Deck 8: The International Monetary System and Financial Forces

Question 1

The Big Mac index is an example of purchasing power parity, an international measure of junk-food consumption.

Answer 1

False

Question 2

Sir Isaac Newton established the price of gold in 1717 and de facto put England on the gold standard.

Answer 2

True

Question 3

As a result of Bretton Woods and the dollar's use as a proxy for gold, the United States ran up a balance-of-payments deficit of around $56 billion, which led to the United States going off the gold exchange standard in 1971.

Answer 3

True

Question 4

The Bank for International Settlements operates as the banker for central banks.

Question 5

The exchange rate for today for delivery within two days is known as the current rate.

Question 6

If freely floating currencies are allowed to fluctuate against one another, at times the fluctuations might be quite large.

Question 7

A central reserve asset is a holding that has value that is held by private banks in case of a liquidity crisis.

Question 8

The law of one price states that in an efficient market, like products will never have like prices.

Question 9

The Bretton Woods system led to minimal growth in international trade but helped to reduce inflation levels.

Question 10

The international Fisher effect states that the interest rate differentials for any two currencies reflect the expected change in their exchange rates.

Question 11

Currency exchange rate movements are well understood by economists and can be accurately forecast, which eliminates risk for the international seller operating with exposure outside the home currency.

Question 12

De Gaulle pushed Nixon to close the gold window at the Treasury, and this one action moved the IMF toward a floating exchange rate system.

Question 13

One possible current currency arrangement is a fixed peg, whereby the exchange rate of a currency is allowed to move (within a narrow band) with another currency. One example is the pegging of the Canadian dollar to the U.S. dollar.

Question 14

The complexity of the gold standard was a part of its appeal.

Question 15

Global foreign currency exchange transactions total in the area of $4 trillion daily.

Question 16

The controlling mechanism for a gold-based exchange system and a floating-rate system are the same.

Question 17

The Fisher effect describes interest rate parity; it's the law of one price applied to interest rates. Interest rates vary to take into account anticipated differences in inflation levels.

Question 18

The Bretton Woods meeting in 1944 established a fixed-rate exchange system among Allied governments that was imposed on the Axis governments.

Question 19

Exchange rate forecasting is an advanced science; with the correct data, we can predict with accuracy exchange rate movements.

Question 20

Countries put limitations on the convertibility of their currencies when they are concerned that their foreign reserves could be depleted.

Question 21

When a business pays in dollars for an import from Turkey, the dollars that leave the United States will eventually show up as a credit on the U.S. capital account.

Question 22

The spot rate is the rate for exchange within two days in the currency market.

Question 23

The Bretton Woods system worked until the late 1960s.

Question 24

Tariffs are not a financial force; they are a political force.

Question 25

Monetary policies control the collecting and spending of money by governments.

Question 26

BOP accounts are recorded in a double-entry bookkeeping method, with each transaction having debit and credit sides.

Question 27

As global financial markets become more integrated, we can expect countries' inflation rates to vary over a small range.

Question 28

When a country imports more than it exports, the currency might be expected to weaken.

Question 29

The Bank for International Settlements is like a central bank for central bankers.

Question 30

One exchange arrangement is to have no separate legal tender.

Question 31

The random walk hypothesis suggests that the best predictor of tomorrow's currency prices are today's prices.

Question 32

The United States in recent years has had a significant deficit in its current account. This means that U.S. citizens are exporting more than they are importing.

Question 33

In POB accounting, a deficit in the current account is always accompanied by a surplus in the capital account.

Question 34

China participates in the management of the international financial environment by managing its currency.

Question 35

The balance of payments is a record of a country's transactions with its major trading partners.

Question 36

Currencies float because they are allowed to make their own adjustments in the marketplace.

Question 37

The value-added tax (VAT) can be rebated to exporters, according to WTO rules.

Question 38

Brazil, India, and the United States are among the highest corporate tax locations.

Question 39

Inflated currencies tend to weaken.

Question 40

Allied and Axis governments met in Bretton Woods in the final days of World War II.

Question 41

Bretton Woods led to an exchange rate agreement known as the Bretton Woods System or:

A) the floating-rate system.
B) the India Accord system.
C) the gold exchange standard.
D) the French rate system.

Question 42

Foreign reserves are used to:

A) help foreigners who need additional funds.
B) provide military support to foreign operations, for example, the French legion and UN peacekeepers.
C) cover foreign debt, import purchases, and other demands for foreign currency that banks might encounter.
D) support foreign operations that are branches but not subsidiaries.

Question 43

Arbitrage functions to:

A) provide French markets access to other EU markets.
B) exploit price differences between markets, so as to profit with no risk.
C) create wealth through interest rate swaps.
D) create increased trading in commodity markets.

Question 44

Purchasing power parity is a way to compare:

A) the purchasing power of several currencies.
B) tastes in several different cultures.
C) the impact of financial aid in several economies.
D) meals in the quick-service restaurant sector-via the Big Mac index.

