International Economics Test
Preparation
Course Introduction
International Economics examines the flow of goods, services, and capital across national borders and the impact of these interactions on economies around the world. The course explores key theories of international trade and finance, such as comparative advantage, the Heckscher-Ohlin model, and the balance of payments, alongside policy tools like tariffs, quotas, and exchange rates. Students will analyze the effects of economic globalization, trade agreements, and international organizations, as well as the challenges faced by both developed and developing countries in the global marketplace. The course aims to provide a comprehensive understanding of how international economic relationships shape economic policy and influence global economic growth and stability.
Recommended Textbook
Multinational Business Finance 14th Edition by David K. Eiteman
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Page 2
Chapter 1: Multinational Financial Management:
Opportunities and Challenges
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Sample Questions
Q1) The five strategic motives driving the decision to invest abroad and become an MNE (market seekers,raw material seekers,production efficiency seekers,knowledge seekers,and political safety seekers)are mutually exclusive.
A)True
B)False
Answer: False
Q2) The theory of comparative advantage owes it origins to Ben Bernanke as described in his book The Wealth of Bankers.
A)True
B)False
Answer: False
Q3) The concept of absolute comparative advantage's origins lie in:
A) Adam Smith's work of 1776
B) David Ricardo's work of 1776
C) The Wealth of Nations book, published in 1887
D) On the Principles of Political Economy and Taxation book, published in 1817
Answer: A
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Page 3
Chapter 2: The International Monetary System
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Sample Questions
Q1) A review of the evolution of the Global Monetary System shows that capital flows dominate trade in which of the following eras EXCEPT:
A) Classical Gold Standard
B) Fixed Exchange Rates, 1945-1973
C) The Floating Era, 1973-1997
D) The Emerging Era, 1997-Present
Answer: A
Q2) China today is a clear example of a nation that has chosen the following policies EXCEPT:
A) control and manage the value of its currency
B) conduct an independent monetary policy
C) full financial integration in an attempt to stimulate its domestic economy
D) restrict the flow of capital into and out of the country
Answer: C
Q3) The ability of a country to profit from its ability to print money is known as:
A) profiteering.
B) dollarization.
C) seignorage.
D) inflation.
Answer: C
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Chapter 3: The Balance of Payments
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Sample Questions
Q1) Which of the following statements about the balance of payments is NOT true?
A) The BOP is the summary statement of all international transactions between one country and all other countries.
B) The BOP is a flow statement, summarizing all international transactions that occur across the geographic borders over a period of time, typically a year.
C) Although the BOP must always balance in theory, in practice there are substantial imbalances as a result of statistical errors and misreporting of current account and financial account flows.
D) All of the above are true.
Answer: D
Q2) Which of the following is NOT part of the balance of payments account?
A) the current account
B) the financial/capital account
C) the official reserves account
D) All of the above are BOP accounts.
Answer: D
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5
Chapter 4: Financial Goals and Corporate Governance
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Sample Questions
Q1) When discussing the structure of corporate governance,the authors distinguish between internal and external factors.________ is an example of an internal factor,and ________ is an example of an external factor.
A) Equity markets; executive management
B) Debt markets; board of directors
C) Executive management; auditors
D) Auditors; regulators
Q2) According to recent research,family-owned firms in some highly-developed economies typically outperform publicly-owned firms.
A)True
B)False
Q3) Unsystematic risk can be defined as:
A) the total risk to the firm.
B) the risk of the individual security.
C) the added risk that a firm's shares bring to a diversified portfolio.
D) the risk of the market in general.
Q4) What are the most important distinctions that make state owned enterprises (SOEs)different from other forms of government organizations?
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Chapter 5: The Foreign Exchange Market
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Sample Questions
Q1) Which of the following is NOT a motivation identified by the authors as a function of the foreign exchange market?
A) the transfer of purchasing power between countries
B) obtaining or providing credit for international trade transactions
C) minimizing the risks of exchange rate changes
D) All of the above were identified as functions of the foreign exchange market.
Q2) For individuals and firms involved in the import and export of goods and services ,using the foreign exchange market is necessary,but incidental,to their underlying commercial or investment purpose.
A)True
B)False
Q3) While trading in foreign exchange takes place worldwide,the major currency trading centers are located in:
A) London, New York, and Tokyo.
B) New York, Zurich, and Bahrain.
C) Paris, Frankfurt, and London.
D) Los Angeles, New York, and London.
Q4) Define spot,forward,and swap transactions in the foreign exchange market and give an example of how each could be used.
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Chapter 6: International Parity Conditions
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Sample Questions
Q1) All that is required for a covered interest arbitrage profit is for interest rate parity to not hold.
