AGB 302 QUIZ 5 Exam Questions with
100% Correct Answers
all barriers to the trade of goods and services among member countries are removed. In
the theoretically ideal free trade area, no discriminatory tariffs, quotas, subsidies, or
administrative impediments are allowed to distort trade between mem-bers. Each
country, however, is allowed to determine its own trade policies with regard to
nonmembers. Thus, for example, the tariffs placed on the products of nonmember coun-
tries may vary from member to member. - Answer-free trade area
eliminates trade barriers between member countries and adopts a common external
trade policy. - Answer-customs union
has no barriers to trade
among member countries, includes a common external trade policy, and allows factors
of production to move freely among members. Labor and capital are free to move
because there are no restrictions on immigration, emigration, or cross-border flows of
capital among member countries. - Answer-common market
involves the free flow of products and factors of production among member countries
and the adoption of a com-mon external trade policy, but it also requires a common
currency, harmonization of mem-bers' tax rates, and a common monetary and fiscal
policy. - Answer-economic union
in which a central political apparatus coordinates the economic, social, and foreign
policy of the member states. - Answer-political union
occurs when high-cost domestic producers are replaced by low-cost pro-ducers within
the free trade area. It may also occur when higher-cost external producers are replaced
by lower-cost external producers within the free trade area. - Answer-Trade creation
occurs when lower-cost external suppliers are replaced by higher-cost suppliers within
the free trade area. - Answer-Trade diversion
represents the interests of member states. It is clearly the ulti-mate controlling authority
within the EU because draft legislation from the commission can become EU law only if
the council agrees. The council is composed of one representa-tive from the
government of each member state. T - Answer-European Council
The parliament, which meets in Strasbourg, France, is primarily a consultative rather
than legislative body. - Answer-European Parliament
which is comprised of one judge from each country, is the su-preme appeals court for
EU law - Answer-rt of Justice
, involves borrowing in one currency where interest rates are low and then using the
proceeds to invest in another currency where interest rates are high. - Answer-carry
trade
typically involves the short-term movement of funds from one currency to another in the
hopes of profiting from shifts in exchange rates. - Answer-Currency speculation
the rate at which a foreign exchange dealer converts one currency into another currency
on a particular day - Answer-spot exchange rate
occurs when two parties agree to exchange currency and execute the deal at some
specific date in the future - Answer-A forward exchange
simultaneous purchase and sale of a given amount of foreign exchange for two different
value dates - Answer-A currency swap
the process of buying a currency low and selling it high - Answer-arbitrage,
in competitive markets free of transportation costs and barriers to trade, identical
products sold in different countries must sell for the same price when their price is
expressed in the same currency - Answer-law of one price
which links changes in the exchange rate between two countries' currencies to changes
in the countries' price levels. By comparing the prices of identical products in different
currencies, it would be possible to determine the "real" or PPP exchange rate that would
exist if markets were efficient. (An efficient market has no impediments to the free flow
of goods and services, such as trade barriers.) - Answer-purchasing power parity (PPP)
states that for any two countries, the spot exchange rate should change in an equal
amount but in the opposite direction to the difference in nominal interest rates between
the two coun-tries. - Answer-international Fisher effect (IFE)
states that a country's "nominal" interest rate (i) is the sum of the required "real" rate of
interest (r) and the expected rate of inflation over the period for which the funds are to
be lent (I). - Answer-Fisher effect
when the country's government allows both residents and nonresi-dents to purchase
unlimited amounts of a foreign currency with it. - Answer-freely convertible
when only nonresidents may convert it into a foreign currency without any limitations. -
Answer-externally convertible
when neither residents nor non-residents are allowed to convert it into a foreign
currency. - Answer-nonconvertible
100% Correct Answers
all barriers to the trade of goods and services among member countries are removed. In
the theoretically ideal free trade area, no discriminatory tariffs, quotas, subsidies, or
administrative impediments are allowed to distort trade between mem-bers. Each
country, however, is allowed to determine its own trade policies with regard to
nonmembers. Thus, for example, the tariffs placed on the products of nonmember coun-
tries may vary from member to member. - Answer-free trade area
eliminates trade barriers between member countries and adopts a common external
trade policy. - Answer-customs union
has no barriers to trade
among member countries, includes a common external trade policy, and allows factors
of production to move freely among members. Labor and capital are free to move
because there are no restrictions on immigration, emigration, or cross-border flows of
capital among member countries. - Answer-common market
involves the free flow of products and factors of production among member countries
and the adoption of a com-mon external trade policy, but it also requires a common
currency, harmonization of mem-bers' tax rates, and a common monetary and fiscal
policy. - Answer-economic union
in which a central political apparatus coordinates the economic, social, and foreign
policy of the member states. - Answer-political union
occurs when high-cost domestic producers are replaced by low-cost pro-ducers within
the free trade area. It may also occur when higher-cost external producers are replaced
by lower-cost external producers within the free trade area. - Answer-Trade creation
occurs when lower-cost external suppliers are replaced by higher-cost suppliers within
the free trade area. - Answer-Trade diversion
represents the interests of member states. It is clearly the ulti-mate controlling authority
within the EU because draft legislation from the commission can become EU law only if
the council agrees. The council is composed of one representa-tive from the
government of each member state. T - Answer-European Council
The parliament, which meets in Strasbourg, France, is primarily a consultative rather
than legislative body. - Answer-European Parliament
which is comprised of one judge from each country, is the su-preme appeals court for
EU law - Answer-rt of Justice
, involves borrowing in one currency where interest rates are low and then using the
proceeds to invest in another currency where interest rates are high. - Answer-carry
trade
typically involves the short-term movement of funds from one currency to another in the
hopes of profiting from shifts in exchange rates. - Answer-Currency speculation
the rate at which a foreign exchange dealer converts one currency into another currency
on a particular day - Answer-spot exchange rate
occurs when two parties agree to exchange currency and execute the deal at some
specific date in the future - Answer-A forward exchange
simultaneous purchase and sale of a given amount of foreign exchange for two different
value dates - Answer-A currency swap
the process of buying a currency low and selling it high - Answer-arbitrage,
in competitive markets free of transportation costs and barriers to trade, identical
products sold in different countries must sell for the same price when their price is
expressed in the same currency - Answer-law of one price
which links changes in the exchange rate between two countries' currencies to changes
in the countries' price levels. By comparing the prices of identical products in different
currencies, it would be possible to determine the "real" or PPP exchange rate that would
exist if markets were efficient. (An efficient market has no impediments to the free flow
of goods and services, such as trade barriers.) - Answer-purchasing power parity (PPP)
states that for any two countries, the spot exchange rate should change in an equal
amount but in the opposite direction to the difference in nominal interest rates between
the two coun-tries. - Answer-international Fisher effect (IFE)
states that a country's "nominal" interest rate (i) is the sum of the required "real" rate of
interest (r) and the expected rate of inflation over the period for which the funds are to
be lent (I). - Answer-Fisher effect
when the country's government allows both residents and nonresi-dents to purchase
unlimited amounts of a foreign currency with it. - Answer-freely convertible
when only nonresidents may convert it into a foreign currency without any limitations. -
Answer-externally convertible
when neither residents nor non-residents are allowed to convert it into a foreign
currency. - Answer-nonconvertible
