International Economics
Final Test Solutions
Course Introduction
International Economics examines the flow of goods, services, and capital across national borders, analyzing the complex interactions that shape the global economy. The course explores key theories of international trade and finance, including comparative advantage, the balance of payments, exchange rate determination, and the impact of trade policies. Students will investigate real-world issues such as globalization, trade agreements, economic integration, and the effects of international economic institutions. By combining theoretical frameworks with current events and policy debates, the course provides a comprehensive understanding of how international economic forces influence domestic economies and global prosperity.
Recommended Textbook
International Financial Management 8th Edition by Cheol Eun
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21 Chapters
2036 Verified Questions
2036 Flashcards
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Page 2
Chapter 1: International Monetary System
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Sample Questions
Q1) One potential drawback of the gold standard is that
A)the world economy can be subject to deflationary pressure due to the limited supply of monetary gold.
B)the world economy can be subject to inflationary pressure without changes in the supply of monetary gold.
C)gold is scarce.
D)all of the options
Answer: A
Q2) The Asian Currency Crisis
A)happened just prior to the Mexican peso crisis.
B)turned out to be far more serious than the Mexican peso crisis in terms of the extent of contagion.
C)was limited to Asian currencies.
D)was almost over before anyone outside the Pacific Rim noticed.
Answer: B
Q3) In the years leading to the collapse of the Bretton Woods system
A)it became clear that the dollar was undervalued.
B)it became clear that the dollar was overvalued.
Answer: B
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Page 3
Chapter 2: Globalization and the Multinational Firm
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Sample Questions
Q1) For case II,let the international price be 1 bottle = 1 bushel.Derive South Dakota's "trading possibilities curve."                     \(\text { South Dakota }\)
\(\begin{array} { | l | c | c | c | c | c | }
\hline & \text { A } & \text { B } & \text { C } & \text { D } \\
\hline \text { Wheat (bushels) }& 3 & 3 & 4 & 1 \\
\hline \text { Beer bottles) } & 4 & 3 & 4 & 2 \\
\hline \end{array}\)
A)Option A
B)Option B
C)Option C
D)Option D
Answer: C
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Page 4
Chapter 3: Balance of Payments
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Sample Questions
Q1) Over half of all dollar bills in circulation are held outside American's borders.
A)True
B)False
Answer: True
Q2) Transactions in currency,bank deposits and so forth
A)tend to be insensitive to both changes in relative interest rates and the anticipated change in exchange rate.
B)tend to be sensitive to both changes in relative interest rates and the anticipated change in exchange rate.
C)tend to be sensitive to changes in relative interest rates but insensitive to the anticipated change in exchange rate.
D)tend to be insensitive to changes in relative interest rates but sensitive to the anticipated change in exchange rate.
Answer: B
Q3) The United States is considered
A)a net creditor nation.
B)a net debtor nation.
Answer: B
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5
Chapter 4: Corporate Governance Around the World
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Sample Questions
Q1) Studies show that the quality of law enforcement,as measured by the rule of law index,will tend to be
A)higher in French civil law countries than in English common law countries.
B)higher in English common law countries than in Scandinavian civil law countries.
C)highest in Scandinavian civil law countries and German civil law countries.
D)highest in English common law countries.
Q2) The Dodd-Frank Act was passed
A)in 1933.
B)in 2010.
C)in 1933 and repealed in 2010.
D)none of the options
Q3) The agency problem tends
A)to be more serious in firms with free cash flows.
B)to be more serious in firms with excessive amounts of excess cash.
C)to be less serious in firms with few numbers of shareholders.
D)all of the options
Q4) In countries with concentrated ownership,
A)hostile takeovers are quite rare.
B)hostile takeovers are quite common.
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Chapter 5: The Market for Foreign Exchange
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Sample Questions
Q1) Bank dealers in conversations among themselves use a shorthand notation to quote bid and ask forward prices in terms of forward points.Complete the following table:
\[\begin{array} { | c | c | c | }
\hline \text { Spot } & \text { Farvird Paint Quntations } & 1.9072 - 1.9077 \\
\hline \text { One-morth } & 32 - 30 & \\
\hline \text { Three-mont } & 57 - 54 & 1.9015 - 1.9023 \\
\hline \text { Six-rmorth } & 145 - 138 & 1.8927 - 1.8939 \\
\hline
\end{array}\]
A)1.9040-1.9047
B)1.9042-1.9049
C)1.9032-1.9030
D)none of the options
Q2) The /$ spot exchange rate is $1.50/ and the 120 day forward exchange rate is 1.45/ .The forward premium (discount)is
A)the dollar trading at an 8% premium to the euro for delivery in 120 days.
B)the dollar trading at a 5% premium to the Swiss franc for delivery in 120 days.
