Chapter 1

Front 1

4. What major dimension sets apart international finance from domestic finance?
A. Foreign exchange and political risks
B. Market imperfections
C. Expanded opportunity set
D. All of the above

Back 1

D. All of the above

Front 2

5. An example of a political risk is
A. expropriation of assets.
B. adverse change in tax rules.
C. the opposition party being elected.
D. both answers a) and b) are correct.

Back 2

D. both answers a) and b) are correct

Front 3

6. Production of goods and services has become globalized to a large extent as a result of
A. natural resources being depleted in one country after another.
B. skilled labor being highly mobile.
C. multinational corporations' efforts to source inputs and locate production anywhere where costs are lower and profits higher.
D. common tastes worldwide for the same goods and services.

Back 3

C. multinational corporations' efforts to source inputs and locate production anywhere where

Front 4

7. Recently, financial markets have become highly integrated. This development
A. allows investors to diversify their portfolios internationally.
B. allows minority investors to buy and sell stocks.
C. has increased the cost of capital for firms.
D. answers a) and c) are both correct.

Back 4

A. allows investors to diversify their portfolios internationally

Front 5

8. Japan has experienced large trade surpluses. Japanese investors have responded to this by
A. liquidating their positions in stocks to buy dollar denominated bonds.
B. investing heavily in U.S. and other foreign financial markets.
C. lobbying the U.S. government to depreciate its currency.
D. lobbying the Japanese government to allow the yen to appreciate.

Back 5

B. investing heavily in U.S. and other foreign financial markets

Front 6

9. Suppose your firm invests $100,000 in a project in Italy. At the time the exchange rate is $1.25 = €1.00. One year later the exchange rate is the same, but the Italian government has expropriated your firm's assets paying only €80,000 in compensation. This is an example of
A. exchange rate risk.
B. political risk.
C. market imperfections.
D. none of the above, since $100,000 = €80,000  $1.25/€1.00

Back 6

B. political risk

Front 7

10. Suppose you start with $100 and buy stock for £50 when the exchange rate is £1 = $2. One year later, the stock rises to £60. You are happy with your 20 percent return on the stock, but when you sell the stock and exchange your £60 for dollars, you only get $45 since the pound has fallen to £1 = $0.75. This loss of value is an example of
A. exchange rate risk.
B. political risk.
C. market imperfections.
D. weakness in the dollar.

Back 7

B. political risk

Front 8

11. Suppose that Great Britain is a major export market for your firm, a U.S.-based MNC. If the British pound depreciates against the U.S. dollar,
A. your firm will be able to charge more in dollar terms while keeping pound prices stable.
B. your firm may be priced out of the U.K. market, to the extent that your dollar costs stay constant and your pound prices will rise.
C. to protect U.K. market share, your firm may have to cut the dollar price of your goods to keep the pound price the same.
D. both b) and c) are correct

Back 8

D. both b) and c) are correct

Front 9

12. Suppose Mexico is a major export market for your U.S.-based company and the Mexican peso appreciates drastically against the U.S. dollar. This means
A. your company's products can be priced out of the Mexican market, as the peso price of American imports will rise following the peso's fall.
B. your firm will be able to charge more in dollar terms while keeping peso prices stable.
C. your domestic competitors will enjoy a period of facing lessened price competition from Mexican imports.
D. both b) and c) are correct

Back 9

D. both b) and c) are correct

Front 10

13. Suppose Mexico is a major export market for your U.S.-based company and the Mexican peso depreciates drastically against the U.S. dollar, as it did in December 1994. This means
A. your company's products can be priced out of the Mexican market, as the peso price of American imports will rise following the peso's fall.
B. your firm will be able to charge more in dollar terms while keeping peso prices stable.
C. your domestic competitors will enjoy a period of facing little price competition from Mexican imports.
D. both b) and c) are correct

Back 10

A. your company's products can be priced out of the Mexican market, as the peso price of American imports will rise following the peso's fall

Front 11

14. Suppose that you are a U.S. producer of a commodity good competing with foreign producers. Your inputs of production are priced in dollars and you sell your output in dollars. If the U.S. currency depreciates against the currencies of our trading partners,
A. your competitive position is likely improved.
B. your competitive position is likely worsened.
C. your competitive position is unchanged.

