Quick Study Questions
Quick Study 1
1. Q: For a country with a currency that is weakening (valued low relative to other countries),
what will happen to the price of its exports and the price of its imports?
A: Devaluation lowers the price of a country’s exports on world markets and increases the price
of imports because the country’s currency is now worth less on world markets.
2. Q: Unfavorable movements in exchange rates can be costly for business, so managers prefer
that exchange rates be what?
A: Stable exchange rates improve the accuracy of financial planning, including cash flow
forecasts. Predictable exchange rates reduce the likelihood that companies will be caught off-
3. Q: The view that prices of financial instruments reflect all publicly available information at any
given time is called what?
A: The efficient market view states that prices of financial instruments reflect all publicly
Quick Study 2
1. Q: The principle that an identical item must have an identical price in all countries when price
is expressed in a common currency is called what?
A: The law of one price is a principle that an identical product must have an identical price in
all countries when expressed in the same currency. This product must be identical in quality and
content and be entirely produced within each country. If the price is not identical in each
country, an arbitrage opportunity would arise—an opportunity to buy a product at a specific
The limitations of the law of one price are several. First, the law of one price requires
that the products must be identical in quality and content in each country, and must be entirely
2. Q: A unique aspect of purchasing power parity in the context of exchange rates is that it is only
useful when applied to what?
A: Purchasing power parity is the relative ability of two countries’ currencies to buy the same
“basket” of goods in those two countries. It tells us how much of currency “A” that a person in
country “A” needs in order to buy the same amount of products that a person in country “B” can
3. Q: What is the impact on purchasing power when growing demand for products outstrips a
stagnant supply?
A: As growing demand for products outstrips stagnant supply, prices will rise and devour any
4. Q: What factors influence the power of purchasing power parity to accurately predict exchange
rates?
A: There are limitations to the PPP concept. First, purchasing power parity is better at
predicting long-term exchange rates than short-term rates. Unfortunately, short-term forecasts
are often more beneficial to managers. Second, although PPP assumes a world of no
transportation costs, this is clearly unrealistic. If adding transportation costs to the cost of a
Quick Study 3
1. Q: The gold standard is an example of what type of international monetary system?
A: In the earliest days of international trade, gold was the internationally accepted currency for
payments of goods and services. The gold standard was an international monetary system in
which nations linked the value of their paper currencies to specific values of gold. The value of
2. Q: What are the main advantages of the gold standard?
A: There are three main advantages associated with an international monetary system based on
the gold standard. First, because the gold standard maintained highly fixed exchange rates
between currencies, it drastically reduced exchange-rate risk. Second, because the gold standard
paper currency in the domestic economy because it cannot have paper currency in excess of
gold reserves. As the money supply falls, so do prices of goods and services in the country
exports on world markets and increased the price of British (and other nations’) goods imported
into the United States. Countries retaliated against one another through “competitive
3. Q: What is the name of the international monetary system that formed in 1944 following the
demise of the gold standard?
A: The Bretton Woods agreement was an accord among nations to create a new international
Quick Study 4
1. Q: An exchange rate system in which currencies float against one another with governments
intervening to stabilize currencies at target rates is called what?
A: A managed float system is one in which currencies float against one another, with
governments intervening to stabilize their currencies at particular target exchange rates.
2. Q: What do we call the arrangement whereby a nation lets its currency float within a margin
around the value of another more stable currency?
A: A free float system is an arrangement whereby a nation lets its currency float within a
margin around the value of another more stable currency.
3. Q: A currency board is a monetary regime based on an explicit commitment to exchange
domestic currency for what?
A: The currency board is a monetary regime based on an explicit commitment to exchange
Teaming Up
1. Q: Suppose you and several classmates are a marketing team assembled by your Brazil-based
firm to estimate demand in the U.S. market for its newly developed product. The market
research firm you hired requires $150,000 to perform a thorough study. But your group is
informed that the total research budget for the year is 3 million Brazilian real and that no more
than 20 percent of the budget can be spent on any one project.
(3a.) If the current exchange rate is 5 real/$, will you have the market study conducted? Why or
why not?
A: The answer is no. Converting real into dollars at an exchange rate of 5 real/$, we arrive at
$600,000 (3,000,000/5 real/$ = $600,000). The research project costing $150,000 is 25 percent
(3b.) If the exchange rate changes to 3 real/$, will you have the study conducted? Why or why
not?
A: The answer is yes. Converting real into dollars at an exchange rate of 3 real/$, we arrive at
$1,000,000 (3,000,000 real/3 real/$ = $1,000,000). The research project costing $150,000 is 15
(3c.) At what exchange rate do you change your decision from rejecting the proposed
research project to accepting the project?
A. The threshold exchange rate at which the project decision changes from “accept” to
“reject” is 4 real/$. We can set up the problem as an equation which is .20x = $150,000. (The .
Ethical Challenges
1. Q: You are the chair of an IMF task force. Your job is to reevaluate the policy of bailing out
national governments that suffer losses in the private sector. Current policy is to enlist the
governments of industrialized countries in bailing out emerging nations in the midst of
financial crises. Taxpayers in industrial countries typically foot the bill for IMF activities, with
total loans running into the many billions of dollars. Recent examples are the bailouts of
Mexico, Indonesia, and Thailand. Some critics call this system a kind of “remnant socialism”
that rescues financial institutions and investors from their own mistakes with money from
taxpayers. For instance, the financial crisis in Thailand was largely a private-sector affair.
Thai banks and insurance companies were heavily in debt and the central bank had recklessly
pledged its foreign exchange reserves to shore up the currency. As chair of the task force, what
is your position on this dilemma? Do you believe that the current system socializes losses (the
government bails them out) and privatizes profits? Explain exactly who benefits from such
bailouts. What is an alternative to an IMF bailout?
A: Students might look at the recent events in the U.S. financial system meltdown for ideas on
this topic. They may research articles around the time of the Southeast Asian crisis to
understand who benefits and loses when losses are socialized—the argument that private
Practicing International Management Case
Banking on Forgiveness
1. This item can be assigned as a Discussion Question in MyManagementLab. Student
responses will vary. Q: The World Bank and the IMF had once argued that the leniency of
debt forgiveness would make it more difficult for the lenders themselves to borrow cheaply on
the world’s capital markets. If you were a World Bank donor, would you support the HIPC
Debt Initiative or argue against it? Explain your answer.
A: This question could set up a debate between groups arguing for and against debt relief.
Students arguing for debt relief must explain the benefits (humanitarian, economic, etc.) that
2. Q: In negotiating the HIPC Debt Initiative, the World Bank and the IMF worked closely
together. At one point, however, the plan came to a standstill when the two organizations
produced different figures for Uganda’s coffee exports, with the IMF giving a more optimistic
forecast and so arguing against the need for debt relief. In your opinion, is there any benefit to
these organizations working together? Explain. Which organization do you think should play a
greater role in aiding economic development? Why?
A: Students should be encouraged to visit the Web sites of the International Monetary Fund and
understanding of these organizations’ activities before answering this question.