International Economics
Exam Answer Key
Course Introduction
International Economics explores the theory and practice of economic interactions between countries, analyzing how goods, services, and capital flow across borders. The course covers fundamental concepts such as comparative advantage, trade policies, exchange rates, balance of payments, and international financial markets. Students will examine the impact of globalization, trade agreements, and economic integration on both developed and developing nations, while considering the effects of international economic policies on growth, inequality, and stability. The course equips students with tools to critically assess current global economic issues and understand the forces shaping international economic relations.
Recommended Textbook
Multinational Business Finance 12th Edition by
Arthur I. Stonehill
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Page 2
Chapter 1: Globalization and the Multinational Enterprise
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Q1) Comparative advantage shifts over time as less developed countries become more developed and realize their latent opportunities.
A)True
B)False
Answer: True
Q2) International trade might have approached the comparative advantage model in the 19th century, and it does so even more today.
A)True
B)False
Answer: False
Q3) Typically, a firm in its domestic stage of globalization has all financial transactions in its domestic currency.
A)True
B)False
Answer: True
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Chapter 2: Financial Goals and Corporate Governance
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Q1) "Maximize corporate wealth"
A)is the primary objective of the non-Anglo-American model of management.
B)as a management objective treats shareholders on a par with other corporate stakeholders such as creditors, labor, and local community.
C)has a broader definition than just financial wealth.
D)all of the above
Answer: D
Q2) The stakeholder capitalism model holds that total risk (operational and financial)is more important than just systematic risk.
A)True
B)False
Answer: A
Q3) The Stakeholder Capitalism Model
A)clearly places shareholders as the primary stakeholder.
B)combines the interests and inputs of shareholders, creditors, management, employees, and society.
C)has financial profit as its goal and is often termed impatient capital.
D)is the Anglo-American model of corporate governance.
Answer: B
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Page 4
Chapter 3: The International Monetary System
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Q1) Under the terms of Bretton Woods countries tried to maintain the value of their currencies to within 1% of a hybrid security made up of the U.S. dollar, British pound, and Japanese yen.
A)True
B)False Answer: B
Q2) Bretton Woods required less in the way of cooperation among countries than did the gold standard.
A)True
B)False Answer: False
Q3) Which of the following is a way in which the euro affects markets?
A)Countries within the Euro zone enjoy cheaper transaction costs.
B)Currency risks and costs related to exchange rate uncertainty are reduced.
C)Consumers and business enjoy price transparency and increased price-based competition.
D)all of the above
Answer: D
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5
Chapter 4: The Balance of Payments
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Sample Questions
Q1) Use the following terms for this question: C = consumption
I = capital investment spending
G = government spending
X = exports of goods and services
M = imports of goods and services
BOP = balance of payments
GDP = gross domestic product
NPV = net present value
INF = inflation
R = real rate of return
The static equation for the nations GDP is:
A)GDP = C + I + G + (X + M )x INF
B)GDP = C + I + G + X + M
C)GDP = C + I + G + X - M
D)GDP = C + I + X - M + R
Q2) Which of the following is NOT part of the Financial Account of the BOP?
A)Net foreign direct investment.
B)Net import/export of services.
C)Net portfolio investment.
D)Other Financial items.
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Page 6
Chapter 5: Current Multinational Financial Challenges: the Credit
Crisis of 2007-2009
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Q1) Asset-backed securities (ASBs)may be securitized based on ________.
A)auto loans
B)home-equity loans
C)credit card receivables
D)all of the above
Q2) The typical TED spread, the difference between the LIBOR and the interest rate swap index, is typically about ________ basis points.
A)350
B)180
C)120
D)80
Q3) ________ is the method of making investments more attractive to prospective buyers by reducing their perceived risk.
A)Subordination
B)Credit enhancement
C)Derivation
D)Deregulation
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Page 7
Chapter 6: The Foreign Exchange Market
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Q1) The authors identify two tiers of foreign exchange markets:
A)bank and nonbank foreign exchange.
B)commercial and investment transactions.
C)interbank and client markets.
D)client and retail market.
Q2) Foreign exchange markets are a relatively recent phenomenon, beginning with the agreement at Bretton Woods.