Back 11

A. your competitive position is likely improved

Front 12

15. Undoubtedly, we are now living in a world where all the major economic functions—consumption, production, and investment
A. are still inherently local.
B. are still regional in nature.
C. are slowly becoming globalized.
D. are highly globalized.

Back 12

D. are highly globalized

Front 13

16. Most governments at least try to make it difficult for people to cross their borders illegally. This barrier to the free movement of labor is an example of
A. information asymmetry.
B. excessive transactions costs.
C. racial discrimination.
D. a market imperfection.

Back 13

D. a market imperfection

Front 14

17. Although the world economy is much more integrated today than was the case 10 or 20 years ago, a variety of barriers still hamper free movements of people, goods, services, and capital across national boundaries. These barriers include
A. legal restrictions.
B. excessive transportation costs.
C. information asymmetry.
D. all of the above

Back 14

D. all of the above

Front 15

18. The Japanese automobile company Honda decided to establish production facilities in Ohio, mainly to
A. circumvent trade barriers.
B. reduce transportation costs.
C. reduce transactions costs.
D. both a) and b)

Back 15

A. circumvent trade barriers

Front 16

19. When individual investors become aware of overseas investment opportunities and are willing to diversify their portfolios internationally,
A. they trade one market imperfection, information asymmetry, for another, exchange rate risk.
B. they benefit from an expanded opportunity set.
C. they should not bother to read or to understand the prospectus, since it's probably written in a foreign language.
D. they should invest only in dollars or euros.

Back 16

B. they benefit from an expanded opportunity set

Front 17

20. The Nestlé Corporation, a well-known Swiss MNC, used to issue two different classes of common stock, bearer shares and registered shares, and foreigners were allowed to hold only
A. registered shares.
B. bearer shares.
C. voting shares.
D. convertible shares.

Back 17

B. bearer shares

Front 18

21. Deregulated financial markets and heightened competition in financial services provided an environment for financial innovations that resulted in the introduction of various instruments. Examples of these innovative instruments include
A. currency futures and options, foreign stock index futures and options.
B. multicurrency bonds.
C. international mutual funds, country funds, exchange traded funds.
D. all of the above

Back 18

D. all of the above

Front 19

22. Nestlé, a well-known Swiss corporation,
A. has been a paragon of virtue in its opposition to all forms of political risk.
B. at one time placed restrictions on foreign ownership of its stock. When it relaxed these restrictions, the total market value of the firm fell.
C. at one time placed restrictions on foreign ownership of its stock. When it relaxed these restrictions, there was a major transfer of wealth from foreign shareholders to Swiss shareholders.
D. none of the above

Back 19

C. at one time placed restrictions on foreign ownership of its stock. When it relaxed these restrictions, there was a major transfer of wealth from foreign shareholders to Swiss shareholders

Front 20

23. The goal of shareholder wealth maximization
A. is not appropriate for non-U.S. business firms.
B. means that all business decisions and investments that a firm makes are done for the purpose of making the owners of the firm better off financially.
C. is a sub-objective the firm should attempt to achieve after the objective of customer satisfaction is met.
D. is in conflict with the privatization process taking place in third-world countries.

Back 20

B. means that all business decisions and investments that a firm makes are done for the purpose of making the owners of the firm better off financially

Front 21

24. As capital markets are becoming more integrated, the goal of shareholder wealth maximization
A. has been altered to include other goals as well.
B. has lost out to other goals, even in the U.S.
C. has been given increasing importance by managers in Europe.
D. has been shown to be a deterrent to raising funds abroad.

Back 21

C. has been given increasing importance by managers in Europe

Front 22

25. Recent corporate scandals at firms such as Enron, WorldCom and the Italian firm Parmalat
A. show that managers might be tempted to pursue their own private interests at the expense of shareholders.
B. show that Italian shareholders are better at monitoring managerial behavior than U.S. shareholders.
C. show that white-collar criminals hardly ever get punished.
D. show that socialism is a better way to go than capitalism.

