International Economics Exam Practice Tests
Course Introduction
International Economics explores the principles and dynamics governing the exchange of goods, services, and capital across national borders. The course covers key topics such as comparative advantage, trade theories, trade policy, the balance of payments, exchange rates, and international financial markets. Students analyze the impact of globalization on economic growth, income distribution, and policy decisions, while also investigating the roles played by international organizations and agreements. Emphasis is placed on understanding the complexities and interdependencies of the global economy, providing students with the analytical tools to assess real-world economic issues in an international context.
Recommended Textbook Fundamentals of Multinational Finance 3rd Edition by Michael H. Moffett
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Page 2
Chapter 1: Globalization and the Multinational Enterprise
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Sample Questions
Q1) Comparative advantage was once the cornerstone of international trade theory, but today it is archaic, simplistic, and irrelevant for explaining investment choices made by MNEs.
A)True
B)False
Answer: False
Q2) Refer to Table 1.1. If each country specializes in their production with Austria producing only digital cameras and Russia producing only snowboards, at a trading rate of three snowboards per digital camera, how many cameras and snowboards will be available to be consumed in Russia if they trade 9,000 snowboards to Austria?
A) 9,000 snowboards and 5,000 digital cameras
B) 3,000 snowboards and 3,000 digital cameras
C) 3,000 snowboards and 9,000 digital cameras
D) There is not enough information to answer this question.
Answer: C
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3
Chapter 2: Financial Goals and Corporate Governance
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Q1) The deliberation of the of the process demonstrated in the European-Japanese system of corporate governance has sometimes been termed ________.
A) socialism
B) impatient capital
C) patient capital
D) communism
Answer: C
Q2) Anglo-American equity markets are characterized by widespread ownership of shares. In other parts of the world ownership is often dominated by consortiums of controlling shareholders. Which of the following is NOT an example of a common consortium of controlling shareholders?
A) Japanese keiretsus
B) South Korean chaebols
C) U.S. labor unions
D) all of the above are common controlling consortiums
Answer: C
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Chapter 3: The International Monetary System
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Q1) Which of the following groups of countries have replaced their individual currencies with the Euro?
A) France, Germany, and the United Kingdom
B) Sweden, Denmark, and Greece
C) The United Kingdom, The Netherlands, and Austria
D) Germany, The Netherlands, and Italy
Answer: D
Q2) A currency is considered hard if
A) it is expected to be revalued or appreciate.
B) it is expected to be devalued or depreciate.
C) it is backed in part by a precious metal such as gold.
D) it is difficult to trade on the international currency exchange markets.
Answer: A
Q3) Which of the following is NOT an example of a Eurocurrency deposit?
A) British pounds deposited outside of the United Kingdom
B) Japanese yen deposited outside of Japan
C) U.S. dollars deposited outside of the United States
D) All of the above could be considered Eurocurrency deposits.
Answer: D
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Page 5
Chapter 4: The Balance of Payments
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Sample Questions
Q1) Which of the following is the best definition of money laundering?
A) legal transfer of funds through the usual international payments mechanisms
B) the transfer of cash into collectibles that are then transferred across borders
C) the cross-border purchase of assets that are then managed in a way that hide the movement of money and its ownership
D) False invoicing of international trade transactions
Q2) In 2001 the United States posted a current account deficit of -$393 billion. The bulk of the negative value came from
A) a net transfer deficit.
B) an income balance deficit.
C) a goods trade deficit.
D) an income trade deficit.
Q3) A country experiencing a serious BOP ________ is more likely to ________ exports than otherwise.
A) surplus; contract
B) deficit; contract
C) deficit; expand
D) none of the above
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Chapter 5: The Foreign Exchange Market
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Sample Questions
Q1) Define spot, forward, and swap transactions in the foreign exchange market and give an example of how each could be used.
Q2) Refer to Table 6.1. The current spot rate of dollars per pound as quoted in a newspaper is ________ or ________.
A) £1.4484/$; $0.6904/£
B) $1.4481/£; £0.6906/$
C) $1.4484/£; £0.6904/$
D) £1.4487/$; $0.6903/£
Q3) Given the following pair wise exchange rates, estimate the cross-rate of pounds per euro.
$0)8410/£ $1.2223/euro
A) £1.000/euro
B) £1.5062/euro
C) £0.6639/euro
D) euro 1.5062/£
Q4) Because the market for foreign exchange is worldwide, the volume of foreign exchange currency transactions is level throughout the 24-hour day.
