International Economics Practice Exam
Course Introduction
International Economics explores the principles and dynamics that govern economic interactions among countries, focusing on topics such as international trade, exchange rates, balance of payments, and the impact of globalization. The course examines the theoretical foundations of trade, including comparative advantage and the effects of trade policies like tariffs and quotas. It also analyzes how capital flows, currency markets, and international agreements influence economic outcomes in both developed and developing economies. Students gain insights into current global economic challenges, policy debates, and the role of international organizations in shaping economic relations between nations.
Recommended Textbook
International Corporate Finance 1st Edition by
J. Ashok Robin
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Page 2
Chapter 1: Introduction
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Q1) When a nation's products are first introduced into global markets,that country has a competitive advantage that is not easily overcome in the short-term.This expresses the basis of the _____________________________ of international trade.
A)Product Life Cycle Theory
B)Gravity Theory
C)Comparative Advantage Theory
D)New Trade Theory
Answer: A
Q2) One impediment to the free flow of some factors of production,especially in the case of raw materials,is:
A)political restrictions.
B)currency risks.
C)competition.
D)high transaction costs.
Answer: D
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3
Chapter 2: International Financial Markets: Structure and Innovation
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Q1) Floating rate notes are financial instruments with interest rates linked to _____________ that are traded on the _________________________.
A)US Treasury bill rates;foreign exchange markets
B)LIBOR;Eurocredit market
C)LIBOR;foreign debt markets
D)US Treasury bill rates;Eurocurrency markets
Answer: B
Q2) ____________________ are Eurobonds that are issued simultaneously in multiple regions or countries.
A)Global bonds
B)Foreign bonds
C)Eurocurrencies
D)Samurai bonds
Answer: A
Q3) A direct quote given in the United States as "USD 0.0109053 per JPY" means:
A)1 JPY is worth .0109053 USD.
B)1 USD is worth .0109053 JPY.
C)the value of JPY relative to USD is increasing.
D)the value of USD relative to JPY is increasing.
Answer: A
Page 4
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Chapter 3: Currency and Eurocurrency Derivatives
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Q1) The seller of an option will always __________ when the option is exercised,so:
A)lose;the buyer of an option pays a premium to the seller of the option as compensation for the risk of loss that the option seller takes.
B)lose;the seller of an option will also have an option to get out of the option contract.
C)profit;the cost of options is very low.
D)profit;the seller of the option will agree to share the profit with the buyer of the option.
Answer: A
Q2) __________________________ comprise the great majority of derivatives used.
A)Currency derivatives
B)Interest rate derivatives
C)Stock purchase derivatives
D)Currency swap derivatives
Answer: B
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Chapter 4: Currency Systems and Valuation
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Q1) The value of a foreign currency is:
A)stable,since values are determined by the marketplace.
B)not subject to determination except at the specific time at which a transaction in the currency occurs.
C)subject to change depending on whether it is a pegged or floating currency.
D)subject to change and determined by forces of supply and demand.
Q2) A disadvantage of using a pegged currency system is that:
A)the country whose currency is pegged must decide on its own economic policies.
B)the country whose currency is pegged does not have the option of adopting economic policies different from those of the country to which the currency is pegged.
C)the cost of maintaining the peg is substantial and must be paid by those transacting business in the country whose currency is pegged.
D)international currency markets shun currency whose value is pegged to another currency.
Q3) How does a floating currency system allow a country more flexibility in dealing with its economic system?
Q4) What was the classical gold standard and why is it not observed today?
Q5) How do price levels in a country affect the value of that country's currency?
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Chapter 5: Currency Parity Conditions
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Q1) MNCs use currency forecasting in:
A)speculating in purchasing and selling foreign currency.
B)budgeting,financing,and working capital management.
C)determining their operating cash needs at a specific future date.
D)computing profit or loss on completed transactions.
Q2) A country's capital controls can affect interest rate parity by:
A)causing interest rates to be higher independent of the forward premium of the country's currency.
B)limiting foreign investment in the country so that interest rates are artificially reduced.
C)limiting foreign investment in the country so that interest rates are artificially increased.
D)causing the forward premium of the country's currency to be increased without regard to the real value of the currency.
Q3) The nominal interest rate contains two components:
A)the real interest rate and the exchange rate.
