Deck 6: International Finance and Trade

Question 1

The International Monetary Fund (IMF) was created to promote world trade through monitoring and maintaining fixed exchange rates and by making loans to countries with payment problems.

Answer 1

True

Question 2

Under the system of flexible exchange rates, exchange rates are determined by the actual process of supply and demand in the foreign exchange market.

Answer 2

True

Question 3

The ultimate effect of large-scale arbitrage activities on exchange rates is the elimination of the variation between the two markets.

Answer 3

True

Question 4

In mid-1944, authorities from all major nations met in Bretton Woods, New Hampshire, to formulate a post-World War II international monetary system.

Question 5

In foreign exchange, variations in quotations among countries at any time are quickly brought into alignment through arbitrage activities.

Question 6

The International Bank for Reconstruction and Development (World Bank) was created to provide banking services for U.S. firms operating overseas.

Question 7

The European Economic Organization (EEO) is an organization of twelve European countries that agreed to have a common overall monetary policy and the euro as their common currency.

Question 8

Beginning in March 1973, major currencies were allowed to "float" against one another.

Question 9

On January 1, 1999, the euro became the official currency of all European Monetary Union members.

Question 10

Arbitrage is the simultaneous buying of securities in one market and selling them in another to make a profit from price differences in the two markets.

Question 11

The direct quotation method expresses the number of foreign currency units needed to buy one U.S. dollar.

Question 12

Foreign exchange markets are electronic communication systems connecting the major financial centers of the world.

Question 13

The direct quotation method indicates the amount of a foreign currency necessary to purchase one unit of the home country's currency.

Question 14

An indirect exchange rate quotation is simply the reciprocal of a direct exchange rate quotation.

Question 15

Prior to the start of World War I in 1914, the international monetary system operated mostly under a silver standard.

Question 16

The international monetary system consists of institutions and mechanisms that foster international trade, manage the flow of financial capital, and determine currency exchange rates.

Question 17

The 1991 Maastricht Treaty formally committed the countries of the European Union to economic and monetary union.

Question 18

The European Monetary Union (EMU) began as a 14-member subset of the 1995 15-member EU.

Question 19

A currency exchange rate indicates the value of one currency relative to the U.S. dollar.

Question 20

Under the Bretton Woods system, individual currencies would be tied to silver through the U.S. dollar via fixed, or pegged, exchange rates.

Question 21

An increase in demand for a currency relative to other currencies will cause it to appreciate in value.

Question 22

Under a floating exchange rate system, the value of one currency relative to another is determined by the forces of supply and demand.

Question 23

A contract for the purchase or sale of a currency where delivery will take place at a future date is called a forward contract.

Question 24

Slow economic growth in investments in another country would be an example of political risk.

Question 25

Political risk is the risk associated with possible slow or negative economic growth, as well as with the likelihood of variability.

Question 26

Economic risk is the risk associated with possible slow or negative economic growth, as well as with the likelihood of variability.

Question 27

A nation with relatively lower interest rate levels than other countries will have a relatively stronger currency.

Question 28

Holding demand constant, an increase in supply for one currency relative to another will cause its value to depreciate relative to that currency.

Question 29

Holding demand constant, an increase in supply for one currency relative to another will cause its value to appreciate relative to that currency.

Question 30

Interest rate parity states that a country with a relatively higher expected inflation rate will have its currency depreciate relative to a country with a relatively lower inflation rate.

Question 31

Political risk is the risk associated with possible actions by a sovereign nation to interrupt or change the value of cash flows accruing to foreign investors.

Question 32

Economic risk is the risk associated with the possibility that a national government might confiscate or expropriate assets held by foreigners.

Question 33

The spot exchange rate is the rate being quoted for delivery of the currency at a particular spot in the future.

Question 34

An expected decline in a country's currency may lead to an attempt to accelerate collection of accounts receivable from that country for transfer to another country with a more stable currency.

Question 35

Purchasing power parity (PPP) states that the currency of a country with relatively higher inflation will depreciate relative to the currency of a country with a relatively lower inflation rate.

Question 36

A nation with a relatively lower inflation rate than other countries will have a relatively stronger currency holding other factors constant.

Question 37

Interest rate parity (IRP) states that the currency of a country with relatively higher interest rate will appreciate relative to the currency of a country with a relatively lower interest rate.

Question 38

International financial markets strongly influence domestic interest rates.

Question 39

The exchange value of the U.S. dollar relative to other currencies does not impact international trade balances.

Question 40

The equilibrium exchange rate is the currency exchange rate where the supply and demand for a currency are in balance.

Question 41

The traveler's letter of credit is issued by a bank to banks in other countries authorizing foreign banks to cash checks or purchase drafts presented by the bearer.

Question 42

Hedging is action taken to reduce risk or insure against a possible negative outcome.

Question 43

An order bill of lading is a document given by a transportation company that lists goods to be transported and terms of the shipping agreement.

Question 44

A decrease in demand for a currency relative to other currencies will cause it to depreciate in value.

Question 45

A trust receipt is an instrument through which a bank retains title to goods until they are paid for.

Question 46

The bankers' acceptance is a draft drawn on and accepted by a bank rather than the importing firm.