A)True
B)False
Q3) Which of the following is NOT a motivation identified by the authors as a function of the foreign exchange market?
A)The transfer of purchasing power between countries.
B)Obtaining or providing credit for international trade transactions.
C)Minimizing the risks of exchange rate changes.
D)All of the above were identified as functions of the foreign exchange market.
Q4) The European and American terms for foreign currency exchange are square roots of one another.
A)True
B)False
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Chapter 7: International Parity Conditions
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Q1) The current U.S. dollar-yen spot rate is 125¥/$. If the 90-day forward exchange rate is 127 ¥/$ then the yen is selling at a per annum ________ of ________.
A)premium; 1.57%
B)premium; 6.30%
C)discount; 1.57%
D)discount; 6.30%
Q2) The price elasticity of demand for DVD players manufactured by Sony of Japan is greater than one. If the Japanese yen appreciates against the U.S. dollar by 10% and the price of the Sony DVD players in the U.S also rises by 10%, then other things equal, the total dollar sales revenues of Sony DVDs would ________.
A)decline
B)increase
C)stay the same
D)insufficient information
Q3) Empirical studies show that the Fisher Effect works best for short-term securities.
A)True
B)False
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Chapter 8: Foreign Currency Derivatives
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Q1) The major difference between currency futures and forward contracts is that futures contracts are standardized for ease of trading on an exchange market whereas forward contracts are specialized and tailored to meet the needs of clients.
A)True
B)False
Q2) Which of the following is NOT a factor in determining the premium price of a currency option?
A)The present spot rate.
B)The time to maturity.
C)The standard deviation of the daily spot price movement.
D)All of the above are factors in determining the premium price.
Q3) Your U.S firm has an accounts payable denominated in UK pounds due in 6 months. To protect yourself against unexpected changes in the dollar/pound exchange rate you should
A)buy a pound put option.
B)sell a pound put option.
C)buy a pound call option.
D)sell a pound call option.
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Chapter 9: Interest Rate and Currency Swaps
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Q1) Which of the following is an unlikely reason for firms to participate in the swap market?
A)To replace cash flows scheduled in an undesired currency with cash flows in a desired currency.
B)Firms may raise capital in one currency but desire to repay it in another currency.
C)Firms desire to swap fixed and variable payment or receipt of funds.
D)All of the above are likely reasons for a firm to enter the swap market.
Q2) Refer to Table 9.1. If the LIBOR rate jumps to 5.00% after the first year what will be the all-in-cost (i.e. the internal rate of return)for Polaris for the entire loan?
A)5.25%
B)5.50%
C)6.09%
D)6.58%
Q3) A swap agreement may involve currencies or interest rates, but never both.
A)True
B)False
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Chapter 10: Foreign Exchange Rate Determination and Forecasting
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Q1) The authors claim that random events, institutional frictions, and technical factors may cause currency values to deviate significantly from their long-term fundamental path.
A)True
B)False
Q2) The ________ is the Argentine currency unit.
A)peso
B)dollar
C)real
D)peseta
Q3) The authors claim that theoretical and empirical studies appear to show that fundamentals do apply to the long-term for foreign exchange.
A)True
B)False
Q4) Foreign exchange forecasting can be either long-term, or short-term in duration. Compare and contrast the motivation for and the techniques a forecaster might use for each of the time periods.
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Chapter 11: Transaction Exposure
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Sample Questions
Q1) MNE cash flows may be sensitive to changes in which of the following?
A)Exchange rates.
B)Interest rates.
C)Commodity prices.
D)all of the above
Q2) ________ exposure is the potential for accounting-derived changes in owner's equity to occur because of the need to translate foreign currency financial statements into a single reporting currency.
A)Transaction
B)Operating
C)Economic
D)Accounting (aka translation)
Q3) Which of the following is cited as a good reason for NOT hedging currency exposures?
A)Shareholders are more capable of diversifying risk than management.
B)Currency risk management through hedging does not increase expected cash flows.
C)Hedging activities are often of greater benefit to management than to shareholders.
D)All of the above are cited as reasons NOT to hedge.
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13
Chapter 12: Operating Exposure
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Q1) After being introduced in the 1980s, currency swaps have gained increasing importance as financial derivative instruments.