Back 22

A. show that managers might be tempted to pursue their own private interests at the expense of shareholders

Front 23

26. While the corporate governance problem is not confined to the United States,
A. it can be a much more serious problem in many other parts of the world, where legal protection of shareholders is weak or nonexistent.
B. it has reached its high point in the United States.
C. the U.S. legal system, with lawsuits used only as a last resort, ensured that any conflicts of interest will soon be a thing of the past.
D. none of the above

Back 23

A. it can be a much more serious problem in many other parts of the world, where legal protection of shareholders is weak or nonexistent

Front 24

27. The owners of a business are the
A. taxpayers.
B. workers.
C. suppliers.
D. shareholders.

Back 24

D. shareholders

Front 25

28. The massive privatization that is currently taking place in formerly socialist countries, will likely
A. eventually enhance the standard of living to these countries' citizens.
B. depend on private investment.
C. increase the opportunity set facing these countries' citizens.
D. all of the above

Back 25

D. all of the above

Front 26

29. A firm with concentrated ownership
A. may give rise to conflicts of interest between dominant shareholders and small outside shareholders.
B. may enjoy more accounting transparency than firms with diffuse ownership structures.
C. is a partnership, never a corporation.
D. tends to exist overseas but not in the U.S.

Back 26

D. tends to exist overseas but not in the U.S

Front 27

30. The ultimate guardians of shareholder interest in a corporation, are the
A. rank and file workers.
B. senior management.
C. boards of directors.
D. all of the above.

Back 27

C. boards of directors

Front 28

31. In countries like France and Germany,
A. managers have often made business decisions with regard to maximizing market share to the exclusion of other goals.
B. managers have often viewed shareholders as one of the "stakeholders" of the firm, others being employees, customers, suppliers, banks and so forth.
C. managers have often regarded the prosperity and growth of their combines, or families of related firms, as their critical goal.
D. managers have traditionally embraced the maximization of shareholder wealth as the only worthy goal.

Back 28

B. managers have often viewed shareholders as one of the "stakeholders" of the firm, others being employees, customers, suppliers, banks and so forth

Front 29

32. When corporate governance breaks down
A. shareholders are unlikely to receive fair returns on their investments.
B. managers may be tempted to enrich themselves at shareholder expense.
C. the board of directors is not doing its job.
D. all of the above

Back 29

D. all of the above

Front 30

33. Privatization refers to the process of
A. having government operate businesses for the betterment of the public sector.
B. government allowing the operation of privately owned business.
C. prohibiting government operated enterprises.
D. a country divesting itself of the ownership and operation of a business venture by turning it over to the free market system.

Back 30

D. a country divesting itself of the ownership and operation of a business venture by turning it over to the free market system

Front 31

34. Deregulation of world financial markets
A. provided a natural environment for financial innovations, like currency futures and options.
B. has promoted competition among market participants.
C. has encouraged developing countries such as Chile, Mexico, and Korea to liberalize by allowing foreigners to directly invest in their financial markets.
D. all of the above

Back 31

D. all of the above

Front 32

35. The emergence of global financial markets is due in no small part to
A. advances in computer and telecommunications technology.
B. enforcement of the Soviet system of state ownership of resources of production.
C. government regulation and protection of infant industries.
D. none of the above

Back 32

A. advances in computer and telecommunications technology

Front 33

36. The common monetary policy for the euro zone is now formulated by
A. the Bundesbank in Germany.
B. the Federal Reserve Bank.
C. the World Bank.
D. the European Central Bank.

Back 33

D. the European Central Bank

Front 34

37. Since the end of World War I, the dominant global currency has been the
A. British pound.
B. Japanese yen.
C. Euro.
D. U.S. dollar.

Back 34

D. U.S. dollar

Front 35

38. Since the end of World War I, the U.S. dollar has played the role of the dominant global currency, displacing the
A. German mark.
B. French Franc.
C. Japanese Yen.
D. British pound.

