidotti-Greenspan rule
B) international Fisher effect
C) comparative advantage theory
D) efficient market view principle
52) Purchasing power parity is better at predicting ________ exchange rates.
A) cross
B) spot
C) short-term
D) long-term
53) Which of the following is a reason for the failure of PPP to predict exchange rates
accurately?
A) PPP takes transportation costs into consideration while predicting exchange rates.
B) PPP assumes no barriers to international trade while predicting exchange rates.
C) PPP considers the role of people’s confidence and beliefs about a nation’s economy in
exchange rate predictions.
D) PPP does not take into account the effect of the market forces of demand and supply.
54) 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
55) 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
56) 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
57) 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
58) 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
59) 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.
60) The ________ is the collection of agreements and institutions that govern exchange rates.
A) Bretton Woods Agreement
B) Plaza Accord
C) international monetary system
D) international bond market
61) In the earliest days of international trade, ________ was the internationally accepted
currency for payment of goods and services.
A) British pound
B) U.S. dollar
C) silver
D) gold
62) The gold standard is a ________ because it secured nations’ currencies to the value of gold.
A) floating exchange-rate system
B) fixed exchange-rate system
C) linked exchange rate system
D) free float system
63) ________ was the first nation to implement the gold standard in the early 1700s.
A) The United States
B) Britain
C) France
D) Japan
64) The value of a currency expressed in terms of gold is called its ________.
A) book value
B) net asset value
C) par value
D) carrying value
65) Under the gold standard, if the U.S. dollar was fixed at $30/oz of gold and Japan was fixed at
¥75/oz of gold, what would be the Yen/dollar exchange rate?
A) ¥2.50/$
B) $2.50/¥
C) ¥0.40/$
D) ¥2250/$
66) The calculation of each currency’s par value under the gold standard was based on the
concept of ________.
A) earnings per share
B) interbank interest rates
C) purchasing power parity
D) inflation rates
67) 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
68) Which of the following was an advantage of the gold standard?
A) It retained trade imbalances.
B) It abolished monetary policies on all countries.
C) It reduced the risk in exchange rates.
D) It increased exchange-rate fluctuations.
69) Which of the following was a disadvantage of using gold as a medium of exchange in
international trade?
A) The weight of gold made transporting it expensive.
B) Gold was not in high demand.
C) The gold standard imposed lenient monetary policies on countries that participated in the
system.
D) The gold standard increased the risk in exchange rates as it maintained highly flexible
exchange rates between currencies.
70) Which of the following created a new international monetary system based on the value of
the U.S. dollar?
A) Plaza Accord
B) Bretton Woods Agreement
C) Louvre Accord
D) Jamaica Agreement
71) Which of the following features did Bretton Woods Agreement incorporate in the
international monetary system based on the U.S. dollar?
A) floating exchange rates
B) trade imbalance corrections
C) an enforcement mechanism
D) a strict ban on devaluation
72) An economic condition in which a trade deficit causes a permanent negative shift in a
country’s balance of payments is called ________.
A) revaluation
B) statistical discrepancy
C) the Fisher effect
D) fundamental disequilibrium
73) The World Bank was created by the ________.
A) Jamaica Agreement
B) Bretton Woods Agreement
C) Smithsonian Agreement
D) Plaza Accord
74) Which of the following was created by the Bretton Woods Agreement to enforce the rules of
the international monetary system?
A) International Bank for Reconstruction and Development
B) International Capital Market
C) International Monetary Fund
D) World Bank
75) The ________ is an IMF asset whose value is based on a weighted basket of four currencies,
including the U.S. dollar, European Union euro, Japanese yen, and British pound.
A) special drawing right
B) gold standard
C) Eurobond
D) currency board