B)the real interest rate and the inflation rate.
C)the inflation rate and a risk factor.
D)the real interest rate and a risk factor.
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Chapter 6: Currency Risk Exposure Measurement
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Q1) The calculation of the standard deviation of a currency is based on:
A)a time series of the values of that currency.
B)the changes in the exchange rate of that currency annually of a specified number of years.
C)the average exchange rates of the currency over a specified period.
D)the exchange rate of the currency at a specific point in time.
Q2) ____________ exposure is an analysis of the effects of currency changes on a firm's operating cash flow.
A)Operating
B)Cash flow
C)Translation
D)Profit
Q3) The risks posed to a firm's operating cash flow by currency-related changes is called:
A)operating exposure.
B)currency risks.
C)economic exposure.
D)transaction risks.
Q4) What is the difference between operating exposure and transaction exposure?
Q5) How does conversion impact affect a firm's operating exposure?
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Chapter 7: Currency Exposure Management
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Q1) Studies have shown that investment opportunities in many industries are negatively correlated with industry cash flow.This means that:
A)firms that can maintain their cash flow when other firms in the industry are experiencing declining cash flow can take advantage of opportunities that other firms cannot pursue.
B)firms within a particular industry are destined to experience the same cash flow declines and increases as other firms in their industry experience.
C)investment opportunities within an industry increase when cash flow within the industry increases.
D)hedging is not a benefit to a firm if the general trend of cash flow within that industry is declining.
Q2) Forward hedges can eliminate cash flow variability:
A)in most cases.
B)to some extent.
C)only occasionally.
D)completely.
Q3) How does hedging assist a firm in reducing its currency exposure?
Q4) Why are firm managers generally considered to be risk-adverse?
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9
Chapter 8: Capital Budgeting
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Q1) Buying currency options with strike prices that approximate the break-even value of currencies for a project is an appropriate currency risk management tool,but:
A)option strike prices are often not available for the break-even value of currencies.
B)option strike prices cannot be established before the option date arrives.
C)option premiums for such options may be prohibitively high.
D)option premiums are only determined after the options are obtained,so the cost of options are variable.
Q2) What is decentralization and what does it mean for MNCs?
Q3) Sensitivity analysis considers how NPV responds to:
A)increased country risk.
B)changes in input values.
C)changes in output values.
D)increased competition.
Q4) In most projects,the typical unit sales forecast will:
A)increase initially and decrease toward the end of the project.
B)remain constant throughout the project.
C)increase initially and then remain constant until the end of the project.
D)increase steadily until the end of the project.
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Page 10
Chapter 9: Advanced Capital Budgeting
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Q1) The option to ___________________ allows a firm to change the scale of a project after committing to the project.
A)alter operating scale
B)abandon
C)grow
D)alter inputs
Q2) The option to alter operating scale generally requires pre-planning so that project output can be changed quickly to meet demand,but that pre-planning involves:
A)a waste of assets since the plans that are made for the future alteration of operating scale may never be used.
B)an option premium in the nature of the extra investment that is required in case the operating scale needs to be altered.
C)abandoning other projects that the firm might profitably pursue.
D)seeking projects that have an estimated NPV in excess of 1.
Q3) What are the causes of parent-subsidiary asymmetry?
Q4) What are real options and how do they affect the estimated value of projects?
Q5) What are side effects and how are they related to the value of international projects?
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Chapter 10: Long-Term Financing
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Q1) A syndicated loan that is denominated in JPY and which involves entities in more than one country is popularly called a:
A)yen loan.
B)Yankee bond.
C)ninja loan.
D)foreign bond.
Q2) A bond issued outside of the U.S.in the local currency is considered to be a:
A)foreign bond.
B)Eurobond.
C)domestic bond.
D)ninja bond.
Q3) Bank loans typically take the form of either:
A)debt or equity.
B)unsecured or secured loans.
C)installment or balloon loans.
D)term loans or lines-of-credit.
Q4) What is cost of capital?
Q5) MNCs might raise equity funds through an IPO or through a seasoned offering.What is the difference between an IPO and a seasoned offering?
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Chapter 11: Optimizing and Financing Working Capital
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Q1) The money that a firm uses on a day-to-day basis to carry out transactions with its customers and suppliers is referred to as:
A)short-term financing.