Question 45

Financial forces such as inflation and taxation are considered uncontrollable because:

A) there is nothing a manager can do to adjust to them, so the recommended approach is to ignore them.
B) they are external forces beyond the influence of the firm, around which a manager can manage.
C) they are external to the firm and their influence is to be avoided.
D) they are unpredictable.

Question 46

Exchange rate forecasting is:

A) important because exchange rates influence all aspects of business.
B) important because markets depend on solid information.
C) unimportant because exchange rate forecasting does not have a theoretical model.
D) unimportant because exchange rate movements do not impact international transactions.

Question 47

Historically, gold has been used as a way for people to store value because of its:

A) purity and scarcity.
B) high transportation and security costs.
C) lack of interest-earning ability.
D) all of the above.

Question 48

The present floating exchange rate system is not a totally free float because:

A) there is an exchange fee of 1.5 to 1.75 percent.
B) For the most part, the major currencies float freely against each other, but there is government interference from time to time (dirty float).
B) some governments refuse to allow foreign traders to trade their currency.
C) some central banks from time to time intervene in the market to buy or sell large amounts of currency to affect the supply and demand of a particular currency.
D) A and

Question 49

Taxation is a financial force in that:

A) if the firm can achieve a lower tax burden than its competitors, it can generate higher revenues and then lower its prices or pay higher wages and dividends.
B) governments, which enact taxes, are formal institutions that enforce tax law via force.
C) businesses are compelled by foreign governments to pay taxes.
D) it is not controlled by the firm.

Question 50

The international Fisher effect says that the interest rate differentials in any two currencies reflect:

A) the ratio of their inflation rates minus COL
B) arbitrary differences in the two economies.
C) PPP differences in the two economies.
D) the expected change in their exchange rates.

Question 51

The forward currency market:

A) allows purchasers to lock in purchases of currencies at known rates.
B) provides governments a way to manage their currency's value.
C) makes trading in several currencies more efficient.
D) helps managers manage domestic debt.

Question 52

When the law of one price is applied to interest rates, it suggests that:

A) interest rates do not differ much across national borders.
B) inflation is not affected by interest rates.
C) inflation and interest rates do not follow the law of one price.
D) varying interest rates take into account anticipated differences in inflation rates.

Question 53

The three main approaches to exchange rate forecasting are:

A) the efficient market approach, the fundamental approach, and the technical approach.
B) the efficient market approach, the random walk hypothesis, and the pragmatic approach.
C) the random walk hypothesis, the pragmatic approach, and the fundamental approach.
D) none of the above.

Question 54

Sir Isaac Newton put England on the gold standard when he:

A) declared, as master of the English mint, that he would sell gold for 1 pound, 1 shilling, 1 pence, under the law of one price.
B) set a market price for gold, the British pound and the U.S. dollar.
C) established a fixed equivalency between gold and the British currency.
D) brought the matter to Queen Anne, who declared Britain would follow the gold standard.

Question 55

Currency exchange controls are found most frequently in:

A) developing countries.
B) developed countries.
C) countries with pegged exchange rates.
D) nondemocratic countries.

Question 56

Market forces that set the relative prices of currencies are:

A) not influenced by government policies.
B) Numerous forces may influence currency values, including supply and demand, inflation, taxation, domestic policies, world events, balance of payments, and psychology.
B) not influenced by world events.
C) influenced by many forces including forces external to business, such as world events.
D) A and

Question 57

If the Japanese yen is strengthening against the U.S. dollar, and the Japanese government wanted to boost exports, the central bank of Japan might well:

A) sell U.S. dollars in large amounts in the currency markets.
B) buy massive amounts of Japanese yen in the FX markets.
C) sell massive amounts of Japanese yen in the FX markets.
D) buy massive amounts of other hard currencies, such as the British pound sterling and the euro, to deflect the focus on dollars.

Question 58

The lowest corporate tax rates are found in:

A) the United States, Brazil, India, and France.
B) Brazil, China, Australia, and Japan.
C) Peru, Australia, Italy, and Luxembourg.
D) Switzerland, Ireland, Singapore, and Russia.

Question 59

The inflation rate determines:

A) a currency's strengthening.
B) the real price of borrowing in capital markets.
C) locations for outsourcing.
D) import substitution regimes.

Question 60

The present floating exchange rate system was:

A) designed by the IMF and implemented flawlessly in 1973.
B) established by the major trading nations in 19721 after Nixon closed the gold window.
C) implemented in tandem with a reintroduction of the gold standard.
D) established after several trials in which central bankers set rates incorrectly and speculators corrected them in the markets, and it was formalized after the fact in the IMF's Jamaica Agreement.

Question 61

When a government requires a permit to purchase foreign currency, the exchange rates:

A) are market-driven.
B) can be negotiated by the firm.
C) are unpredictable.
D) are set by the government, often above the free market rate.