C)the dollar trading at a 10% discount to the euro for delivery in 120 days.
D)the dollar trading at a 5% discount to the euro for delivery in 120 days.
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Chapter 6: International Parity Relationships and Forecasting Foreign Exchange Rates
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Sample Questions
Q1) The price of a McDonald's Big Mac sandwich
A)is about the same in the 120 countries that McDonalds does business in.
B)varies considerably across the world in dollar terms.
C)supports PPP.
D)none of the options.
Q2) One implication of the random walk hypothesis is
A)given the efficiency of foreign exchange markets,it is difficult to outperform the market-based forecasts unless the forecaster has access to private information that is not yet reflected in the current exchange rate.
B)given the efficiency of foreign exchange markets,it is difficult to outperform the market-based forecasts unless the forecaster has access to private information that is already reflected in the current exchange rate.
C)given the relative inefficiency of foreign exchange markets,it is difficult to outperform the technical forecasts unless the forecaster has access to private information that is not yet reflected in the current futures exchange rate.
D)none of the options
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8
Chapter 7: Futures and Options on Foreign Exchange
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Sample Questions
Q1) Yesterday,you entered into a futures contract to buy 62,500 at $1.50 per .Your initial performance bond is $1,500 and your maintenance level is $500.At what settle price will you get a demand for additional funds to be posted?
A)$1.5160 per .
B)$1.208 per .
C)$1.1920 per .
D)$1.4840 per .
Q2) Most exchange traded currency options
A)mature every month,with daily resettlement.
B)have original maturities of 1,2,and 3 years.
C)have original maturities of 3,6,9,and 12 months.
D)mature every month,without daily resettlement.
Q3) Suppose the futures price is below the price predicted by IRP.What steps would assure an arbitrage profit?
A)Go short in the spot market,go long in the futures contract.
B)Go long in the spot market,go short in the futures contract.
C)Go short in the spot market,go short in the futures contract.
D)Go long in the spot market,go long in the futures contract.
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9
Chapter 8: Management of Transaction Exposure
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Sample Questions
Q1) With any successful hedge,
A)you are guaranteed to lose money on one side.
B)you can avoid the accounting ramifications of a loss on one side by keeping it off the books.
C)you are guaranteed to lose money on one side,but you can avoid the accounting ramifications of a loss on one side by keeping it off the books.
D)none of the options
Q2) If you have a long position in a foreign currency,you can hedge with A)a short position in an exchange-traded futures option.
B)a short position in a currency forward contract.
C)a short position in foreign currency warrants.
D)borrowing (not lending)in the domestic and foreign money markets.
Q3) An exporter can shift exchange rate risk to their customers by
A)invoicing in their home currency.
B)invoicing in their customer's local currency.
C)splitting the difference,and invoicing half of sales in local currency and half of sales in home currency.
D)invoicing sales in a currency basket such as the SDR as the invoice currency.
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Page 10
Chapter 9: Management of Economic Exposure
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Sample Questions
Q1) Investments in R&D
A)are usually a waste of time and money.
B)can allow the firm to maintain and strengthen its competitive position.
C)can allow the firm to cut costs and enhance productivity.
D)can allow the firm to maintain and strengthen its competitive position,as well as cut costs and enhance productivity.
Q2) In recent years,the U.S.dollar has depreciated substantially against most major currencies of the world,especially against the euro.
A)The stronger euro has made many European products more expensive in dollar terms,hurting sales of these products in the United States.
B)The stronger euro has made many American products less expensive in euro terms,boosting sales of U.S.products in Europe.
C)The stronger euro has made many European products more expensive in dollar terms,hurting sales of these products in the United States.Additionally,the stronger euro has made many American products less expensive in euro terms,boosting sales of U.S.products in Europe.
D)none of the options
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Page 11
Chapter 10: Management of Translation Exposure
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Sample Questions
Q1) A translation exposure report shows,for each account that is included in the consolidated balance sheet,
A)the amount of foreign exchange exposure that exists for each foreign subsidiary in which the MNC has a material interest.
B)the amount of foreign exchange exposure that exists on a net basis for the firm.
C)the amount of foreign exchange exposure that exists for each foreign currency in which the MNC has exposure.
D)none of the options
Q2) Generally speaking,
A)it is not possible to hedge both translation exposure and transaction exposure simultaneously.
B)if a firm can hedge translation exposure then transaction exposure will be simultaneously hedged.
C)if a firm can hedge transaction exposure then translation exposure will be simultaneously hedged.
D)none of the options
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Chapter 11: International Banking and Money Market
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Sample Questions
Q1) In reference to capital requirements,value-at-risk analysis
A)refers to traditional bank loans and deposits.