A)True
B)False
Q2) Intracompany leads and lags are generally more feasible than comparable intercompany activities because the favorable impact of the lead or lag for one company is the reverse for the other firm.
A)True
B)False
Q3) Which of the following is NOT seen as a potential disadvantage to the formation of an intra-company reinvoicing center?
A)Reinvoicing center personnel may develop expertise in the selection and implementation of foreign exchange hedging techniques.
B)The company must create an additional corporate unit.
C)Initial setup costs may be high.
D)A separate set of books must be kept for this new corporate division.
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Page 14
Chapter 13: Translation Exposure
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Q1) The temporal rate method is the most prevalent method today for the translation of financial statements.
A)True
B)False
Q2) Consider two different foreign subsidiaries of Georgia-Pacific Wood Products Inc. The first subsidiary mills trees in Canada and ships its entire product to the Georgia-Pacific U.S. The second subsidiary is also owned by the parent firm but is located in Japan and retails tropical hardwood furniture that it buys from many different sources. The first subsidiary is likely a/an ________ foreign entity with most of its cash flows in U.S. dollars, and the second subsidiary is more of a/an ________ foreign entity.
A)domestic; integrated
B)self-sustaining; domestic
C)integrated; self-sustaining
D)self-sustaining; integrated
Q3) The current rate method is the most prevalent method today for the translation of financial statements.
A)True
B)False
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15
Chapter 14: The Global Cost and Availability of Capital
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Q1) Which of the following statements is NOT true regarding MNEs when compared to purely domestic firms?
A)MNEs tend to rely more on short and intermediate term debt.
B)MNEs have greater foreign exchange risk.
C)MNEs have greater costs of asymmetric information.
D)MNEs have higher agency costs.
Q2) Which of the following is NOT a portfolio diversification technique used by portfolio managers?
A)Diversify by type of security.
B)Diversify by the size of capitalization of the securities held.
C)Diversify by country.
D)All of the above are diversification techniques.
Q3) Which of the following is generally unnecessary in measuring the cost of debt?
A)a forecast of future interest rates
B)the proportions of the various classes of debt a firm proposes to use
C)the corporate income tax rate
D)All of the above are necessary for measuring the cost of debt.
Q4) What do theory and empirical evidence say about capital structure and the cost of capital for MNEs versus their domestic counterparts?
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Chapter 15: Sourcing Equity Globally
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Q1) Which of the following is NOT an advantage of ADRs to U.S. shareholders?
A)Transfer of ownership is done in the U.S. in accordance with U.S. laws.
B)In the event of the death of the shareholder, the estate does not go through a foreign court.
C)Settlement for trading is generally faster in the United States.
D)All of the above are advantages of ADRs.
Q2) Which of the following were NOT identified by the authors as an alternative instrument to source equity in global markets?
A)Sale of a directed public share issue to investors in a target market.
B)Private placements under SEC rule 144a.
C)Sale of shares to private equity funds.
D)All of the above are alternatives to source equity instruments.
Q3) In addition to gaining liquidity, which of the following could also be considered a legitimate reason for cross-listing equity?
A)enhance a firm's local image
B)become more familiar with the local financial community
C)get better local press coverage
D)all of the above
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Chapter 16: Sourcing Debt Globally
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Q1) The domestic theory of optimal capital structure does not need to be modified for MNEs.
A)True
B)False
Q2) ________ are domestic currencies of one country on deposit in a second country.
A)LIBORs
B)Eurocurrencies
C)Federal funds
D)Discount window deposits
Q3) Internal sources of funds for a foreign subsidiary of a MNE may come from the parent company but not from a sister subsidiary. Funding from sister subsidiaries are considered external funding.
A)True
B)False
Q4) Portfolio diversification of domestic firms reduces risk because cash flows are not perfectly correlated. The same reasoning is often argued for MNEs diversifying into international markets.
A)True
B)False
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Chapter 17: International Portfolio Theory and Diversification
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Q1) The optimal domestic portfolio of risky securities is the portfolio of minimum risk.