Question 62

Fixed-rate relationships among currencies could not stay fixed, according to Obstfeld and Rogoff, because:

A) the volume of global transactions started to exceed most countries' foreign exchange reserves, so governments couldn't intervene to sustain the value of their currency.
B) the complexity of international trade demanded return of the gold standard.
C) Walmart and other leading firms argued successfully at the Federal Reserve that fixed rates were too costly to maintain.
D) the EU had decided to float the euro.

Question 63

In general, with regard to exchange controls, developed countries:

A) rarely use them.
B) use them only to discourage foreign investment.
C) use them when needed to implement monetary policy.
D) use them secretly.

Question 64

A vehicle currency is a currency:

A) used to trade in the transportation sector and is usually the dollar, euro, or yen.
B) whose value lies in its function in transfer pricing.
C) specifically used in arbitrage deals as a trading medium only.
D) used for international trade or investment.

Question 65

The balance-of-payments account is divided into the following three major subaccounts:

A) trade, capital, and debt.
B) cash flow, assets, and reserves.
C) services, cash flow, and debt.
D) current, capital, and reserves.

Question 66

A value-added tax is actually a sales tax that is:

A) paid by the firm rather than the consumer.
B) paid in stages along the process from raw materials to consumer and then credited after final sale.
C) called value added to create a positive spin on taxation.
D) voluntarily paid on exports.

Question 67

In order to strengthen the U.S. dollar, the Federal Reserve might sell yen and buy dollars, in which case the yen functions as:

A) a stronger currency than the dollar.
B) an intervention currency.
C) an arbitrage currency.
D) none of the above.

Question 68

Withholding tax is:

A) an indirect tax paid by employers before employees receive salaries.
B) a direct tax levied on earned income.
C) a 30 percent tax levied on foreign residents.
D) an indirect tax levied on passive income.

Question 69

The international Fisher effect says that interest rate differentials:

A) predict exchange rate movement.
B) can be used to determine purchasing power parity.
C) are an example of the law of one price.
D) illustrate Pareto optimality.

Question 70

Countries put limitations on the convertibility of their currency when they are concerned that:

A) there is too much domestic spending.
B) foreigners will hold control of their monetary policy.
C) their foreign reserves could be depleted.
D) there is not enough domestic spending.

Question 71

One attribute of the U.S. tariff schedule is:

A) that it is printed in both Arabic and Hebrew.
B) how specific it is.
C) that its categories are quite general and easy to apply.
D) that its harmonized version can be accessed via cell phone and iPad.

Question 72

Most significantly for the international manager, the balance of payments reveals:

A) demand for a firm's products.
B) a firm's financial position.
C) a country's export patterns.
D) demand for a country's currency and potential changes in its economic environment.

Question 73

The balance-of-payments account is a record of:

A) the total tangible trade flows of a country over a five-year period.
B) a country's transactions with the rest of the world.
C) a country's total debt service payments during a one-year period.
D) the outstanding balance of a country's debt payments for the fiscal year.

Question 74

The law of one price is that:

A) only one price can be charged for an item in a contract deal.
B) in an efficient market, one price only is the permissible price.
C) in an efficient market, like goods will have like prices.
D) even in international markets, bait and switch is illegal.

Question 75

The inflation rate determines:

A) the capital structure of the firm.
B) the growth rate of sales.
C)
C) the real cost of borrowing in capital markets.
D) the equilibrium point.
Of these choices, the only one that directly connects to inflation rate is

Question 76

In an inflationary economy the following conditions may be present:

A) demand exceeds supply.
B) money supply is increasing.
C) prices are rising.
D) all of the above.

Question 77

The three major taxes governments use to generate revenue are:

A) VAT, income tax, and withholding tax.
B) sales tax, VAT, and income tax.
C) property tax, VAT, and sales tax.
D) income tax, property tax, and sales tax.

Question 78

The Eonomist's Big Mac index (May 2010) suggests that against the dollar, the Chinese yuan is:

A) trading fairly, since the Big Mac prices are similar.
B) quite undervalued, since the Chinese Big Mac is almost 50 percent less expensive than the U.S.-dollar Big Mac.
C) is overvalued, since the Big Mac sells for almost 50 percent less in Chinese currency than in U.S. dollars.
D) trading at a historical premium.

Question 79

Monetary and fiscal policies:

A) have nothing to do with exchange rate movement.
B) influence interest rates and taxation, and so may influence exchange rates.
C) have no predictable influence on inflation.
D) have no influence on trade patterns.

Question 80

The Fisher effect states that the real interest rate:

A) is the nominal rate plus the recorded inflation rate.
B) is the only measure to use in calculating PPP.
C) is the nominal rate minus the expected inflation rate.
D) is the difference between the nominal rate and the inflation rate.