B)refers to a "risk-focused" approach to determining adequate bank capital.
C)provides a level of confidence measure of the probability of the maximum loss that can occur during a period of time.
D)refers to a "risk-focused" approach to determining adequate bank capital and provides a level of confidence measure of the probability of the maximum loss that can occur during a period of time.
Q2) A U.S.-based multinational bank
A)would not have to provide deposit insurance and meet reserve requirements on foreign currency deposits.
B)would have to provide deposit insurance and meet reserve requirements on foreign currency deposits.
C)would not have to provide deposit insurance but would have to meet reserve requirements on foreign currency deposits.
D)would have to provide deposit insurance but not meet reserve requirements on foreign currency deposits.
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Chapter 12: International Bond Market
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Sample Questions
Q1) "Bulldog" bonds are
A)dollar-denominated foreign bonds originally sold to U.S.investors.
B)yen-denominated foreign bonds originally sold in Japan.
C)pound sterling-denominated foreign bonds originally sold in the U.K.
D)none of the options
Q2) Private placement bond issues
A)do not have to meet the strict information disclosure requirements of publicly traded issues.
B)have auditing requirements that do not adhere to publicly traded issues.
C)meet the strict information disclosure requirements of publicly traded issues,but have larger minimum denominations.
D)none of the options
Q3) A "global bond" issue
A)is a very large international bond offering by several borrowers pooled together.
B)is a very large international bond offering by a single borrower that is simultaneously sold in several national bond markets.
C)has higher yields for the purchasers.
D)has a lower liquidity.
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14
Chapter 13: International Equity Markets
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Sample Questions
Q1) Global Registered Shares
A)are created when a MNC issues shares globally.
B)purchased on one exchange (say NYSE)is fully fungible with shares purchased on another exchange (e.g.,Frankfurt Stock Exchange).
C)can trade in multiple currencies.
D)all of the options
Q2) The turnover velocity percentages for 75 of the stock exchanges beginning with 2011 were measured.Over 40 percent of the exchanges,in most years,had in excess of A)15 percent turnover per month.
B)25 percent turnover per month.
C)30 percent turnover per month.
D)75 percent turnover per month.
Q3) Cross-correlations among major stock markets and exchange markets are
A)relatively high.
B)relatively low.
C)essentially perfect.
D)practically zero.
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Chapter 14: Interest Rate and Currency Swaps
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Sample Questions
Q1) Consider the situation of firm A and firm B.The current exchange rate is $2.00/£ Firm
A is a U.S.MNC and wants to borrow £30 million for 2 years.Firm B is a British MNC and wants to borrow $60 million for 2 years.Their borrowing opportunities are as shown,both firms have AAA credit ratings.
\[\begin{array} { l l l } & \$ & £ \\
\text { A } & \$ 6 \% & £5 \% \\
B & \$7 \% & £ 4\%
\end{array}\] Explain how firm B could use the forward exchange markets to redenominate a 2-year £30m 4 percent pound sterling loan into a 2-year USD-denominated loan.
Q2) Pricing an interest-only single currency swap after inception involves
A)sending a market order to a swap dealer.
B)finding the difference between the present values of the payments streams the party will receive and pay.
C)finding the sum of the present values of the payments streams that each party will receive in one currency and pay in the other currency,converted to a common currency. D)none of the options
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Chapter 15: International Portfolio Investment
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Sample Questions
Q1) Advantages of investing in mutual funds known as country funds include
A)speculation in a single foreign market at minimum cost.
B)using them as building blocks of a personal international portfolio.
C)diversification into emerging markets that are otherwise practically inaccessible.
D)all of the options
Q2) Calculate the euro-based return an Italian investor would have realized by investing 10,000 into a $50 American stock using 50 percent margin.One year after investment,the stock pays a $1 dividend,and sells for $54 the exchange has changed from 0.625 per dollar to 0.6875 per dollar.The interest on the margin loan is 1 percent per year.The margin loan was denominated in dollars.
Q3) The majority of ADRS
A)are from such developed countries as Australia and Japan.
B)are from developing nations.
C)are from emerging markets.
D)are from both developing nations and emerging markets.
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17
Chapter 16: Foreign Direct Investment and Cross-Border Acquisitions
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Sample Questions
Q1) When firms undertake FDI,
A)they become MNCs.
B)they reduce their tax rate since they can tell each country that they do business in that they paid their taxes in other countries.
C)they can exploit workers by paying them below-market wages in depreciating currencies.
D)all of the options
Q2) The key factors that are important in a firm's decision to invest overseas are
A)trade barriers,imperfect labor market,and intangible assets.
B)vertical integration,product life cycle,and shareholder diversification services.
C)profit maximization,global prestige,and competition.
