Deck 9: The International Monetary and Financial Environment

Question 1

Which of the following is an example of a currency risk?

A) purchasing products from a supplier in a country whose currency is appreciating against yours
B) purchasing products from a supplier in a country with depreciating currency
C) selling products to a customer in a country with appreciating currency
D) selling products to a to a customer in a country that has the same currency value as the exporter's

Answer 1

A

Question 2

Which of the following term refers to the type of currency used only for domestic business transactions, and is accepted only by the residents of the issuing country?

A) hard currency
B) convertible currency
C) nonconvertible currency
D) alternative currency

Answer 2

C

Question 3

Which of the following should an international manager keep in mind about the constantly fluctuating exchange rates?

A) The prices the firm charges should be quoted in the firm's currency exclusively.
B) The firm and its customers should use the exchange rate as it stands on the date of each transaction, there is no scope for an agreement between them to use any other specific exchange rate.
C) If goods are bought from a supplier whose currency is appreciating against the buyer's currency, the buyer will have to pay a lesser amount of their currency to complete the purchase.
D) The time taken between placement and delivery of an order can at times go up to a few months; fluctuations in the exchange rate during that time can cost or earn the firm money.

Answer 3

D

Question 4

The U.S. dollar is an example of ________.

A) soft currency
B) convertible currency
C) nonconvertible currency
D) private currency

Question 5

Which of the following resolves the problem of making international payments and facilitates international investment and borrowing among firms, banks, and governments?

A) foreign exchange
B) barter
C) capital flight
D) buyback

Question 6

Plas-Tex Exporting (Scenario)
Plas-Tex Plastic Company manufactures plastic storage containers of all different sizes. Plas-Tex has been exporting more storage containers to Europe recently because of the depreciation of the U.S. dollar relative to the euro. Plas-Tex CEO, Wayne Chisholm, has prepared a report for the annual shareholders meeting in which he outlines his manufacturing and sales recommendations for the upcoming year.
Which of the following supports maintaining the current production status instead of increasing production?

A) The euro/dollar exchange rate is unpredictable due to its constant fluctuation.
B) Exporters and importers typically profit from currency speculation.
C) The euro/dollar exchange rate usually remains steady for long periods of time.
D) The cost of living in the U.S. has risen dramatically in the last year.

Question 7

Which of the following is an effect caused by capital flight?

A) It increases the need for domestic investment holdings.
B) It decreases the ability of the nation to service debt and pay for imports.
C) It reduces harmful currency restrictions.
D) It decreases the nation's supply of hard currencies.

Question 8

Which of the following statements is TRUE when a national currency can be undervalued?

A) They cannot be quantified.
B) They remain highly stable.
C) They can result in a trade surplus.
D) They change occasionally.

Question 9

A U.S. company buys from a supplier whose currency is increasing against the dollar. Which of the following will the company most likely have to do if the purchasing price is expressed in the supplier's currency?

A) pay less in dollars than originally expected
B) pay more in dollars than originally expected
C) pay the same amount of dollars as originally expected
D) pay part of the transaction in the supplier's currency

Question 10

Currency risk can best be defined as the risk that occurs when ________.

A) currency values remain constant for prolonged periods
B) one currency changes in relation to another currency
C) buyers and sellers disagree over which currency to use
D) fluctuations in the stock market affect all exchange rates

Question 11

What is the value of one country's currency expressed in relation to the currency of another country?

A) countertrade
B) monetization
C) credit derivative
D) exchange rate

Question 12

Plas-Tex Exporting (Scenario)
Plas-Tex Plastic Company manufactures plastic storage containers of all different sizes. Plas-Tex has been exporting more storage containers to Europe recently because of the depreciation of the U.S. dollar relative to the euro. Plas-Tex CEO, Wayne Chisholm, has prepared a report for the annual shareholders meeting in which he outlines his manufacturing and sales recommendations for the upcoming year.
Which of the following should be considered closely before Chisholm recommends increasing production to take advantage of the current exchange rate?

