—Multinational Financial Management: An Overview

Chapter 1—Multinational Financial Management: An Overview 1. The commonly accepted goal of the MNC is to: a. maximize short-term earnings. b. maximize shareholder wealth. c. minimize risk. d. A and C. e. maximize international sales. ANS: B PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 2. With regard to corporate goals, an MNC is mostly concerned with maximizing ____, and a purely domestic firm is mostly concerned with maximizing ____. a. shareholder wealth; short-term earnings b. shareholder wealth; shareholder wealth c. short-term earnings; sales volume d. short-term earnings; shareholder wealth ANS: B PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 3. For the MNC, agency costs are typically: a. non-existent. b. larger than agency costs of a small purely domestic firm. c. smaller than agency costs of a small purely domestic firm. d. the same as agency costs of a small purely domestic firm. ANS: B PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 4. Which of the following could reduce agency problems for an MNC? a. stock options as managerial compensation. b. hostile takeover threat. c. investor monitoring. d. all of the above are forms of corporate control that could reduce agency problems for an MNC. ANS: D PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.01 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 5. The valuation of an MNC should rise when an event causes the expected cash flows from foreign to ____ and when foreign currencies denominating these cash flows are expected to ____. a. decrease; appreciate b. increase; appreciate contact: c. decrease; depreciate d. increase; depreciate ANS: B PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 6. Which of the following theories identifies specialization as a reason for international business? a. theory of comparative advantage. b. imperfect markets theory. c. product cycle theory. d. none of the above ANS: A PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 7. Which of the following theories identifies the non-transferability of resources as a reason for international business? a. theory of comparative advantage. b. imperfect markets theory. c. product cycle theory. d. none of the above ANS: B PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 8. Which of the following theories suggests that firms seek to penetrate new markets over time? a. theory of comparative advantage. b. imperfect markets theory. c. product cycle theory. d. none of the above ANS: C PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 9. Which of the following industries would most likely take advantage of lower costs in some less developed foreign countries? a. assembly line production. b. specialized professional services. c. nuclear missile planning. d. planning for more sophisticated computer technology. ANS: A PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.02 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Application 10. Due to the risks involved in international business, firms should: a. only consider international business in major countries. b. maintain international business to no more than 20% of total business. c. maintain international business to no more than 35% of total business. d. none of the above ANS: D PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.02 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 11. A product cycle is the process by which a firm provides a specialized sales or service strategy, support assistance, and possibly an initial investment in the franchise in exchange for periodic fees. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 12. Licensing is the process by which a firm provides its technology (copyrights, patents, trademarks, or trade names) in exchange for fees or some other specified benefits. a. True b. False ANS: T PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 13. The agency costs of an MNC are likely to be lower if it: a. scatters its subsidiaries across many foreign countries. b. increases its volume of international business. c. uses a centralized management style. d. A and B. ANS: C PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 14. An MNC may be more exposed to agency problems if most of its shares are held by: a. a few mutual funds b. a widely dispersed set of individual investors c. a few pension funds d. all of the above would prevent agency problems ANS: B PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 15. The Sarbanes-Oxley Act improves corporate governance of MNCs because it: a. makes executives more accountable for verifying financial statements b. eliminates stock options as a form of compensation c. ties executive compensation to firm performance d. places a limit on the amount of funds that managers can spend ANS: A PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 16. MNCs can improve their internal control process by all of the following, except: a. establishing a centralized data base of information b. ensuring that all data are reported consistently among subsidiaries c. ensuring that the MNC always borrows from countries where interest rates are lowest d. using a system that checks internal data for unusual discrepancies ANS: C PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 17. Franchising is the process by which national governments sell state owned operations to corporations and other investors. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 18. The parent of MNC can implement compensation plans that directly reward the subsidiary managers for enhancing the value of the MNC. a. True b. False ANS: T PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 19. If a publicly-traded MNC's managers make poor decisions that reduce its value, it may encourage other firms to acquire it. a. True b. False ANS: T PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 20. Institutional investors such as mutual funds or pension funds which have large holdings of an MNC's stock do not normally want to take control of it and therefore have no influence over management of the MNC. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 21. In comparing exporting to direct foreign investment (DFI), an exporting operation will likely incur ____ fixed production costs and ____ transportation costs than DFI. a. higher; higher b. higher; lower c. lower; lower d. lower; higher ANS: D PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.03 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 22. Which of the following is an example of direct foreign investment? a. exporting to a country. b. establishing licensing arrangements in a country. c. purchasing existing companies in a country. d. investing directly (without brokers) in foreign stocks. ANS: C PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.03 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Application 23. According to the text, a disadvantage of licensing is that: a. it prevents a firm from importing. b. it is difficult to ensure quality control of the production process. c. it prevents a firm from exporting. d. none of the above ANS: B PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 24. ____ are most commonly classified as a direct foreign investment. a. Foreign acquisitions b. Purchases of international stocks c. Licensing agreements d. Exporting transactions ANS: A PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 25. Imperfect markets represent conditions under which factors of production are immobile. a. True b. False ANS: T PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 26. The Sarbanes-Oxley Act (SOX) was enacted in 2002 required MNCs and other firms to implement an internal reporting process that could be easily monitored by executives and the board of directors. a. True b. False ANS: T PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 27. If markets were perfect, then labor and other costs of production would be perfectly stable (no movement across borders). a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 28. The valuation of an MNC is reduced if the required return on its investments in foreign countries is reduced. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 29. Which of the following is not mentioned in the text as an additional risk resulting from international business? a. exchange rate fluctuations. b. political risk. c. interest rate risk. d. exposure to foreign economies. ANS: C PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 30. Licensing obligates a firm to provide ____, while franchising obligates a firm to provide ____. a. a specialized sales or service strategy; its technology b. its technology; a specialized sales or service strategy c. its technology; its technology d. a specialized sales or service strategy; a specialized sales or service strategy e. its technology; an initial investment ANS: B PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 31. Which of the following is not a way in which agency problems can be reduced through corporate control? a. executive compensation. b. threat of hostile takeover. c. acquisition of a foreign subsidiary. d. monitoring by large shareholders. ANS: C PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 32. The goal of a multinational corporation (MNC) is the maximization of shareholder wealth. a. True b. False ANS: T PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 33. A centralized management style, where major decisions about a foreign subsidiary are made by the parent company, results in an increase in agency costs. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 34. If a U.S. firm sets up a plant in Mexico to benefit from low cost labor, it will likely have a comparative advantage over other firms in Mexico that sell the same product. a. True b. False ANS: F PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.02 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Application 35. Although MNCs may need to convert currencies occasionally, they do not face any exchange rate risk, as exchange rates are stable over time. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 36. One of the most prevalent factors conflicting with the realization of the goal of an MNC is the existence of agency problems. a. True b. False ANS: T PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 37. A centralized management style for an MNC results in relatively high agency costs. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 38. The imperfect markets theory states that factors of production are somewhat immobile, allowing firms to capitalize on a foreign country's resources. a. True b. False ANS: T PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.02 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 39. If a U.S.-based MNC focused completely on importing, then its valuation would likely be adversely affected if most currencies were expected to appreciate against the dollar over time. a. True b. False ANS: T PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Application 40. The acquisition of a foreign subsidiary is commonly considered by MNCs because the cost is less expensive than establishing a new subsidiary of the same size. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 41. If a U.S.-based MNC focused completely on exporting, then its valuation would likely be adversely affected if most currencies were expected to appreciate against the dollar over time. a. True b. False ANS: F PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Application 42. If markets were perfect, then labor and other costs of production would be easily transferable. a. True b. False ANS: T PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 43. International trade: a. is a relatively conservative approach to foreign market penetration. b. entails minimal risk. c. does not require large amount of investment. d. all of the above. ANS: D PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 44. Assume that an American firm wants to engage in international business without major investment in the foreign country. Which method is least appropriate in this situation? a. International Trade b. Licensing c. Franchising d. Direct foreign investment ANS: D PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.03 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Application 45. The valuation of MNC accounts for all the cash flows received by the foreign subsidiaries plus all the cash flows remitted by the subsidiaries. a. True b. False ANS: F PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 46. The MNC's value depends on all of the following, except: a. MNC's required rate of return b. Amount of MNC's cash flows in particular currency c. The exchange rate at which cash flows are converted to dollars d. The value of MNC depends on all of the above factors ANS: D PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 47. Which of the following is not an example of political risk? a. Government may impose taxes on subsidiary b. Government may impose barriers on subsidiary c. Consumers may boycott the MNC d. Consumers' income levels will decrease, thus decreasing consumption. ANS: D PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 48. A microeconomic perspective focuses on external forces such as economic conditions that can affect the value of an MNC. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.01 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 49. Assume that an MNC has a subsidiary in Italy, which exports its products to various countries in Europe. Since all of the countries where it exports use Euro as their currency, this MNC is not subject to the exchange rate risk. a. True b. False ANS: F PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Application 50. International trade generally results in ____ exposure to international political risk and ____ exposure to international economic conditions, when compared to other methods of international business. a. higher; lower b. higher; higher c. lower; higher d. lower; lower ANS: D PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 51. Assume that Boca Co. wants to expand its business to Japan, and wants complete control over the operations in Japan. Which method of international business is most appropriate for Boca Co? a. Joint venture b. Licensing c. Partial acquisition of existing Japanese firm d. Establishment of Japanese subsidiary ANS: B PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.03 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Application 52. A decentralized management style of MNC results in relatively high agency costs. a. True b. False ANS: T PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 53. The establishment of a new subsidiary is commonly considered by MNCs because the cost is less expensive than acquiring a foreign subsidiary of the same size. a. True b. False ANS: T PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 54. Assume that Live Co. has expected cash flows of $200,000 from domestic operations, SF200,000 from Swiss operations, and 150,000 euros from Italian operations at the end of the year. The Swiss franc's value and euro's value are expected to be $.83 and $1.29 respectively, at the end this year. What are the expected dollar cash flows of Live Co? a. $200,000 b. $559,500 c. $582,500 d. $393,500 ANS: B PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Application 55. Saller Co. has a subsidiary in Mexico. The expected cash flows in pesos to be received in the future from this subsidiary have not changed since last month, but the valuation of Saller Co. has declined since last month. What could've caused this decline in value? a. A weaker Mexican economy b. Lower Mexican interest rates c. Depreciation of the Mexican peso d. Appreciation of the Mexican peso. ANS: C PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Application 56. Jensen Co. wants to establish a new subsidiary in Mexico that will sell computers to Mexican customers and remit earnings back to the U.S. parent. The value of this project will be favorably affected if the value of the peso ____ while it establishes the new subsidiary and ____ when the subsidiary starts operations. a. depreciates; appreciates b. appreciates; appreciates c. appreciates; depreciates d. depreciates; depreciates ANS: A PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Application 57. A macroeconomic perspective focuses on the financial management decisions that affect the value of MNC. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.05.01 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 58. An MNC will always use the same required rate of return in the valuation of foreign projects, as it would for its domestic projects. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 59. Livingston Co. has a subsidiary in Korea. The subsidiary reinvests half of its net cash flows into operations and remits half to the parent. Livingston's expected cash flows from domestic business are $100,000 and the Korean subsidiary is expected to generate 100 million Korean won at the end of the year. The expected value of won is $.0012. What are the expected dollar cash flows of Livingston Co.? a. $100,000 b. $200,000 c. $160,000 d. $60,000 ANS: C PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Application 60. A U.S.-based MNC has many foreign subsidiaries in Europe and does not expect to increase its investment there. Its value should increase if the value of the euro weakens over time. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Application 61. If managers of foreign subsidiaries make decisions that maximize the values of their respective subsidiaries, they automatically maximize the value of the entire corporation. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 62. A decentralized management style, where subsidiary managers make the relevant decisions regarding their subsidiary, may result in better decision making, as subsidiary managers are generally better informed about their subsidiary's operations. a. True b. False ANS: T PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 63. U.S.-based MNCs are typically not monitored by mutual funds and pension funds, as these institutions rarely hold stock in MNCs. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 64. The Sarbanes-Oxley Act ensures a more transparent process for managers to report on the productivity and financial condition of their firm. a. True b. False ANS: T PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 65. The Theory of Comparative Advantage begins by assuming that a given firm first becomes established in its home country and may subsequently penetrate foreign markets via geographic or product differentiation. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 66. Under the Imperfect Markets Theory, it is assumed that factors of production are entirely mobile, so that firms can capitalize on a foreign country's resources. a. True b. False ANS: F PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.02 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 67. Under the Product Cycle Theory, foreign demand can be initially satisfied by exporting. a. True b. False ANS: T PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 68. Licensing allows firms to use their technology in foreign markets without a major investment in foreign countries. a. True b. False ANS: T PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 69. International trade is the most common form of direct foreign investment (DFI). a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 70. When the parent's home currency is weak, remitted funds from foreign subsidiaries will convert to a smaller amount of the home currency. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 71. A purely domestic firm may be affected by exchange rate fluctuations if it faces at least some foreign competition. a. True b. False ANS: T PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.04 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 72. One form of an exposure to political risk is terrorism. a. True b. False ANS: T PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.04 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 73. The goal of a multinational corporation (MNC) is a. The minimization of taxes remitted from foreign subsidiaries. b. The establishment of subsidiaries in any country where operations would provide a return over and above the cost of capital, even if better projects are available domestically. c. The maximization of shareholder wealth. d. The maximization of social benefits resulting from actions such as the employment of foreign managers. ANS: C PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 74. Agency costs faced by multinational corporations (MNCs) may be larger than those faced by purely domestic firms because a. Monitoring of managers located in foreign countries is more difficult. b. Foreign subsidiary managers raised in different cultures may not follow uniform goals. c. MNCs are relatively large. d. All of the above e. A and B only ANS: D PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.01 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 75. Which of the following is not one of the more common methods used by MNCs to improve their internal control process? a. Establishing a centralized database of information b. Ensuring that all data are reported consistently among subsidiaries c. Speeding the process by which all departments and all subsidiaries have access to the data that they need d. Making executives more accountable for financial statements by personally verifying their accuracy e. All of the above are common methods used by MNCs to improve their internal control process. ANS: E PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.01 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 76. Which of the following is not mentioned in the text as a theory of international business? a. Theory of Comparative Advantage b. Imperfect Markets Theory c. Product Cycle Theory d. Globalization of Business Theory e. All of the above are mentioned in the text as theories of international business ANS: D PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.02 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 77. The most risky method(s) by which firms conduct international business is (are): a. Franchising. b. The acquisitions of existing operations. c. The establishment of new subsidiaries. d. All of the above e. B and C only ANS: E PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.01.03 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 78. The least risky method by which firms conduct international business is: a. Franchising. b. The acquisitions of existing operations. c. International Trade. d. The establishment of new subsidiaries. e. Licensing ANS: C PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 79. Which of the following does not constitute a form of direct foreign investment? a. Franchising b. International trade c. Joint ventures d. Acquisitions of existing operations e. Establishment of new foreign subsidiaries ANS: B PTS: 1 DIF: Easy OBJ: INFM.MADU.15.01.03 NAT: BUSPROG.INFM .MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge Chapter 2—International Flow of Funds 1. Recently, the U.S. experienced an annual balance of trade representing a ____. a. large surplus (exceeding $100 billion) b. small surplus c. level of zero d. deficit ANS: D PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 2. A high home inflation rate relative to other countries would ____ the home country's current account balance, other things equal. A high growth in the home income level relative to other countries would ____ the home country's current account balance, other things equal. a. increase; increase b. increase; decrease c. decrease; decrease d. decrease; increase ANS: C PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 3. If a country's government imposes a tariff on imported goods, that country's current account balance will likely ____ (assuming no retaliation by other governments). a. decrease b. increase c. remain unaffected d. either A or C are possible ANS: B PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 4. ____ purchases more U.S. exports than the other countries listed here. a. Italy b. Spain c. Mexico d. Canada ANS: D PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 5. An increase in the current account deficit will place ____ pressure on the home currency value, other things equal. a. upward b. downward c. no d. upward or downward (depending on the size of the deficit) ANS: B PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 6. If the home currency begins to appreciate against other currencies, this should ____ the current account balance, other things equal (assume that substitutes are readily available in the countries, and that the prices charged by firms remain the same). a. increase b. have no impact on c. reduce d. all of the above are equally possible ANS: C PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 7. The International Financial Corporation was established to: a. enhance development solely in Asia through grants. b. enhance economic development through non-subsidized loans (at market interest rates). c. enhance economic development through low-interest rate loans (below-market rates). d. enhance economic development of the private sector through investment in stock of corporations. ANS: D PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 8. The World Bank was established to: a. enhance development solely in Asia through grants. b. enhance economic development through non-subsidized loans (at market interest rates). c. enhance economic development through low-interest rate loans (below-market rates). d. enhance economic development of the private sector through investment in stock of corporations. ANS: B PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 9. The International Development Association was established to: a. enhance development solely in Asia through grants. b. enhance economic development through non-subsidized loans (at market interest rates). c. enhance economic development through low-interest rate loans (below-market rates). d. enhance economic development of the private sector through investment in stock of corporations. ANS: C PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 10. Which of the following would likely have the least direct influence on a country's current account? a. inflation. b. national income. c. exchange rates. d. tariffs. e. a tax on income earned from foreign stocks. ANS: E PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 11. The "J curve" effect describes: a. the continuous long-term inverse relationship between a country's current account balance and the country's growth in gross national product. b. the short-run tendency for a country's balance of trade to deteriorate even while its currency is depreciating. c. the tendency for exporters to initially reduce the price of goods when their own currency