A)True
B)False
Q2) The government just released international exchange rate statistics and reported that the real effective exchange rate index for the U.S.dollar vs the Japanese yen decreased from 105 last year to 95 currently and is expected to fall still further in the coming year.Other things equal U.S.________ to/from Japan think this is good news and U.S.________ to/from Japan think this is bad news.
A) importers; exporters
B) importers; importers
C) exporters; exporters
D) exporters; importers
Q3) With covered interest arbitrage:
A) the market must be out of equilibrium.
B) a "riskless" arbitrage opportunity exists.
C) the arbitrageur trades in both the spot and future currency exchange markets.
D) all of the above
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Chapter 7: Foreign Currency Derivatives: Futures and Options
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Sample Questions
Q1) Option volatility is defined as the square root of the standard deviation of daily percentage changes in the underlying exchange rate.
A)True
B)False
Q2) Peter Simpson thinks that the U.K.pound will cost $1.43/£ in six months.A 6-month currency futures contract is available today at a rate of $1.44/£.If Peter was to speculate in the currency futures market,and his expectations are correct,which of the following strategies would earn him a profit?
A) Sell a pound currency futures contract.
B) Buy a pound currency futures contract.
C) Sell pounds today.
D) Sell pounds in six months.
Q3) Which of the following is NOT true for the writer of a put option?
A) The maximum loss is limited to the strike price of the underlying asset less the premium.
B) The gain or loss is equal to but of the opposite sign of the buyer of a put option.
C) The maximum gain is the amount of the premium.
D) All of the above are true.
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Chapter 8: Interest Risk and Swaps
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Sample Questions
Q1) The potential exposure that any individual firm bears that the second party to any financial contract will be unable to fulfill its obligations under the contract is called:
A) interest rate risk.
B) credit risk.
C) counterparty risk.
D) clearinghouse risk.
Q2) For a corporate borrower,it is especially important to distinguish between credit risk and repricing risk.Explain both types of risks.
Q3) Refer to Instruction 8.1.After the fact,under which set of circumstances would you prefer strategy #1? (Assume your firm is borrowing money.)
A) Your credit rating stayed the same and interest rates went up.
B) Your credit rating stayed the same and interest rates went down.
C) Your credit rating improved and interest rates went down.
D) Not enough information to make a judgment.
Q4) A basis point is one-tenth of one percent.
A)True
B)False
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10
Chapter 9: Foreign Exchange Rate Determination
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Sample Questions
Q1) Most theories of technical analysis differentiate fair value from market value.
A)True
B)False
Q2) If the goal were to increase the value of a country's currency - to fight an depreciation of the domestic currency in exchange for foreign currency - the central bank would:
A) buy its own currency in exchange for foreign currency.
B) follow a expansive monetary policy.
C) drive real rates of interest down.
D) sell its own currency in exchange for foreign currency.
Q3) Critics of the balance of payments approach to exchange rate determination point to the emphasis on ________ of currency and capital rather than ________ of money or financial assets.
A) flows; stocks
B) stocks; flows
C) import; export
D) export; import
Q4) Foreign exchange forecasting can be either long-term,or short-term in duration.Compare and contrast the motivation for and the techniques a forecaster might use for each of the time periods.
Page 11
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Chapter 10: Transaction Exposure
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Sample Questions
Q1) The effectiveness of a hedge is determined to what degree the change in spot asset's value is correlated with the equal change in the hedge asset's value to a change in the underlying spot exchange rate.
A)True
B)False
Q2) The key arguments in opposition to currency hedging such as market efficiency,agency theory,and diversification do not have financial theory at their core.
A)True
B)False
Q3) Refer to Instruction 10.1.CVT chooses to hedge its transaction exposure in the forward market at the available forward rate.The required amount in dollars to pay off the accounts payable in 6 months will be:
A) $3,000,000.
B) $3,660,000.
C) $3,750,000.
D) $3,810,000.
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Chapter 11: Translation Exposure
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Sample Questions
Q1) ________ exposure is the potential for an increase or decrease in the parent company's net worth and reported net income caused by a change in exchange rates since the last transaction.
A) Transaction
B) Operating
C) Currency
D) Translation
Q2) The main technique to minimize translation exposure is called a/an ________ hedge.
A) balance sheet
B) income statement
C) forward
D) translation
Q3) Under the U.S.method of translation procedures,if the financial statements of the foreign subsidiary of a U.S.company are maintained in the local currency,and the local currency is the functional currency,then:
A) the translation method to be used is not obvious.
B) translation is accomplished through the temporal method.
C) translation is not required.
D) translation is accomplished through the current rate method.