Back 35

D. British pound

Front 36

39. The ascendance of the dollar the dominant global currency reflects several key factors such as
A. the size of the U.S. population.
B. the mature and open capital markets of the U.S. economy.
C. exchange rate stability.
D. all of the above.

Back 36

B. the mature and open capital markets of the U.S. economy

Front 37

40. The euro
A. is the common currency of Europe.
B. is divisible into 100 cents, just like the U.S. dollar.
C. may eventually have a transaction domain larger than the U.S. dollar.
D. all of the above.

Back 37

D. all of the above

Front 38

41. Since its inception the euro has brought about revolutionary changes in European finance. For example,
A. by redenominating corporate bonds and stocks from 12 different currencies into one common currency, the euro has precipitated the emergence of continent wide capital markets in Europe that are comparable to U.S. markets in depth and liquidity.
B. Swiss bank accounts are all denominated in euro.
C. the European banking sector has become much more important as a source of financing for European firms.
D. there have actually not been any revolutionary changes.

Back 38

A. by redenominating corporate bonds and stocks from 12 different currencies into one common currency, the euro has precipitated the emergence of continent wide capital markets

Front 39

42. In David Ricardo's theory of comparative advantage,
A. international trade is a zero-sum game in which one trading partner's gain comes at the expense of another's loss.
B. liberalization of international trade will enhance the welfare of the world's citizens.
C. is a short-run argument, not a long-run argument.
D. has been superseded by the now-orthodox view of mercantilism.

Back 39

B. liberalization of international trade will enhance the welfare of the world's citizens

Front 40

43. Under the theory of comparative advantage, liberalization of international trade will
A. enhance the welfare of the world's citizens.
B. create unemployment and displacement of workers permanently.
C. result in higher prices in the long run as monopolists are able to charge higher prices after eliminating their competitors.
D. all of the above

Back 40

A. enhance the welfare of the world's citizens

Front 41

44. Privatization is often seen as a cure for bureaucratic inefficiency and waste; some economists estimate that privatization improves efficiency and reduces operating costs by as much as
A. 5 percent.
B. 10 percent.
C. 15 percent.
D. 20 percent.

Back 41

D. 20 percent

Front 42

45. The World Trade Organization, WTO,
A. has the power to enforce the rules of international trade.
B. covers agriculture and physical goods, but not services or intellectual property rights.
C. recently expelled China for human rights violations.
D. ruled that NAFTA is to be the model for world trade integration.

Back 42

A. has the power to enforce the rules of international trade

Front 43

46. Privatization
A. has spurred a tremendous increase in cross-border investment.
B. has allowed many governments to have the funds to nationalize important industries.
C. has guaranteed that new ownership will be limited to the local citizens.
D. has generally decreased the efficiency of the enterprise.

Back 43

A. has spurred a tremendous increase in cross-border investment

Front 44

47. The theory of comparative advantage
A. claims that economic well-being is enhanced if each country's citizens produce only a single product.
B. claims that economic well-being is enhanced when all countries compare commodity prices after adjusting for exchange rate differences in order to standardize the prices charged all countries.
C. claims that economic well-being is enhanced if each country's citizens produce that which they have a comparative advantage in producing relative to the citizens of other countries, and then trade production.
D. claims that no country has an absolute advantage over another country in the production of any good or service.

Back 44

C. claims that economic well-being is enhanced if each country's citizens produce that which they have a comparative advantage in producing relative to the citizens of other countries, and then trade production

Front 45

48. A multinational firm can be defined as a firm that
A. invests short-term cash inflows in more than one currency.
B. has sales affiliates in several countries.
C. is incorporated in more than one country.
D. incorporated in one country that has production and sales operations in several other countries.