B)accounts receivable and payable.
C)cash and equivalents.
D)working capital.
Q2) The Euro commercial paper is:
A)a debt instrument denominated in euros.
B)a debt instrument that is issued in Europe and denominated in a European currency.
C)a medium-term debt instrument that is usually denominated in USD but sold in Europe.
D)a short-term debt instrument without coupon payments that matures in a few months.
Q3) In making short-term investments,firms consider:
A)creditworthiness of the company and the interest rate.
B)maturity,liquidity,risk,and flexibility.
C)broker's recommendation and competing opportunities.
D)opportunity costs and flexibility.
Q4) In the context of cash management,what are opportunity costs?
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Chapter 12: International Alliances and Acquisitions
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Q1) What is the primary difference between outsourcing agreements and procurement agreements?
A)Outsourcing agreements provide for the purchase of finished goods while procurement agreements provide for the purchase of raw materials.
B)Outsourcing agreements are generally broader in scope than procurement agreements.
C)Procurement agreements must be approved by the government of the country where the procurements are to be made,but outsourcing agreements do not require approval.
D)Procurement agreements seek to obtain tangible goods while outsourcing agreements are limited to services.
Q2) An arrangement in which firms share resources or develop or market products,is generally referred to as a:
A)joint venture.
B)strategic alliance.
C)distribution agreement.
D)merger.
Q3) How is outsourcing related to a firm's core competencies?
Q4) What is the difference between private equity funds and hedge funds?
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14
Chapter 13: International Trade
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Q1) One of the most important post-World War II developments related to trade was the:
A)Bretton Woods Agreement.
B)multilateral reduction of tariffs and non-tariff barriers to trade.
C)creation of the General Agreement on Tariffs and Trade.
D)establishment of the North American Free Trade Agreement organization.
Q2) If a bank issuing a letter of credit accepts the time draft that is issued in connection with the letter of credit,a _______________________ results.
A)sight draft
B)banker's acceptance
C)bill of lading
D)transfer of title
Q3) The International Bank for Reconstruction and Development is primarily funded by:
A)interest collected on loans made in past years.
B)the member nations of the United Nations.
C)issuing bonds in global debt markets.
D)fines imposed by the World Trade Organization for trade restriction violations.
Q4) Describe the process by which a letter of credit is paid.
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Chapter 14: International Taxation and Accounting
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Q1) What does transfer pricing mean in the context of the operations of MNCs?
Q2) The notational value of a derivative:
A)is used to determine its market value.
B)usually has nothing to do with its market value.
C)is closer to its market value the longer the term of the hedge.
D)is equivalent to the market value of the hedge in most cases.
Q3) What can cause the taxable income of a firm to vary over time?
A)Technology and exchange rates
B)Competition and economic cycles
C)Tax rates and competition
D)Tax credits and tax deductions
Q4) Internally,firms use performance metrics provided by accounting for:
A)communicating with potential investors.
B)applying for loans and subsidies.
C)satisfying regulatory agencies.
D)determination of compensation and for risk management.
Q5) How can MNCs use payments received from subsidiaries to reduce the overall tax burden of the MNC-subsidiary group?
Q6) How does the separate entity approach to taxation differ from the integrated system approach?
Page 16
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Chapter 15: International Portfolio Investments
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Q1) Investors limited to _________________ are limited in both increasing returns and reducing risks,while investors willing to invest in _______________________ are unconstrained in increasing returns and reducing risks.
A)stocks;bonds
B)debt investing;equities
C)domestic investments;international investments
D)current investments;futures
Q2) What is corporate governance and how does it affect foreign investments?
Q3) Foreign equity investments:
A)cannot be made directly by investors from other countries.
B)carry considerable risks,but also offer high returns.
C)can easily be made through any organized stock exchange.
D)are discouraged because informational asymmetry makes such investments too risky.
Q4) In inefficient markets,asset prices tend to be:
A)lower than normal,so investment opportunities are available.
B)higher than normal,so investment opportunities are limited.
C)abnormally high or low,thereby creating opportunities for profit.
D)subject to the forces of supply and demand.
Q5) How does correlation of assets affect the risks involved in foreign investments?
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