Question 1

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.

Accepted Answer

A depreciation of the U.S. currency means that your products become relatively cheaper for foreign consumers while your costs of production remain the same. Therefore, your competitive position is likely improved as you become more attractive to buyers in foreign markets, allowing you to potentially sell more and increase profits.

Question 2

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

Accepted Answer

If the British pound depreciates against the U.S. dollar, it means that it will be more expensive for the U.S.-based MNC to import goods from Great Britain. If the firm keeps their prices stable in pounds, their dollar costs will increase, which could lead to higher prices for their goods in dollar terms. This could result in the firm being priced out of the U.K. market (option B). To prevent this, the firm may have to cut prices in dollars to keep the pound prices stable (option C). Therefore, both options B and C are correct.

Question 3

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.

Accepted Answer

The barrier to the free movement of labor created by governments is an example of a market imperfection because it interferes with the efficient functioning of the labor market. If labor were able to move freely across borders, then the market would more efficiently allocate workers to their most productive use, resulting in overall economic gains. However, government restrictions on immigration create inefficiencies in the labor market, resulting in deadweight losses and reduced economic output.

Question 4

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

Accepted Answer

If the Mexican peso appreciates against the U.S. dollar, it means that the U.S. dollar is weaker relative to the Mexican peso. In this situation, Option B is correct because the company will be able to charge more in dollar terms while keeping peso prices stable. Additionally, Option C is also correct because the domestic competitors will face lessened price competition from Mexican imports. Therefore, both options b and c are correct. Option A is not correct, as the appreciation of the peso does not necessarily mean that American imports will be priced out of the Mexican market.

Question 5

Is Northern Ireland better off when it trades with Southern Ireland?

Accepted Answer

Northern Ireland benefits from trading with Southern Ireland as it provides a larger market for its goods and services, increases the potential for investment, and strengthens overall economic ties between both regions. The open border between Northern Ireland and Southern Ireland also facilitates trade and movement of people between the two regions.

Question 6

Now suppose that Southern workers are paid €1 per day but the Northern workers receive a raise to £2 per day.Will trade be possible at the exchange rate you found in the question before the last question?

Accepted Answer

Trade feasibility depends on the relative costs and benefits of trading goods, not just on wage differences or exchange rates.

Question 7

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.

Accepted Answer

Multinational corporations have globalized production by sourcing inputs and locating production in countries where costs are lower and profits are higher. This has led to the movement of jobs, technology, and capital across borders, resulting in increased competition and economies of scale. A and D are incorrect because natural resource depletion and common tastes do not fully account for the globalization of production, and B is only one factor contributing to the process.

Question 8

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

Accepted Answer

All of the above are barriers that still exist in the global economy today. Legal restrictions such as tariffs and quotas, excessive transportation costs for goods, services, and people, and information asymmetry regarding policies and regulations are factors that inhibit free movements across borders.

Question 9

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

Accepted Answer

A depreciating Mexican peso means that the value of the peso relative to the dollar has decreased. This means that American imports will become more expensive for Mexican consumers since they use pesos. Thus, the products of the U.S. based company may become more expensive in terms of pesos, making them less attractive or affordable to Mexican consumers. Therefore, Option A is correct. Option B is incorrect because if the peso value is depreciating, it would not be logical to keep peso prices stable as this would be the same as increasing dollar prices. Option C is also incorrect as the competitors would face little price competition from Mexican imports only if the company maintains its current pricing strategy, which is not probable, given that a currency depreciation may prompt price changes.

Question 10

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.

Accepted Answer

With the advancement of technology, transportation, and communication, the major economic functions of consumption, production, and investment have become highly globalized. Companies can easily operate and trade across borders, and consumers have access to products and services from all over the world. This has led to the creation of a global economy, where the actions of one country's economy can have significant effects on the economies of other countries.

Question 11

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.

Accepted Answer

The answer of The Nestlé Corporation,a well-known Swiss MNC,used to...

Question 12

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

Accepted Answer

This is an example of political risk, which is the risk of loss due to political actions, such as government expropriation or nationalization, in a foreign country. While there was no exchange rate risk in this scenario, as the exchange rate remained constant, there was a loss due to political actions taken by the government.

Question 13

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

Accepted Answer

International finance involves foreign exchange and political risks, market imperfections, and an expanded opportunity set due to the availability of investments and financing options in various countries. These factors make international finance significantly different from domestic finance.

Question 14

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)

Accepted Answer

The answer of The Japanese automobile company Honda decided to...

Question 15

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.

Accepted Answer

Japanese investors have responded to the large trade surpluses by investing heavily in U.S. and other foreign financial markets. This is because they have excess funds due to the surplus and need to diversify their investments to reduce risk and earn higher returns. Buying dollar-denominated assets is also a way to counteract the appreciation of the yen, which would make Japanese exports more expensive and less competitive. Liquidating stocks to buy dollar-denominated bonds or lobbying the U.S. or Japanese government for currency depreciation/appreciation are less likely responses from Japanese investors.

Question 16

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.

Accepted Answer

The integration of financial markets allows investors to diversify their portfolios internationally, giving them access to a wider range of investment options and potentially reducing their risks. It does not necessarily increase the cost of capital for firms, as they now have access to a larger pool of potential investors, which may in turn drive down the cost of capital. Choice D is incorrect because choice C is not necessarily true.

Question 17

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.

Accepted Answer

This loss of value is due to the fluctuations in the exchange rate between pounds and dollars, which is commonly known as exchange rate risk.

Question 18

Now suppose that Southern workers receive a raise to €2 per day.Will trade be possible at the exchange rate you found in the last question?

Accepted Answer

Since workers in the South receive a raise to €2 per day, their productivity has increased and the purchasing power of their currency has risen. Therefore, trade is still possible at the exchange rate found in the last question.

Question 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.

Accepted Answer

When individual investors become aware of overseas investment opportunities and diversify their portfolio internationally, they benefit from an expanded opportunity set. They can invest in companies and markets that are not present in their domestic market and potentially earn higher returns. However, they may still face exchange rate risks, but this risk can be managed through proper hedging techniques. It is also important for investors to read and understand the prospectus, even if it's in a foreign language, to make informed investment decisions. They should also consider investing in other currencies besides US dollars or euros to further diversify their portfolio.

Question 20

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.

Accepted Answer

Both expropriation of assets and adverse change in tax rules are examples of political risks that can significantly impact a company's operations and financial performance. In addition, the election of a new, potentially opposition party that may implement policies unfavorable to the company could also pose a political risk. Therefore, both options A and B are correct.

Quiz 1: Globalization and the Multinational Firm

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,

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,

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

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

Is Northern Ireland better off when it trades with Southern Ireland?

Now suppose that Southern workers are paid €1 per day but the Northern workers receive a raise to £2 per day.Will trade be possible at the exchange rate you found in the question before the last question?

Production of goods and services has become globalized to a large extent as a result of

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

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

Undoubtedly,we are now living in a world where all the major economic functions-consumption,production,and investment

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

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

What major dimension sets apart international finance from domestic finance?

The Japanese automobile company Honda decided to establish production facilities in Ohio,mainly to

Japan has experienced large trade surpluses.Japanese investors have responded to this by

Recently,financial markets have become highly integrated.This development

Now suppose that Southern workers receive a raise to €2 per day.Will trade be possible at the exchange rate you found in the last question?

When individual investors become aware of overseas investment opportunities and are willing to diversify their portfolios internationally,

An example of a political risk is