Back 45

D. incorporated in one country that has production and sales operations in several other countries

Front 46

49. An MNC may gain from its global presence by
A. spreading R&D expenditures and advertising costs over their global sales.
B. pooling global purchasing power over suppliers.
C. utilizing their technological and managerial know-how globally with minimum additional costs.
D. all of the above are potential gains

Back 46

D. all of the above are potential gains

Front 47

50. MNCs can use their global presence to
A. take advantage of underpriced labor services available in certain developing countries.
B. gain access to special R&D capabilities residing in advanced foreign counties.
C. boost profit margins and create shareholder value.
D. all of the above

Back 47

D. all of the above

Front 48

51. Foreign-owned manufacturing companies in the world's most highly developed countries
A. generally are more productive and pay their workers more than do comparable locally-owned businesses.
B. generally are less productive and therefore pay their workers less than do comparable locally-owned businesses.
C. tend to specialize in different articles of manufacture than they produce in their home countries.
D. usually do not build their own production facilities but simply buy existing domestic manufacturing firms.

Back 48

A. generally are more productive and pay their workers more than do comparable locally-owned businesses

Front 49

52. A purely domestic firm sources its products, sells its products, and raises its funds domestically
A. can face stiff competition from a multinational corporation that can source its products in one country, sell them in several countries, and raise its funds in a third country.
B. can be more competitive than an MNC on its home turf due to superior knowledge of the local market.
C. can still face exchange rate risk, just like an MNC.
D. all of the above are true

Back 49

D. all of the above are true

Front 50

53. MNC stands for
A. Multinational Corporation.
B. Multi Nationalized Corporation.
C. Military National Cooperation.

Back 50

A. Multinational Corporation

Front 51

54. Which is growing at a faster rate, foreign direct investment by MNCs or international trade?
A. FDI by MNCs.
B. International trade.
C. Since they are linked, they grow at the same rate.
D. None of the above.

Back 51

A. FDI by MNCs

Front 52

55. A true MNC, with operations in dozens of different countries
A. must effectively manage foreign exchange risk.
B. can ignore foreign exchange risk since it is diversified.
C. will pay taxes in only its home county.
D. none of the above

Back 52

A. must effectively manage foreign exchange risk

Front 53

56. An MNC can
A. be a factor that increases the opportunities of the citizens of less developed countries.
B. be a factor that increases the opportunity set of domestic investors.
C. increase economic efficiency.
D. all of the above

Back 53

D. all of the above

Front 54

57. Today for an MNC to produce merchandise in one country on capital equipment financed by funds raised in a number of different currencies through issuing securities to investors in many countries and then selling the finished product to customers in yet other countries is
A. not uncommon.
B. extremely common.
C. uncommon.
D. the norm.

Back 54

A. not uncommon

Front 55

58. A corporation that can source its products in one country, sell them in another country, and raise the funds in a third country
A. is a multinational corporation.
B. is a domestic firm if all of the shareholders are from the same country.
C. enjoys a built-in hedge against exchange rate risk.
D. enjoys a built-in hedge against political risk.

Back 55

A. is a multinational corporation

Front 56

59. Country A can produce 10 yards of textiles or 6 pounds of food per unit of input. Compute the opportunity cost of producing one additional unit of food instead of textiles.
A. 1 yard of textiles per 1.67 pounds of food
B. 1 pound of food per 1.67 yards of textiles
C. 1 yard of textiles per .6 pounds of food
D. 1 pound of food per .6 yards of textiles

Back 56

C. 1 yard of textiles per .6 pounds of food=
60. The gains from trade
A. are likely realized in the long run when workers and firms have had the time to adjust to the new competitive environment.
B. are immediately realized in the short run, when governments drop protectionist policies.
C. are smaller than the costs of adjustment.
D. none of the above;; A. are likely realized in the long run when workers and firms have had the time to adjust to the new competitive environment

Front 57

61. Restrictions or impediments to free trade include such things as
A. import quotas.
B. import tariffs.
C. costly transportation.
D. all of the above

Back 57

D. all of the above

Front 58

62. Suppose that country A is twice as good at producing widgets as country B. If the currency of B is twice as valuable as the currency of A,
A. the comparative advantage will be canceled out.
B. trade will be an improved outcome for both A and B.
C. the comparative advantage could possible be canceled out depending on how much it costs to produce the widget in country B.
D. none of the above