A) What is the expected outcome of Plas-Tex negotiations with an Asian manufacturer?
B) How much revenue did Plas-Tex generate from European sales last year?
C) What will be the effect on Plas-Tex if the euro depreciates more than the U.S. dollar?
D) What has been the historic impact of capital flight on Plas-Tex revenues?

Question 13

Plas-Tex Exporting (Scenario)
Plas-Tex Plastic Company manufactures plastic storage containers of all different sizes. Plas-Tex has been exporting more storage containers to Europe recently because of the depreciation of the U.S. dollar relative to the euro. Plas-Tex CEO, Wayne Chisholm, has prepared a report for the annual shareholders meeting in which he outlines his manufacturing and sales recommendations for the upcoming year.
Which of the following questions would be more important for Chisholm to evaluate before presenting his manufacturing recommendations to shareholders?

A) What was the impact of the exchange rate on European exports last year?
B) What is the currency risk of exporting additional Plas-Tex products to Europe?
C) How effective has the Plas-Tex marketing campaign been in Europe?
D) What was the impact on Plas-Tex sales when the euro depreciated last year?

Question 14

Which of the following is an example of a country that has experienced dollarization?

A) Ecuador
B) Japan
C) France
D) Brazil

Question 15

The most universally accepted currencies for international business transactions are the British pound, European euro, Japanese yen, and U.S. dollar, which are all considered hard or convertible currencies.

Question 16

A French company sells goods to a foreign customer whose currency is depreciating against the euro. Which of the following will the company most likely experience when completing the sale?

A) The company will receive fewer euros if the sales price was expressed in the buyer's currency.
B) The company will receive more euros if the sales price was expressed in the buyer's currency.
C) The company will receive fewer euros if the sales price was expressed in euros originally.
D) The company will receive more euros if the sales price was expressed in euros originally.

Question 17

If last year one dollar equaled one euro, and then the exchange rate shifted so that today one dollar equals two euros, which of the following would most likely NOT occur?

A) European firms would pay more for raw materials imported from the United States.
B) European consumers would purchase fewer U.S. products and services.
C) Fewer Europeans would travel to the U.S. or study at U.S. universities.
D) U.S. exports to Europe would increase.

Question 18

Which of the following statements is TRUE about currencies?

A) The British pound is an example of a nonconvertible currency.
B) Hard currencies are highly unstable currencies.
C) Currencies that are used for international transactions are called nonconvertible.
D) Convertible currencies can be readily exchanged for other currencies.

Question 19

Because the firm either accepting or making the payment assumes the risk for the fluctuation, companies have a tendency to prefer handling international business transactions with their own country's currency rather than with the currency of another country.

Question 20

If the currency of Country A is depreciating against a currency of Country B, exports from Country A to Country B should increase.

Question 21

All else being equal, the greater the demand for a currency, the higher its price; the lower the demand for a currency, the lower its price.

Question 22

Which of the following terms refers to the summary of all transactions between one country and the rest of the world over a given period of time?

A) momentum trading
B) trade surplus
C) exchange rate system
D) balance of payments

Question 23

Which of the following statements is TRUE of trade surplus?

A) It is a negative balance of trade.
B) It occurs when there is a net outflow of domestic currency to foreign markets.
C) It occurs when a nation's imports are greater than its exports.
D) It occurs when a nation's exports are greater than its imports.

Question 24

Which of the following is a characteristic of momentum trading?

A) Investors buy stocks as prices fall.
B) Investors sell stocks when others sell.
C) Investors buy stocks as prices rise.
D) Investors buy and sell stocks spontaneously.

Question 25

Explain the concept of currency risk. How can inflation and interest rates create currency risk?

Question 26

Which of the following statements is most likely to be TRUE regarding a currency's price if the supply of the currency increases?