A)True
B)False
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Chapter 6: International Parity Conditions
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Sample Questions
Q1) Empirical tests have yielded ________ evidence about market efficiency with a general consensus that developing foreign markets are ________.
A) conflicting; not efficient
B) conflicting; efficient
C) consistent; inefficient
D) None of the above
Q2) In its approximate form the Fisher effect may be written as ________. Where: i = the nominal rate of interest, r = the real rate of return and = the expected rate of inflation.
A) i = (r)( )
B) i = r + + (r)( )
C) i = r +
D) i = r + 2
Q3) The premium or discount on forward currency exchange rates between any two countries is visually obvious when you plot the interest rates of each country on the same yield curve. The currency of the country with the higher yield curve should be selling at a forward discount.
A)True
B)False
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Page 8
Chapter 7: Foreign Exchange Rate Determination and Forecasting
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Q1) It is safe to say that most determinants of the spot exchange rate are also affected by changes in the spot rate. i.e., they are linked AND mutually determined.
A)True
B)False
Q2) In 1991 the Argentine peso was fixed to the value of the U.S. dollar on a one-to-one basis.
A)True
B)False
Q3) Short-term foreign exchange forecasts are often motivated by such activities as ________ whereas long-term forecasts are more likely motivated by ________.
A) long-term investment; long-term capital appreciation
B) long-term capital appreciation; desire to hedge a receivable
C) the desire to hedge a payable; the desire for long-term investment
D) the desire for long-term investment; the desire to hedge a payable
Q4) One of the solutions to the Argentine peso crisis of 2003 was to devalue the peso to the approximate value of $2.00 per Argentine peso.
A)True
B)False
Page 9
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Chapter 8: Foreign Currency Derivatives
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Sample Questions
Q1) Most option profits and losses are realized through taking actual delivery of the currency rather than offsetting contracts.
A)True
B)False
Q2) A speculator that has ________ a futures contract has taken a ________ position.
A) sold; long B) purchased; short C) sold; short D) purchased; sold
Q3) Currency futures contracts have become standard fare and trade readily in the world money centers.
A)True
B)False
Q4) The ________ of an option is the value if the option were to be exercised immediately. It is the options ________ value.
A) intrinsic value; maximum B) intrinsic value; minimum C) time value; maximum D) time value; minimum
Page 10
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Chapter 9: Transaction Exposure
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Sample Questions
Q1) A U.S. firm sells merchandise today to a British company for £100,000. The current exchange rate is $2.03/£ , the account is payable in three months, and the firm chooses to avoid any heding techniques designed to reduce or eliminate the risk of changes in the exchange rate. If the exchange rate changes to $2.05/£ the U.S. firm will realize a ________ of ________.
A) loss; $2000
B) gain; $2000
C) loss; £2000
D) gain; £2000
Q2) Refer to Instruction 9.1. If Plains States chooses not to hedge their euro receivable, the amount they receive in six months will be ________.
A) $1,750,000
B) $1,250,000
C) $892,857
D) undeterminable today
Q3) Does foreign currency exchange hedging both reduce risk and increase expected value? Explain, and list several arguments in favor of currency risk management and several against.
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11
Chapter 10: Operating Exposure
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Sample Questions
Q1) A ________ resembles a back-to-back loan except that it does not appear on a firm's balance sheet.
A) forward loan
B) currency hedge
C) counterparty
D) currency swap
Q2) Which of the following is NOT an example of diversifying operations?
A) diversifying sales
B) diversifying location of operations
C) raising funds in more than one country
D) sourcing raw materials in more than one country
Q3) ________ cash flows arise from intracompany and intercompany receivables and payments while ________ cash flows are payments for the use of loans and equity.
A) Financing; operating
B) Operating; financing
C) Operating; accounting
D) Accounting; financing
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Chapter 11: Translation Exposure
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Sample Questions
Q1) A Canadian subsidiary of a U.S. parent firm is instructed to bill an export to the parent in U.S. dollars. The Canadian subsidiary records the accounts receivable in Canadian dollars and notes a profit on the sale of goods. Later, when the U.S. parent pays the subsidiary the contracted U.S. dollar amount, the Canadian dollar has appreciated 10% against the U.S. dollar. In this example, the Canadian subsidiary will record a
A) 10% foreign exchange loss on the U.S. dollar accounts receivable.