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Chapter 12: 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 diversification in financing?
A) raising funds in more than one market
B) raising funds in more than one country
C) diversifying sales
D) All of the above qualify.
Q3) Purely domestic firms will be at a disadvantage to MNEs in the event of market disequilibria because:
A) domestic firms lack comparative data from its own sources.
B) international firms are already so large.
C) all of the domestic firm's raw materials are imported.
D) None of the above; domestic firms are not at a disadvantage.
Q4) Currency swaps are exclusively for periods of time under one year.
A)True
B)False
14
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Chapter 13: The Global Cost and Availability of Capital
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Sample Questions
Q1) Empirical tests of market efficiency fail to show that most major national markets are reasonably efficient.
A)True
B)False
Q2) If a firm's expected returns are more volatile than the expected return for the market portfolio,it will have a beta less than 1.0.
A)True
B)False
Q3) What do theory and empirical evidence say about capital structure and the cost of capital for MNEs versus their domestic counterparts?
Q4) Empirical studies indicate that MNEs have higher costs of capital than purely domestic firms.This could be due to higher levels of:
A) political risk.
B) exchange rate risk.
C) agency costs.
D) all of the above
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Chapter 14: Raising Equity and Debt Globally
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Q1) Which of the following is NOT an advantage of ADRs to U.S.shareholders?
A) Transfer of ownership is done in the U.S. in accordance with U.S. laws.
B) In the event of the death of the shareholder, the estate does not go through a foreign court.
C) Settlement for trading is generally faster in the United States.
D) All of the above are advantages of ADRs.
Q2) The initial issuance of shares by a company in an IPO typically represents no more than:
A) 25%.
B) 35%.
C) 45%.
D) 55%.
Q3) Once a firm has "gone public," it is open to a considerably higher level of public scrutiny.
A)True
B)False
Q4) Financial theory has at last provided us with a single optimal capital structure for domestic firms.
A)True
B)False
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Chapter 15: Multinational Tax Management
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Sample Questions
Q1) Of the OECD 30 countries,most employ a worldwide approach to tax policy,but a few,including the United States,use the worldwide approach.
A)True
B)False
Q2) Refer to Table 15.1.How much in additional U.S.taxes would be due if BayArea averaged the tax credits and liabilities of the two foreign units,assuming a 50% payout rate from each?
A) $3,750
B) $13,750
C) $2,500
D) $0
Q3) In a typical naked corporate inversion transaction the corporation's effective global tax liability is reduced but the effective control does not change.
A)True
B)False
Q4) Between 2006 - 2012,global corporate tax rates have trended upward.
A)True
B)False
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Chapter 16: International Trade Finance
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Sample Questions
Q1) The risk of noncompletion is most important when:
A) the international trade is recurrent in nature.
B) there is a sustained relationship between the buyer and seller.
C) with an outstanding agreement for recurring shipments.
D) when the relationship is between countries whose currencies are considered strong.
Q2) Today,international trade is dominated by transactions between unaffiliated parties (known or unknown).
A)True
B)False
Q3) The European Union recommends maximum credit terms for many items including,for example,heavy capital goods (five years),light capital goods (three years),and consumer durable goods (one year).
A)True
B)False
Q4) The person or company initiating the draft or bill of exchange is known as the: A) maker.
B) drawer.
C) originator.
D) any of the above
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Chapter 17: Foreign Direct Investment and Political Risk
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Q1) According to the Boston Consulting Group gloabl challengers are companies based in rapidly developing economies that are "shaking up" the established economic order.
A)True
B)False
Q2) List and explain three strategic motives why firms become multinationals and give an example of each.
Q3) Transnationals are firms that have operations in more than one country and conduct their business through branches,foreign subsidiaries,or joint ventures with host country firms.
A)True
B)False
Q4) Business risk can be measured through sensitivity analysis but from only the project viewpoint.
A)True
B)False
Q5) Small- and medium-size firms often attract foreign investors and achieve a global cost of capital.
A)True
B)False
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Chapter 18: Multinational Capital Budgeting and Cross-Border Acquisitions
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Q1) Which of the following is NOT a typical pitfall of cross-border acquisitions?
A) paying too much
B) excessive financing costs
C) melding corporate cultures
D) all of the above are pitfalls
Q2) Which of the following is NOT a characteristic of international long-term capital project financing?
A) The projects are large in scale.
B) The projects are long in life.
C) The projects are generally high in risk.
D) The projects may be all of the above.
Q3) In project finance,retained earnings and the reinvestment of earnings are the most important decisions to guarantee the long term growth of the project's value.
A)True
B)False
Q4) Debt is usually a large component of project financing.
A)True B)False
Page 20
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