A)True
B)False
Q2) Draw the curve representing the Optimal Domestic Efficient Frontier. Be sure to draw and label the following: The vertical axis and the horizontal axis, the risk-free security, the minimum risk portfolio, the domestic portfolio opportunity set, the optimal domestic portfolio, and the capital market line. Choose a point along the domestic portfolio opportunity set between the optimal domestic portfolio and the minimum risk domestic portfolio and explain why that point is not the optimal risky domestic portfolio for investors to hold.
Q3) An internationally diversified portfolio
A)should result in a portfolio with a lower beta than a purely domestic portfolio.
B)has the same overall risk shape as a purely domestic portfolio.
C)is only about 12% as risky as the typical individual stock.
D)all of the above
Q4) Portfolio diversification can eliminate 100% of risk.
A)True
B)False
Page 19
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Chapter 18: Foreign Direct Investment Theory and Political Risk
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Q1) The OLI paradigm is an attempt to create a framework to explain why MNEs choose ________ rather than some other form of international venture.
A)licensing
B)joint ventures
C)foreign direct investment
D)strategic alliances
Q2) Which of the following is NOT a factor of Porter's "diamond of national advantage"?
A)Factor conditions.
B)Demand conditions.
C)Related and supporting industries.
D)All of the above are factors of the diamond of national advantage.
Q3) A country can react to the potential for blocked funds prior to making an investment, during operations, or by investing in the local country in assets than maintain their value.
A)True
B)False
Q4) What does the OLI Paradigm propose to explain? Define each component and provide an example of each.
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Chapter 19: Multinational Capital Budgeting
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Q1) A foreign firm that is 20% to 49% owned by a parent is called a/an ________.
A)subsidiary
B)affiliate
C)partner
D)rival
Q2) Refer to Instruction 19.1. What is the IRR of the Wheel Deal expansion?
A)14.4%
B)10.3%
C)12.0%
D)8.6%
Q3) For financial reporting purposes, U.S. firms must consolidate the earnings of any subsidiary that is over ________ owned.
A)20%
B)40%
C)50%
D)75%
Q4) Project financing is the arrangement of financing for very large individual long-term capital projects.
A)True
B)False
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Chapter 20: Multinational Tax Management
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Q1) The territorial approach to taxation policy is also termed the ________ approach.
A)source
B)ethical
C)greedy
D)location
Q2) Refer to Table 20.1. If MetroCity pays out 50% of its earnings from each subsidiary, what are the additional U.S. taxes due on the foreign sourced income from the Ukraine and Korea respectively.
A)Ukraine = $0; Korea = ($30,000)
B)Ukraine = $100,000; Korea = $0
C)Ukraine = $0; Korea = $66,250
D)none of the above
Q3) Refer to Instruction 20.1. If the U.S. treated the taxes paid on income earned in the host country as a tax-credit, then Rogue River's total U.S. corporate tax on the foreign earnings would be ________.
A)$51,250
B)$35,000
C)$26,250
D)$10,000
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Page 22
Chapter 21: Working Capital Management
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Q1) Because they are direct payments, dividends are among the most efficient way for foreign subsidiaries to remit funds back to the parent.
A)True
B)False
Q2) An organizational structure employed by an MNE to reduce its use of bank lending for the support of operations is
A)a centralized depository.
B)a reinvoicing center.
C)a cost center.
D)a syndicated bank.
Q3) ________ is the process that cancels via offset all, or part, of the debt owed by one entity to another related entity.
A)Syndicated banking
B)Centralized depositing
C)Multilateral netting
D)Debt cancellation
Q4) What is a free-trade zone? Identify three techniques and provide examples of how firms and countries can benefit from having free trade zones.
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Page 23
Chapter 22: International Trade Finance
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Q1) A letter of credit that is confirmed in the ________ country has the additional advantage of eliminating the problem of ________.
A)exporter's; portfolio risk
B)importer's; blocked foreign exchange
C)exporter's; blocked foreign exchange
D)none of the above
Q2) Because most international transactions are between affiliated parties, international transaction contracts are less complex, but the management of the total value of the MNE is more complex.
A)True
B)False
Q3) Refer to Instruction 22.1. What is the size of the discount (not including the commission fee)Jackson must take for receiving the proceeds of the sale today rather than waiting for six months?
A)$7,000
B)$5,000
C)$12,000
D)$14.000
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