B) 10% foreign exchange gain on the U.S. dollar accounts receivable.
C) since the Canadian firm is a U.S. subsidiary neither a gain nor loss will be recorded.
D) any gain or loss will be recoded only by the parent firm.
Q2) Under the temporal rate method, specific assets and liabilities are translated at exchange rates consistent with the timing of the item's creation.
A)True
B)False
Q3) Multinational enterprises always completely hedge translation exposure.
A)True
B)False
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Chapter 12: Global Cost and Availability of Capital
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Q1) Which of the following is NOT a key variable in the weighted average cost of capital (WACC) equation?
A) the before tax cost of debt
B) the risk-adjusted cost of equity
C) the beta of the market portfolio
D) the total market value of the firm's securities
Q2) The beginning share price for a security over a three-year period was $50. Subsequent year-end prices were $62, $58 and $64. The arithmetic average annual rate of return and the geometric average annual rate of return for this stock was
A) 9.30% and 8.78% respectively.
B) 9.30% and 7.89% respectively.
C) 9.30% and 7.03% respectively.
D) 9.30% and 6.37% respectively.
Q3) A firm whose equity has a beta of 1.0
A) has greater systematic risk than the market portfolio.
B) stands little chance of surviving in the international financial market place.
C) has less systematic risk than the market portfolio.
D) None of the above is true.
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Page 14
Chapter 13: Sourcing Equity Capital Globally
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Q1) What are the two schools of thought regarding the worldwide trend toward increased financial disclosure by publicly traded firms. Explain which school of thought you hold to and why.
Q2) Cross border trading of some Canadian company securities in the U.S. preceded the development of Global Registered Shares (GRSs) by several decades.
A)True
B)False
Q3) The stock exchange with the greatest value of shares traded is ________.
A) NYSE
B) Tokyo
C) Nasdaq
D) London
Q4) Empirical evidence has found that on average public firms that have been privatized by issuing public equity have
A) lowered capital investment levels.
B) decreased efficiency.
C) expanded their employment.
D) all of the above.
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Chapter 14: Financial Structure and International Debt
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Sample Questions
Q1) MNEs situated in countries with small illiquid and segmented markets are most like A) small domestic U.S. firms in that they must rely on internally generated funds and bank borrowing.
B) large U.S. MNEs in that they are all MNEs and have worldwide markets and sources of financing.
C) small domestic U.S. firms in that they have a strong niche market in the U.S.
D) none of the above is true.
Q2) Obtaining local currency debt obligations is particularly attractive to an MNE if the subsidiary has
A) substantial accounts payable in the local currency.
B) substantial financial obligations in foreign currency units.
C) substantial accounts receivable in the local currency.
D) all of the above.
Q3) 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 15: Interest Rate and Currency Swaps
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Q1) Which of the following would an MNE NOT want to do?
A) Pay a very low fixed rate of interest in the long term.
B) Swap into a foreign currency payment that is falling in value.
C) Swap into a floating interest rate receivable just prior to interest rates going up.
D) Swap into a fixed interest rate receivable just prior to interest rates going up.
Q2) Refer to Instruction 15.1. The risk of strategy #1 is that interest rates might go down or that your credit rating might improve. The risk of strategy #3 is (Assume your firm is borrowing money.)
A) that interest rates might go down or that your credit rating might improve.
B) that interest rates might go up or that your credit rating might improve.
C) that interest rates might go up or that your credit rating might get worse.
D) none of the above.
Q3) Interest rate futures are relatively unpopular among financial managers because of their relative illiquidity and their difficulty of use.
A)True
B)False
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Chapter 16: International Portfolio Theory and Diversification
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Sample Questions
Q1) 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.
Q2) Relative to the efficient frontier of risky portfolios, it is impossible to hold a portfolio that is located ________ the efficient frontier.
A) to the left of B) to the right of C) on
D) to the right or left of
Q3) Unsystematic risk is
A) the remaining risk in a well-diversified portfolio.
B) measured with beta.
C) can be diversified away.
D) all of the above.
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Chapter 17: Foreign Direct Investment Theory and Strategy
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Q1) A MNE can choose all of the following modes of entry for FDI EXCEPT:
A) a joint venture with a local partner.