A) The price of the currency fluctuates randomly.
B) The price of the currency remains constant.
C) The price of the currency lowers.
D) The price of the currency increases.

Question 27

High Inflation (Scenario)
Country X primarily exports coffee beans, and in the last two years the demand for coffee beans has caused economic growth in Country X. To accommodate the economic growth, the central bank of Country X increased the nation's money supply. Country X is now experiencing inflation of over 200 percent. A group of economic experts, government representatives, and business owners have gathered for a conference in Country X to discuss the situation.
Which of the following is most likely an additional problem faced by Country X due to its inflation?

A) high interest rates
B) herding behavior
C) balance of trade
D) country risk

Question 28

What is the difference between a convertible currency and a nonconvertible currency? Explain why governments of some countries impose restrictions on currency convertibility.

Question 29

The foreign-exchange market is located exclusively in the United States.

Question 30

Which of the following does the central bank perform in order to accommodate a nation's economic growth?

A) enforce strict regulations on foreign direct investment
B) increase the nation's money supply
C) establish a voluntary export restraint
D) restrict innovation and entrepreneurship

Question 31

If demand for the dollar is low, the price of the dollar is most likely to ________.

A) rise
B) remain stable
C) fall, then rise
D) fall

Question 32

High Inflation (Scenario)
Country X primarily exports coffee beans, and in the last two years the demand for coffee beans has caused economic growth in Country X. To accommodate the economic growth, the central bank of Country X increased the nation's money supply. Country X is now experiencing inflation of over 200 percent. A group of economic experts, government representatives, and business owners have gathered for a conference in Country X to discuss the situation.
Which of the following questions would be more important to evaluate in determining the reason behind the inflation in Country X?

A) Has momentum trading of agricultural commodities been occurring in Country X?
B) What is the exchange rate between Country X currency and the euro?
C) How quickly was the money supply increased by the central bank of Country X?
D) How many pounds of coffee beans are being imported annually to Country X?

Question 33

________ refers to the government reduction of its currency value relative to the other currency values.

A) Devaluation
B) Hyperinflation
C) Depreciation
D) Fluctuation

Question 34

The French franc is one of the European currencies that was taken out of circulation and replaced by the euro.

Question 35

________ occurs when investors buy stocks whose prices have been rising and sell stocks whose prices have been falling.

A) Switch trading
B) Dumping
C) Momentum trading
D) Herding

Question 36

Capital flight from a country hinders its ability to service debt and pay for imports.

Question 37

Each of the following factors significantly affects the balance of trade EXCEPT ________.

A) exchange rate
B) market share
C) prices of goods
D) trade barriers

Question 38

All else being equal, the greater the supply of a currency, the higher its price; the lower the supply of a currency, the lower its price.

Question 39

High Inflation (Scenario)
Country X primarily exports coffee beans, and in the last two years the demand for coffee beans has caused economic growth in Country X. To accommodate the economic growth, the central bank of Country X increased the nation's money supply. Country X is now experiencing inflation of over 200 percent. A group of economic experts, government representatives, and business owners have gathered for a conference in Country X to discuss the situation.
Which of the following should be considered before the government takes any action to correct the high rate of inflation?

A) What have been the historical consequences of trade barriers in Country X?
B) What is the current price of coffee in the United States and Europe?
C) What will be the long-term effects of currency depreciation to Country X?
D) What other industries in Country X could replace agriculture?

Question 40

The levels of supply and demand for a currency in a free market vary ________ with its price.

A) rarely
B) occasionally
C) directly
D) inversely

Question 41

The official price of gold is used to determine the value of all major currencies in the exchange rate system used for international trade today.

Question 42

Which of the following statements is TRUE of a dirty float?

A) Exchange rates fluctuate with occasional central bank intervention.
B) Beneficial exchange rates are offered in trade with certain nations.
C) Fixed exchange rates are set and maintained by the World Bank.
D) Currency values rise and fall according to the U.S. dollar.