Back 58

C. the comparative advantage could possible be canceled out depending on how much it costs

Front 59

63. Comparative advantage
A. is also known as relative efficiency.
B. can lead to trade even in the face of absolute efficiency.
C. exists when one party can produce a good or service at a lower opportunity cost than another party.
D. all of the above

Back 59

D. all of the above

Front 60

64. Country A can produce 10 yards of textiles or 6 pounds of food per unit of input. Country B can produce 8 yards of textiles or 5 pounds of food per unit of input.
A. Country A is relatively more efficient than Country B in the production of food.
B. Country B is relatively more efficient than Country A in the production of textiles.
C. Country A has an absolute advantage over Country B in the production of food and textiles.
D. Country B has an absolute advantage over Country A in the production of food and textiles.

Back 60

C. Country A has an absolute advantage over Country B in the production of food and textiles

Front 61

65. Underlying the theory of comparative advantage are assumptions regarding
A. free trade between nations.
B. that the factors of production (land, labor, capital, and entrepreneurial ability) are relatively immobile.
C. that the factors of production (land, labor, capital, and entrepreneurial ability) are relatively mobile.
D. a) and b)

Back 61

D. a) and b)

Front 62

66. If one country is twice the size of another country and is better at making almost everything than the benighted citizens of the smaller county,
A. the bigger country enjoys an absolute advantage.
B. the bigger country enjoys a relative advantage.
C. the bigger country enjoys a comparative advantage.
D. there is not enough information to make a determination.

Back 62

A. the bigger country enjoys an absolute advantage

Front 63

67. Country A can produce 10 yards of textiles or 6 pounds of food per unit of input. Country B can produce 8 yards of textiles or 5 pounds of food per unit of input.
A. Country A is relatively more efficient than Country B in the production of food.
B. Country B is relatively more efficient than Country A in the production of textiles.
C. Country A has an absolute advantage over Country B in the production of food and textiles.
D. Answers b) and c) are both correct

Back 63

D. Answers b) and c) are both correct

Front 64

68. Country A can produce 10 yards of textiles or 6 pounds of food per unit of input. Country B can produce 8 yards of textiles or 5 pounds of food per unit of input.
A. Country A is relatively more efficient than Country B in the production of textiles.
B. Country B is relatively more efficient than Country A in the production of food.
C. Country A has an absolute advantage over Country B in the production of food and textiles.
D. all of the above

Back 64

D. all of the above

Front 65

73. In modern times, it is not a country per se but rather a controller of capital and know-how that gives the country in which it is domiciled a comparative advantage over another country. These controllers of capital and technology are
A. the state.
B. the multinational corporations (MNCs).
C. portfolio managers of international mutual funds.
D. none of the above

Back 65

B. the multinational corporations (MNCs)

Front 66

74. International trade is
A. a "zero-sum" game in which one country benefits at the expense of another country.
B. an "increasing-sum" game at which all players become winners.
C. none of the above

Back 66

B. an "increasing-sum" game at which all players become winners

Front 67

75. The doctrine of comparative advantage was first put forth by
A. Adam Smith.
B. Adam Sandler.
C. David Ricardo.
D. Ricky Ricardo.
E. none of the above

Back 67

C. David Ricardo

Front 68

76. The comparative advantage argument in free trade
A. ignores the cost of readjustment.
B. is a short-run argument.
C. only works for two goods at a time.
D. none of the above

Back 68

A. ignores the cost of readjustment

Front 69

77. If you can make a good at a low opportunity cost,
A. you would be well served to produce that good and trade for other goods.
B. you should make something else that has a higher value.
C. you should make something else that has a higher opportunity cost.
D. none of the above

Back 69

A. you would be well served to produce that good and trade for other goods

Front 70

78. A country like North Korea
A. probably rejects the notion of increased opportunity presented by free trade.
B. engages in free trade.
C. lies on a production possibilities curve superior to South Korea, since North Korea protects its domestic producers.
D. none of the above

Back 70

A. probably rejects the notion of increased opportunity presented by free trade