appreciates. d. the reaction of a country's currency to initially depreciate after the country's inflation rate declines. ANS: B PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 12. An increase in the use of quotas is expected to: a. reduce the country's current account balance, if other governments do not retaliate. b. increase the country's current account balance, if other governments do not retaliate. c. have no impact on the country's current account balance unless other governments retaliate. d. increase the volume of a country's trade with other countries. ANS: B PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 13. The U.S. typically has a balance of trade surplus in its trade with ____. a. China b. Japan c. A and B d. none of the above ANS: D PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 14. The North American Free Trade Agreement (NAFTA) increased restrictions on: a. trade between Canada and Mexico. b. trade between Canada and the U.S. c. direct foreign investment in Mexico by U.S. firms. d. none of the above. ANS: D PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 15. According to the text, international trade (exports plus imports combined) as a percentage of GDP is: a. higher in the U.S. than in European countries. b. lower in the U.S. than in European countries. c. higher in the U.S. than in about half the European countries, and lower in the U.S. than the others. d. about the same in the U.S. as in European countries. ANS: B PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 16. The direct foreign investment positions by U.S. firms have generally ____ over time. Restrictions by governments on direct foreign investment have generally ___ over time. a. increased; increased b. increased; decreased c. decreased; decreased d. decreased; increased ANS: B PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.02 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 17. Which of the following countries purchases the largest amount of exports by U.S. firms? a. Mexico b. Japan c. Canada d. France ANS: C PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 18. The primary component of the current account is the: a. balance of trade. b. balance of money market flows. c. balance of capital market flows. d. unilateral transfers. ANS: A PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 19. As a result of the European Union, restrictions on exports between ____ were reduced or eliminated. a. member countries and the U.S. b. member countries c. member countries and European non-members d. none of the above ANS: B PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 20. Over the last several years, international trade has generally: a. increased for most major countries. b. decreased for most major countries. c. stayed about constant for most major countries. d. increased for about half the major countries and decreased for the others. ANS: A PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 21. Which is not a concern about the North American Free Trade Agreement (NAFTA)? a. its impact on U.S. inflation. b. its impact on U.S. unemployment. c. lower environmental standards in Mexico. d. different health laws for workers in Mexico. ANS: A PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 22. A General Agreement on Tariffs and Trade (GATT) accord in 1993 called for: a. increased trade restrictions outside of North America. b. lower trade restrictions around the world. c. uniform environmental standards around the world. d. uniform worker health laws. ANS: B PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 23. Which of the following is mentioned in the text as a possible means by which the government may attempt to improve its balance of trade position (increase its exports or reduce its imports). a. It could attempt to reduce its home currency's value. b. The government could require firms to engage in outsourcing. c. The government could require that its local firms pursue outsourcing. d. All of the above are mentioned. ANS: A PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 24. The demand for U.S. exports tends to increase when: a. economic growth in foreign countries decreases. b. the currencies of foreign countries strengthen against the dollar. c. U.S. inflation rises. d. none of the above. ANS: B PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 25. "Dumping" is used in the text to represent the: a. exporting of goods that do not meet quality standards. b. sales of junk bonds to foreign countries. c. removal of foreign subsidiaries by the host government. d. exporting of goods at prices below cost. ANS: D PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 26. ____ is (are) income received by investors on foreign investments in financial assets (securities). a. Portfolio income b. Direct foreign income c. Unilateral transfers d. Factor income ANS: D PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 27. A weak home currency may not be a perfect solution to correct a balance of trade deficit because: a. it reduces the prices of imports paid by local companies. b. it increases the prices of exports by local companies. c. it prevents international trade transactions from being prearranged. d. foreign companies may reduce the prices of their products to stay competitive. ANS: D PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 28. Intracompany trade makes up approximately ____ percent of all international trade. a. 50 b. 70 c. 25 d. 13 e. 5 ANS: A PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 29. Like the International Monetary Fund (IMF), the ____ is composed of a collection of nations as members. However, unlike the IMF, it uses the private rather than the government sector to achieve its objectives. a. World Bank b. International Financial Corporation (IFC) c. World Trade Organization (WTO) d. International Development Association (IDA) e. Bank for International Settlements (BIS) ANS: B PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 30. The World Bank's Multilateral Investment Guarantee Agency (MIGA): a. offers various forms of export insurance. b. offers various forms of import insurance. c. offers various forms of exchange rate risk insurance. d. provides loans to developing countries. e. offers various forms of political risk insurance. ANS: E PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 31. Also known as the "central banks' central bank," the ____ attempts to facilitate cooperation among countries with regard to international transactions and provides assistance to countries experiencing a financial crisis. a. World Bank b. International Financial Corporation (IFC) c. World Trade Organization d. International Development Association (IDA) e. Bank for International Settlements (BIS) ANS: E PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 32. Direct foreign investment into the U.S. represents a ____. a. capital inflow b. trade inflow c. capital outflow d. trade outflow ANS: A PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.04 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 33. A balance of trade surplus indicates an excess of imports over exports. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 34. A weakening of the U.S. dollar with respect to the British pound would likely reduce the U.S. exports to Britain and increase U.S. imports from Britain over time. a. True b. False ANS: F PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 35. The World Bank extends loans only to developed nations, while the International Development Association (IDA) extends loans only to developing nations. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 36. The World Bank frequently enters into cofinancing agreements. Under these agreements, financing is provided by the World Bank and/or official aid agencies, export credit agencies, or commercial banks. a. True b. False ANS: T PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 37. The balance of payments is a measurement of all transactions between domestic and foreign residents over a specified period of time. a. True b. False ANS: T PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 38. Changes in country ownership of long-term and short-term assets are measured in the balance of payments with the capital account. a. True b. False ANS: T PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 39. Portfolio investment represents transactions involving long-term financial assets (such as stocks and bonds) between countries that do not affect the transfer of control. a. True b. False ANS: T PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 40. The current account represents the investment in fixed assets in foreign countries that can be used to conduct business operations. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 41. Exporting of products by one country to other countries at prices below cost is called elasticity. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 42. Direct foreign investment by U.S.-based MNCs occurs primarily in the Bahamas and Brazil. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.04 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 43. The J curve effect is the initial worsening of the U.S. trade balance due to a weakening dollar because of established trade relationships that are not easily changed; as the dollar weakens, the dollar value of imports initially rises before the U.S. trade balance is improved. a. True b. False ANS: T PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 44. Portfolio investments represent transactions involving long-term financial assets (such as stocks and bonds) between countries that do not affect the transfer of control. a. True b. False ANS: T PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 45. Intracompany trade represents the exporting of products by one country to other countries below cost. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 46. A tariff is a maximum limit on imports. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 47. A country's net outflow of funds ____ affect its interest rates, and ____ affect its economic conditions. a. does; does b. does; does not c. does not; does not d. does not; does ANS: A PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.04 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 48. The sale of patent rights by a U.S. firm to a Russian firm reflects a credit to the U.S. balance of payments account. a. True b. False ANS: T PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 49. A U.S. purchase of patent rights from a firm in Mexico reflects a credit to the U.S. balance of payments account. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 50. Regarding the U.S. balance of payments, capital account items are relatively minor compared to the financial account items. a. True b. False ANS: T PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 51. In recent years, the U.S. has had a relatively (compared to other countries) ____ balance of trade ____ with China. a. small; surplus b. large; surplus c. small; deficit d. large; deficit ANS: D PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 52. The Central American Trade Agreement (CAFTA) is intended to raise tariffs and regulations between the U.S., the Dominican Republic, and Central American countries. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 53. U.S. government officials would likely prefer that China devalue the yuan against the dollar. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 54. Assume that some U.S. firms will purchase supplies from either China or from U.S. firms. If the Chinese yuan appreciates against the dollar, it should reduce the U.S. balance of trade deficit with China. a. True b. False ANS: T PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.02 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 55. Assume the U.S. has a balance of trade surplus with the country of Thor. When individuals in Thor manufacture CDs and DVDs that look almost exactly like the original product produced in the U.S. and other countries, they ____ the U.S. balance of trade surplus with Thor. This activity is called ____. a. reduce; flipping b. reduce; pirating c. increase; pirating d. increase; flipping ANS: B PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 56. Japan's annual interest rate has been relatively ____ compared to other countries for several years, because the supply of funds in its credit market has been very ____. a. low; small b. high; small c. low; large d. high; large ANS: C PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.04 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 57. Without the international capital flows, there would be ____ funding available in the U.S. across all risk levels, and the cost of funding would be ____ regardless of the firm's risk level. a. more; lower b. more; higher c. less; lower d. less; higher ANS: D PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.04 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 58. The primary component of the capital account is the balance of trade. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 59. A balance of trade surplus indicates an excess of merchandise imports over merchandise exports. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 60. An American tourist visiting Germany and spending money there (for lodging, food, etc.) will reduce the U.S. current account deficit and reduce Germany's current account balance. a. True b. False ANS: F PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.04 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 61. A balance of trade deficit indicates an excess of imports over exports. a. True b. False ANS: T PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 62. The capital account reflects changes in country ownership of long-term (but not short-term) assets. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 63. Outsourcing allows some MNCs to reduce costs but shifts jobs to other countries. a. True b. False ANS: T PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.02 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 64. A weakening of the U.S. dollar with respect to the British pound would likely reduce U.S. exports to the U.K. and increase U.S. imports from the U.K. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 65. The World Bank extends loans only to developed nations, while the International Development Association (IDA) extends loans only to developing nations. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 66. The ____ is the difference between exports and imports. a. balance of trade b. balance on goods and services c. balance of payments d. current account e. capital account ANS: A PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.03 KEY: Bloom's: Knowledge 67. Which of the following will probably not result in an increase in a country's current account balance (assuming everything else constant)? a. A decrease in the country's rate of inflation b. A decrease in the country's national income level c. An increase in government restrictions in the form of tariffs or quotas d. An appreciation of the country's currency e. All of the above will result in an increased current account balance. ANS: D PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 68. Which of the following factors probably does not directly affect a country's capital account and its components? a. Inflation b. Interest rates c. Withholding taxes on foreign income d. Exchange rate movements e. All of the above will directly affect a country's capital account. ANS: A PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 69. The ____, an accord among 117 nations, called for lower tariffs around the world. a. General Agreement on Tariffs and Trade (GATT) b. North American Free Trade Agreement (NAFTA) c. Single European Act of 1987 d. European Union Accord e. None of the above ANS: A PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 70. Which of the following is not likely to represent a strategy by the government of Country X to reduce its balance of trade deficit with Country Y? a. The government of Country X eliminates environmental restrictions. b. The government of Country X subsidizes firms in its country to facilitate dumping. c. The government of Country X provides tax breaks to firms in specific industries. d. The government of Country X removes a tariff on goods imported from Country Y. ANS: D PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.02.03 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Analysis 71. Which of the following statements is not true? a. Exporters commonly complain that they are being mistreated because the currency of their country is too weak. b. Outsourcing affects the balance of trade because it means that a service is purchased in another country. c. Sometimes, trade policies are used to punish countries for various actions. d. Tariffs imposed by the EU have caused some friction between EU countries that commonly import products and other EU countries. e. All of the above are true. ANS: A PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.03 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 72. Which of the following would increase the current account of Country X? Country Y is Country X's sole trading partner. a. Inflation increases in countries X and Y by comparable amounts. b. Country X's and Country Y's currencies depreciate by the same amount. c. Country X imposes tariffs on imports from Country Y, and Country Y retaliates by imposing an identical tax on X's exports. d. The central banks of Country X and Country Y reduce the money supply to increase interest rates. e. Country X imposes a quota on imports, and Country Y retaliates by imposing an identical quota on X's exports. ANS: D PTS: 1 DIF: Challenging OBJ: INFM.MADU.15.02.03 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Application 73. ____ represent aid, grants, and gifts from one country to another. a. Transfer payments b. Factor income c. The balance of trade d. The balance of payments e. The capital account ANS: A PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 74. Which of the following is not a goal of the International Monetary Fund (IMF)? a. To promote cooperation among countries on international monetary issues b. To promote stability in exchange rates c. To enhance a country's long-term economic growth via the extension of structural adjustment loans d. To promote free trade e. To promote free mobility of capital funds across countries ANS: C PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.05 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 75. According to the "J curve effect," a weakening of the U.S. dollar relative to its trading partners' currencies would result in an initial ____ in the current account balance, followed by a subsequent ____ in the current account balance. a. decrease; increase b. increase; decrease c. decrease; decrease d. increase; increase ANS: A PTS: 1 DIF: Easy OBJ: INFM.MADU.15.02.04 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension Chapter 3—International Financial Markets 1. Assume that a bank's bid rate on Swiss francs is $.45 and its ask rate is $.47. Its bid-ask percentage spread is: a. about 4.44%. b. about 4.26%. c. about 4.03%. d. about 4.17%. ANS: B SOLUTION: Bid-ask percentage spread = ($.47  $.45)/$.47 = 4.26% PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Application 2. Assume that a bank's bid rate on Japanese yen is $.0041 and its ask rate is $.0043. Its bid-ask percentage spread is: a. about 4.99%. b. about 4.88%. c. about 4.65%. d. about 4.43%. ANS: C SOLUTION: Bid-ask percentage spread = ($.0043  $.0041)/$.0043 = 4.65% PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Application 3. The bid/ask spread for small retail transactions is commonly in the range of ____ percent. a. 3 to 7 b. .01 to .03 c. 10 to 15 d. .5 to 1 ANS: A PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 4. ____ is not a factor that affects the bid/ask spread. a. Order costs b. Inventory costs c. Volume d. All of the above factors affect the bid/ask spread ANS: D PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 5. The forward rate is the exchange rate used for immediate exchange of currencies. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 6. The ask quote is the price for which a bank offers to sell a currency. a. True b. False ANS: T PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 7. According to the text, the forward rate is commonly used for: a. hedging. b. immediate transactions. c. previous transactions. d. bond transactions. ANS: A PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 8. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it is receiving 100,000 in 90 days, it could: a. obtain a 90-day forward purchase contract on euros. b. obtain a 90-day forward sale contract on euros. c. purchase euros 90 days from now at the spot rate. d. sell euros 90 days from now at the spot rate. ANS: B PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Application 9. If a U.S. firm desires to avoid the risk from exchange rate fluctuations, and it will need C$200,000 in 90 days to make payment on imports from Canada, it could: a. obtain a 90-day forward purchase contract on Canadian dollars. b. obtain a 90-day forward sale contract on Canadian dollars. c. purchase Canadian dollars 90 days from now at the spot rate. d. sell Canadian dollars 90 days from now at the spot rate. ANS: A PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Application 10. Assume the Canadian dollar is equal to $.88 and the Peruvian Sol is equal to $.35. The value of the Peruvian Sol in Canadian dollars is: a. about .3621 Canadian dollars. b. about .3977 Canadian dollars. c. about 2.36 Canadian dollars. d. about 2.51 Canadian dollars. ANS: B SOLUTION: $.35/$.88 = .3977 PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Application 11. Which of the following is not true with respect to spot market liquidity? a. The more willing buyers and sellers there are, the more liquid a market is. b. The spot markets for heavily traded currencies such as the Japanese yen are very liquid. c. A currency's liquidity affects the ease with which an MNC can obtain or sell that currency. d. If a currency is illiquid, an MNC is typically able to quickly purchase that currency at a reasonable exchange rate. ANS: D PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Comprehension 12. Forward markets for currencies of developing countries are: a. prohibited. b. less liquid than markets for developed countries. c. more liquid than markets for developed countries. d. only available for use by government agencies. ANS: B PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 13. A forward contract can be used to lock in the ____ of a specified currency for a future point in time. a. purchase price b. sale price c. A or B d. none of the above ANS: C PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 14. The forward market: a. for euros is very illiquid. b. for Eastern European countries is very liquid. c. does not exist for some currencies. d. none of the above ANS: C PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 15. ____ is not a bank characteristic important to customers in need of foreign exchange. a. Quote competitiveness b. Speed of execution c. Forecasting advice d. Advice about current market conditions e. All of the above are important bank characteristics to customers in need of foreign exchange. ANS: E PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 16. The Basel II accord is focused on eliminating inconsistencies in ____ across countries. a. capital requirements b. deposit rates c. deposit insurance d. bank failure policies ANS: A PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.03 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 17. The international money market primarily concentrates on: a. short-term lending (one year or less). b. medium-term lending. c. long-term lending. d. placing bonds with investors. e. placing newly issued stock in foreign markets. ANS: A PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.02 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 18. The international credit market primarily concentrates on: a. short-term lending (less than one year). b. medium-term lending. c. long-term lending. d. providing an exchange of foreign currencies for firms who need them. e. placing newly issued stock in foreign markets. ANS: B PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.03 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 19. The main participants in the international money market are: a. consumers. b. small firms. c. large corporations. d. small European firms needing European currencies for international trade. ANS: C PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.02 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 20. LIBOR is: a. the interest rate commonly charged for loans between banks. b. the average inflation rate in European countries. c. the maximum loan rate ceiling on loans in the international money market. d. the maximum deposit rate ceiling on deposits in the international money market. e. the maximum interest rate offered on bonds that are issued in London. ANS: A PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.02 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 21. A syndicated loan: a. represents a loan by a single bank to a syndicate of corporations. b. represents a loan by a single bank to a syndicate of country governments. c. represents a direct loan by a syndicate of oil-producing exporters to a less developed country. d. represents a loan by a group of banks to a borrower. e. A and B ANS: D PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.03 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 22. The international money market is primarily served by: a. the governments of European countries, which directly intervene in foreign currency markets. b. government agencies such as the International Monetary Fund that enhance development of countries. c. several large banks that accept deposits and provide loans in various currencies. d. small banks that convert foreign currency for tourists and business visitors. ANS: C PTS: 1 DIF: Moderate OBJ: INFM.MADU.15.03.02 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 23. International money market transactions normally represent: a. the equivalent of $1 million or more. b. the equivalent of $1,000 to $10,000. c. the equivalent of between $10,000 and $100,000. d. the equivalent of between $100,000 and $200,000. ANS: A PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.02 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 24. A put option is the amount or percentage by which the existing spot rate exceeds the forward rate. a. True b. False ANS: F PTS: 1 DIF: Easy OBJ: INFM.MADU.15.03.01 NAT: BUSPROG.INFM.MADU.15.03 STA: DISC.INFM.MADU.15.02 KEY: Bloom's: Knowledge 25. From 1944 to 1971, the exchange rate between any two currencies was typically: a. fi