Question 47

A documentary draft is a draft that is accompanied by an order bill of lading and other documents.

Question 48

Holding demand constant, a decrease in supply for one currency relative to another will cause its value to depreciate relative to that currency.

Question 49

The Board of Governors of the Federal Reserve System authorizes member banks to accept drafts that arise in the course of certain types of international transactions.

Question 50

The international monetary system consists of institutions and mechanisms that foster oversees the World Bank, sets international trade policy, and determines the exchange rate regime for all participating countries.

Question 51

A sight draft is one that is not accompanied by any special documents and is generally used when the exporter has confidence in the importer's ability to meet the draft when presented.

Question 52

The order bill of lading represents the written acceptance of goods for shipment by a transportation company and the terms under which the goods are to be transported to their destination.

Question 53

The United Nations operates a world central bank that provides a world monetary unit to accommodate commerce across national boundaries.

Question 54

An instrument requiring immediate payment is classified as a time draft.

Question 55

The Export-Import Bank is a corporation owned by the Federal Reserve Banks.

Question 56

A traveler's letter of credit is issued by a bank in one country and addressed to a list of foreign banks which are usually correspondents of the issuing bank and have agreed to purchase sight drafts presented to them by persons with appropriate letters of credit.

Question 57

The capital account balance includes all foreign private and government investment in the United States netted against U.S. investments in foreign countries.

Question 58

A clean draft is accompanied by an order bill of lading along with other papers such as insurance receipts, certificates of sanitation, and consular invoices.

Question 59

The current account balance shows the flow of income into and out of the United States during a specified time period.

Question 60

The balance of payments is a record of all economic transactions between one country and the rest of the world.

Question 61

When the flow of income into the United States exceeds the flow of income out of the United States, it creates a

A) current account surplus
B) current account deficit
C) capital account surplus
D) capital account deficit

Question 62

The World Bank is also called the International Bank for Reconstruction and Development.

Question 63

A time draft must be paid quicker than a sight draft.

Question 64

It is a system in which individual currencies would be tied to gold through the U.S. dollar via fixed, or pegged, exchange rates.

A) United National International Bank
B) International Monetary Fund
C) Bretton Woods system
D) World Bank

Question 65

Which of the following statements is most correct?

A) A weaker dollar results in less imports of foreign merchandise since it requires fewer dollars for purchase.
B) A stronger dollar results in fewer imports of foreign merchandise since it requires fewer dollars for purchase.
C) A stronger dollar results in more imports of foreign merchandise since it requires more dollars for purchase.
D) A weaker dollar results in more imports of foreign merchandise since it requires more dollars for purchase.

Question 66

It is also called the International Bank for Reconstruction and Development.

A) United National International Bank
B) International Monetary Fund
C) Bretton Woods system
D) World Bank

Question 67

It was created to help economic growth in developing countries.

A) United National International Bank
B) International Monetary Fund
C) Bretton Woods system
D) World Bank

Question 68

The currency quotation method that indicates the amount of a home country's currency needed to purchase one unit of a foreign currency is called the

A) direct quotation method.
B) indirect quotation method.
C) floating exchange rate method.
D) variable rate method.

Question 69

The official currency of the EMU is what?

A) Pound
B) Dollar
C) Yen
D) Euro

Question 70

_________________________ was an international monetary system in which the U.S. dollar was valued in gold and other exchange rates were pegged to the dollar.

A) The gold standard
B) The flexible exchange rate system
C) The Bretton Woods System
D) The Taft-Hartley Act

Question 71

A draft and a bill of exchange are the same thing.

Question 72

_________________________ was created to promote world trade through monitoring and maintaining fixed exchange rates and by making loans to countries with payments problems.

A) The World Bank
B) The International Monetary Fund
C) The International Bank for Reconstruction and Development
D) None of the above

Question 73

The World Bank is also called the United National International Bank.

Question 74

The ___________________ shows the flow of income into and out of the United States during a specified period.

A) balance of payments
B) capital account balance
C) current account balance
D) merchandise trade balance

Question 75

_________________________ was created to help economic growth in developing countries.

A) The World Bank
B) The International Monetary Fund
C) The Export-Import Bank
D) The Agency for International Development.

Question 76

Foreign exchange markets may be described as

A) specific locations in major industrial cities.
B) major financial centers connected by good communications systems.
C) money markets outside of the United States.
D) facilities of central banks for foreign exchange.

Question 77

Which of the following statements is false?

A) Foreign banks, in addition to having correspondent relation with United States banks, are permitted to set up subsidiaries in this country.
B) The trust receipt is used by a bank in releasing shipping documents to a customer when the bank wishes to retain title to the merchandise.
C) A nation with relatively lower interest rate levels will have a relatively stronger currency.
D) A nation with a relatively lower inflation rate will have a relatively stronger currency.

Question 78

The exchange rate is the rate at which a given unit of foreign currency is quoted in terms of

A) commodity prices.
B) the domestic currency.
C) the foreign currency.
D) gold.

Question 79

Foreign exchange markets are the same thing as as currency exchange markets.

Question 80

A quotation differential of as little as one-sixteenth of one cent may be sufficient to encourage arbitrage activities.