Question 43

Explain how a nation's economic growth is measured and what stimulates economic growth. What is the central bank, and how does it affect economic growth?

Question 44

The purpose of the Bretton Woods Agreement was to ________.

A) enable the U.S. government to monetarily recover after WWII
B) control the fluctuating price of gold used for global trading
C) oversee the importing and exporting of international traders
D) govern the exchange rates of major international currencies

Question 45

Which of the following best characterizes the functions of the World Bank?

A) monitor interest rates in emerging economies
B) provide loans and technical assistance to developing countries for infrastructure development
C) offer financial assistance to small businesses
D) assist countries suffering from severe balance of payment problems

Question 46

The Bretton Woods Agreement most likely influenced the current trend towards international free trade when member countries agreed to ________.

A) no longer impose trading tariffs within economic blocs
B) provide low interest loans to poor countries
C) not impose restrictions on currency trading
D) implement a multilateral trade and investment system

Question 47

Which of the following is the most likely underlying reason for the demise of the Bretton Woods system?

A) U.S. trade deficits
B) creation of the EU
C) gold depreciation
D) WTO restrictions

Question 48

In most high-inflation nations, interest rates are increasing while the purchasing power of the national currency is plummeting.

Question 49

The Bretton Woods Agreement was brought into existence in the late 1960s when the U.S. needed to finance government programs and the Vietnam War.

Question 50

The Bretton Woods Agreement established International Monetary Fund (IMF; www.imf.org) as an international agency that attempted to stabilize currencies by monitoring the foreign exchange systems of member countries and lending money to developing economies.

Question 51

A devaluation is an action taken by the central bank.

Question 52

The central bank also seeks to ensure the safety and soundness of the national financial system by supervising and regulating the nation's banking system.

Question 53

The floating exchange rate system is victim to maximum governmental intervention.

Question 54

A pegged exchange rate system is one in which the value of a currency is set relative to the value of another (or to the value of a basket of currencies) at a specified rate.

Question 55

Which of the following is characteristic of the fixed exchange rate system?

A) utilized by most advanced economies
B) rates based on supply and demand forces
C) The value of currency is set relative to the value of another.
D) allows for monetary policy flexibility

Question 56

An increase in a nation's rate of inflation is caused by an oversupply of money and this eventually leads to a decrease in the value of the nation's currency.

Question 57

Explain the belief that a persistent trade deficit is harmful to the national economy. Why was the Bretton Woods Agreement initiated and why was it terminated?

Question 58

In a short essay, describe the underlying reasons for inflation. Provide an example of a nation that faced a high rate of inflation.

Question 59

Momentum trading occurs when investors buy stocks whose prices have been falling and sell stocks whose prices have been rising.

Question 60

The International Monetary Fund was created through the Bretton Woods Agreement as a way to monitor the foreign exchange systems and lend money to developing economies.

Question 61

Which of the following best describes the role that the international monetary system plays with foreign firms?

A) underwrites stock and bond issues and gives advice on mergers
B) establishes regulations for FDI financing
C) oversees finance and trade in developing nations
D) provides a framework for monetary and foreign exchange activities worldwide

Question 62

Which of the following is a characteristic of a bond?

A) It is a short-term loan from a commercial bank.
B) It refers to capital raised by selling corporate shares.
C) It refers to a debt security used to raise capital.
D) It is a debt instrument on which dividends are paid.

Question 63

Explain why international financial and monetary activities are becoming more integrated. What are the risks and benefits of the growing integration of the two activities?

Question 64

A ________ is a facility for trading securities and other financial instruments, including shares issued by companies, trust funds, pension funds, and corporate and government bonds.

A) stock exchange
B) business strategic unit
C) grey market
D) shell corporation

Question 65

Global Finance Meeting (Scenario)
International finance experts are meeting in Tokyo for a weeklong conference to discuss the current state of global finance. At the conference are representatives from a variety of monetary and financial organizations. Expert A often works with international firms arranging capital in the form of shares. Expert B works for the Bank of Nova Scotia in the British Virgin Islands (as offshore bank). Expert C advises international firms on corporate mergers.
Expert A most likely works for which of the following?