D)trade barriers,imperfect labor market,and intangible assets,as well as vertical integration,product life cycle,and shareholder diversification services.
Q3) The third most important source of FDI outflows is
A)the United States.
B)Japan.
C)China.
D)Mexico.
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Chapter 17: International Capital Structure and the Cost of Capital
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Sample Questions
Q1) Solve for the weighted average cost of capital. \(\begin{aligned}
17.20 \% &=K_{1} \\
6 / 7 &=\lambda \\
8.0 \% &=i \\
40.0 \% 0 &=\tau
\end{aligned}\)
A)7.00 percent
B)6.89 percent
C)6.73 percent
D)6.57 percent
Q2) With regard to the financial structure of a foreign subsidiary
A)one option is to conform to the parent company's capital structure.
B)one option is to conform to the local norm of the country where the subsidiary operates.
C)one option is to vary judiciously to capitalize on opportunities to lower taxes,reduce financing costs and risks,and take advantage of market imperfections.
D)all of the options
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19
Chapter 18: International Capital Budgeting
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Sample Questions
Q1) What is the expected return on equity for a tax-free firm with a 15 percent expected return on assets that pays 12 percent on its debt,which totals 25 percent of assets?
A)24 percent
B)15.60 percent
C)16 percent
D)20 percent
Q2) Which of the following statements is false about "borrowing capacity"?
A)It is an especially important point in international capital budgeting analysis because of the frequency of large concessionary loans.
B)It creates tax shields for APV analysis regardless of how the project is actually financed.
C)It is synonymous to the "project debt."
D)It is based on the firm's optimal capital structure.
Q3) In the APV model
A)interest tax shields are discounted at i.
B)operating cash flows are discounted at KS1U1B1u.S1U1B0
C)depreciation tax shields are discounted at i.
D)all of the options
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Chapter 19: Multinational Cash Management
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Sample Questions
Q1) Your firm's inter-affiliate cash receipts and disbursements matrix is shown here ($000): \[\begin{array} { | l | c | c | c | c | }
\hline & { \text { Disbursements } } \\
\hline \text { Receipts } & \text { U.S. } & \text { Canida } & \text { Cermany } & \text { U.K } \\
\hline \text { U.S. } & & 10 & 5 & 15 \\
\hline \text { Carada } & 10 & & 5 & 20 \\
\hline \text { Germarty } & 5 & 5 & &5 \\
\hline \text { U.K. } & 15 & 20 & 5 & \\
\hline
\end{array}\] Find the net cash flow in (out of)the U.S.affiliate.
A)$0 in or out
B)$5,000 out
C)$10,000 in
D)$15,000 out
Q2) With a centralized cash depository
A)an MNC can facilitate fund mobilization.
B)system-wide excess cash is invested at the most advantageous rates.
C)system-wide cash shortages are borrowed at the most advantageous rates.
D)all of the options
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Page 21
Chapter 20: International Trade Finance
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Sample Questions
Q1) Forfaiting (forfeiting)meets Islamic finance practices.
A)True
B)False
Q2) The time from acceptance to maturity on a $500,000 banker's acceptance is 270 days.The importing bank's acceptance commission is 0.75 percent and that the market rate for 270-day B/As is 4 percent.
Calculate the amount the banker will receive if the exporter discounts the B/A with the importer's bank.
Q3) The time from acceptance to maturity on a $6,000,000 banker's acceptance is 360 days.The importing bank's acceptance commission is 2 percent and the market rate for 360-day B/As is 3 percent.
Determine the bond equivalent yield the importer's bank will earn from discounting the B/A with the exporter.
Q4) The time from acceptance to maturity on a $50,000 banker's acceptance is 180 days.The importing bank's acceptance commission is 2.50 percent and the market rate for 180-day B/As is 2 percent.
Determine the bond equivalent yield the importer's bank will earn from discounting the B/A with the exporter.
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Page 22
Chapter 21: International Tax Environment and Transfer Pricing
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Sample Questions
Q1) You are a U.S.MNC with a 40 percent U.S.tax rate.You have an Irish subsidiary.The corporate income tax there is 12½ percent.For every $10,000,000 of income the subsidiary reports,you will owe taxes to the U.S.Treasury in the amount of
A)$4,000,000.
B)$1,250,000.
C)$2,750,000.
D)none of the options
Q2) Assume that a product has the following three stages of production: \(\begin{array}{cc}
\text { Production Stage } & \text { Selling Price } \\
1 & 10 \mathrm{C} \\
2 & 250 \\
3 & 75 \mathrm{C}
\end{array}\) If the value-added tax (VAT)rate is 20 percent,what would be the VAT over all stages of production?
A) 110
B) 120
C) 150
D) 225
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