B) a 100%-owned greenfield subsidiary.
C) merger with or acquisition of an existing local firm.
D) exporting products to a local firm.
Q2) The authors cite China-based Haier as an example of a firm following the strategy of ________. Haier is shown to have firmly established themselves as the top producer of home appliances in China and then using their economies of scale in an attempt to gain market share globally.
A) acquiring offshore assets
B) taking brands global
C) targeting a niche
D) engineering to innovation
Q3) Which of the following is NOT a strategy employed by the firms included in the text list of emerging market MNEs?
A) taking brands global
B) leveraging natural resources
C) acquiring offshore assets
D) All of the above are techniques used by emerging MNEs.
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Page 19
Chapter 18: Political Risk Assessment and Management
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Sample Questions
Q1) Negotiations under the General Agreement on Tariffs and Trade (GATT) have NOT had much impact on reducing the level of tariffs over the last several decades.
A)True
B)False
Q2) OPIC stands for
A) Organization for the Prevention of Insufficient Capitalization.
B) Organization of Petroleum Importing Countries.
C) Overseas Private Investment Corporation.
D) Overseas Public Insurance Commission.
Q3) ________, also known as micro risks, are political risks that affect the MNE at the project and corporate level but do not originate at the country level.
A) Firm-specific risks
B) Country-specific risks
C) Global-specific risks
D) Transfer risks
Q4) What are blocked funds? List and explain two of the three methods the authors list in this chapter for dealing with blocked funds.
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Chapter 19: Multinational Capital Budgeting
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Q1) It is important that firms adopt a common standard for the capital budgeting process for choosing among foreign and domestic projects.
A)True
B)False
Q2) Which of the following considerations is NOT important for a parent firm when considering foreign investment?
A) the form of financing
B) remittance of funds at risk due to political considerations
C) differing rates of national inflation
D) All of the above are important considerations.
Q3) Generally speaking a firm's cost of ________ capital is greater than the firm's
A) debt; equity
B) debt; wacc
C) equity; wacc
D) None of the above is true.
Q4) Explain how political risk and exchange rate risk increase the uncertainty of international projects for the purpose of capital budgeting.
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Chapter 20: International Trade Finance
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Q1) An instrument issued by a bank, at the request of an importer, in which the bank promises to pay a beneficiary upon presentation of specified documents is a
A) time certificate of deposit.
B) time draft.
C) sight draft.
D) letter of credit.
Q2) The three parties to a letter of credit are
A) issuing bank, seller, and applicant.
B) importer, exporter, and shipping company.
C) notary public, importer, and importer's bank.
D) Ex-Im bank, commercial bank, and importer.
Q3) Polaris Corporation has made an agreement to ship goods to a foreign firm with whom they have not entered into a contract for three years. However, the firms have communicated regularly since the last sale three years ago. This is an example of an A) unaffiliated known party transaction.
B) unaffiliated unknown party transaction.
C) affiliated party transaction.
D) none of the above.
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Chapter 21: Multinational Tax Management
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Q1) Refer to Instruction 21.1. If the U.S. treated the taxes paid on income earned in the host country as a tax-deductible expense, then Rogue River's total U.S. corporate tax on the foreign earnings would be ________.
A) $10,000
B) $26,250
C) $35,000
D) $51,250
Q2) The territorial approach to taxation policy is also termed the ________ approach.
A) source
B) ethical
C) greedy
D) location
Q3) ________ is the pricing of goods, services, and technology between related companies.
A) Among pricing
B) Retail pricing
C) Transfer pricing
D) Wholesale pricing
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Chapter 22: Working Capital Management
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Q1) A foreign banking office that is separately incorporated in the host country is
A) a correspondent bank.
B) a representative office.
C) a bank subsidiary.
D) an Edge Act corporation.
Q2) The Clearing House Interbank Payment System (CHIPS) is
A) the largest publicly operated payments system in the world.
B) owned and operated by the worlds seven largest central banks.
C) a computerized network that connects banks globally.
D) none of the above.
Q3) Which of the following is NOT a correspondent banking service?
A) accepting bank drafts
B) honoring letters of credit
C) furnishing credit informational
D) All of the above are correspondent bank activities.
Q4) Working capital management involves the management of
A) current and long-term assets.
B) current assets and current liabilities.
C) current liabilities and long-term assets.
D) current liabilities and long-term debt and equity.
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