A) Union Bank in Switzerland (private bank)
B) Bank of America (commercial bank)
C) Arab-Malaysian Merchant Bank (merchant bank)
D) Goldman Sachs (investment bank)

Question 66

Which of the following, originally known as the International Bank for Reconstruction and Development, was founded to fund construction of Japan and Europe after World War II?

A) The International Monetary Fund
B) The Financial Stability Board
C) The World Bank
D) Bank for International Settlements

Question 67

Explain the differences between the international monetary system and the International Monetary Fund. What are the three major types of crises most frequently addressed by the International Monetary Fund?

Question 68

Global Finance Meeting (Scenario)
International finance experts are meeting in Tokyo for a weeklong conference to discuss the current state of global finance. At the conference are representatives from a variety of monetary and financial organizations. Expert A often works with international firms arranging capital in the form of shares. Expert B works for the Bank of Nova Scotia in the British Virgin Islands (as offshore bank). Expert C advises international firms on corporate mergers.
Expert C most likely works for which of the following?

A) Nomura Securities
B) Banco General in Panama
C) Federal Reserve Bank
D) International Monetary Fund

Question 69

Global Finance Meeting (Scenario)
International finance experts are meeting in Tokyo for a weeklong conference to discuss the current state of global finance. At the conference are representatives from a variety of monetary and financial organizations. Expert A often works with international firms arranging capital in the form of shares. Expert B works for the Bank of Nova Scotia in the British Virgin Islands (as offshore bank). Expert C advises international firms on corporate mergers.
The employer of Expert B can most likely be categorized as which of the following?

A) investment bank
B) private bank
C) commercial bank
D) offshore bank

Question 70

Which of the following levels of the global monetary and financial systems pyramid includes commercial banks?

A) national government level
B) national infrastructure level
C) international organization level
D) firm level

Question 71

Describe the two main types of foreign exchange management used today. Provide examples of nations that use each type of system. What are the benefits of each system?

Question 72

Investment banks underwrite (guarantee the sale of) stock and bond issues and advise on mergers.

Question 73

Describe four principles or organizations brought about by the Bretton Woods Agreement that remain important to international business and trade today. Why does the integration of financial and monetary activity worldwide continue to grow?

Question 74

The integration of international financial and monetary activity can be attributed to the growing role of single-currency systems, such as the euro.

Question 75

Which of the following statements is TRUE of the global financial system?

A) It consists of the institutional frameworks, rules, and procedures that govern how national currencies are exchanged for one another.
B) It includes key players such as finance ministries and national stock exchanges but excludes commercial banks and central banks.
C) It is built on the activities of firms, banks, and financial institutions engaged in ongoing international financial activity.
D) Since the 1960s, the volume and structure of the global financial system has been reducing.

Question 76

The global financial system is the collective of financial institutions that facilitate and regulate investment and capital flows and make possible massive trading of currencies and financial assets. It reflects the activities of companies, banks, and financial institutions, all engaged in ongoing financial activity.

Question 77

________ are managers of pensions and mutual funds, as well as insurance companies who have assumed an enormous role in driving capital markets around the world.

A) Entrepreneurs
B) Institutional investors
C) Angel investors
D) Venture capitalists

Question 78

Which of the following would a firm considering a corporate merger consult for issues related to the merger?

A) private bank
B) offshore bank
C) commercial bank
D) investment bank

Question 79

The International Monetary Fund stands ready to provide financial assistance in the form of loans and grants to support policy programs intended to correct macroeconomic problems.

Question 80

Which of the following situations often results in a banking crisis?

A) when investors withdraw funds from financial institutions
B) when exchange rates fluctuate dramatically
C) when governments borrow excessively from banks
D) when a nation's currency rapidly depreciates