International Finance
Exam Answer Key
Course Introduction
International Finance explores the financial dynamics of the global economy, focusing on the flow of capital across borders, exchange rate mechanisms, international financial markets, and the management of foreign exchange risk. Students will examine the functioning of international financial institutions, the impact of globalization on corporate finance, and the strategies multinational firms use to finance operations abroad. The course also covers topics such as balance of payments, international monetary systems, currency crises, and the implications of government policies and economic events on international investments and trade.
Recommended Textbook
Economics of Money Banking and Financial Markets 12th Edition by Frederic S. Mishkin
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27 Chapters
2796 Verified Questions
2796 Flashcards
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Page 2
Chapter 1: Why Study Money, banking, and Financial Markets
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109 Verified Questions
109 Flashcards
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Sample Questions
Q1) Everything else constant,a stronger dollar will mean that
A)vacationing in England becomes more expensive.
B)vacationing in England becomes less expensive.
C)French cheese becomes more expensive.
D)Japanese cars become more expensive.
Answer: B
Q2) Budget deficits are important because deficits
A)cause bank failures.
B)always cause interest rates to fall.
C)can result in higher rates of monetary growth.
D)always cause prices to fall.
Answer: C
Q3) What crucial role do financial intermediaries perform in an economy?
Answer: Financial intermediaries borrow funds from people who have saved and make loans to other individuals and businesses and thus improve the efficiency of the economy.
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Chapter 2: An Overview of the Financial System
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Sample Questions
Q1) Which of the following instruments are traded in a money market?
A)bank commercial loans
B)commercial paper
C)state and local government bonds
D)residential mortgages
Answer: B
Q2) Which of the following can be described as involving direct finance?
A)A corporation takes out loans from a bank.
B)People buy shares in a mutual fund.
C)A corporation buys a short-term corporate security in a secondary market.
D)People buy shares of common stock in the primary markets.
Answer: D
Q3) How do regulators help to ensure the soundness of financial intermediaries?
Answer: Regulators restrict who can set up a financial intermediary,conduct regular examinations,restrict assets,and provide insurance to help ensure the soundness of financial intermediaries.
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Chapter 3: What Is Money
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Sample Questions
Q1) Compared to an economy that uses a medium of exchange,in a barter economy
A)transaction costs are higher.
B)transaction costs are lower.
C)liquidity costs are higher.
D)liquidity costs are lower.
Answer: A
Q2) Explain how cigarettes could be called "money" in prisoner-of-war camps of World War II.
Answer: The cigarettes performed the three functions of money. They served as the medium of exchange because individuals did exchange items for cigarettes. They served as a unit of account because prices were quoted in terms of the number of cigarettes required for the exchange. They served as a store of value because an individual would be willing to save their cigarettes even if they did not smoke because they believed that they could exchange the cigarettes for something that they did want at some time in the future.
Q3) Why are most of the U.S. dollars held outside of the United States?
Answer: Concern about high inflation eroding the value of their own currency causes many people in foreign countries to hold U.S. dollars as a hedge against inflation risk.
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Page 5
Chapter 4: The Meaning of Interest Rates
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107 Flashcards
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Sample Questions
Q1) Since the early 1950s,nominal interest rates and real interest rates in the United States
A)do not always move in the same direction.
B)always increase proportionally.
C)are never moving in the same direction.
D)are of no interest to decision makers.
Q2) An equal decrease in all bond interest rates
A)increases the price of a five-year bond more than the price of a ten-year bond.
B)increases the price of a ten-year bond more than the price of a five-year bond.
C)decreases the price of a five-year bond more than the price of a ten-year bond.
D)decreases the price of a ten-year bond more than the price of a five-year bond.
Q3) Comparing a discount bond and a coupon bond with the same maturity
A)the coupon bond has the greater effective maturity.
B)the discount bond has the greater effective maturity.
C)the effective maturity cannot be calculated for a coupon bond.
D)the effective maturity cannot be calculated for a discount bond.
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Page 6
Chapter 5: The Behavior of Interest Rates
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Sample Questions
Q1) When gold prices become more volatile,the ________ curve for gold shifts to the ________;________ the price of gold.
A)supply;right;increasing B)supply;left;increasing C)demand;right;decreasing D)demand;left;decreasing
Q2) Keynes assumed that money has ________ rate of return.
A)a positive
B)a negative
C)a zero
D)an increasing
Q3) It is possible that when the money supply rises,interest rates may ________ if the ________ effect is more than offset by changes in income,the price level,and expected inflation.
A)fall;liquidity
B)fall;risk
C)rise;liquidity
D)rise;risk
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7
Chapter 6: The Risk and Term Structure of Interest Rates
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Sample Questions
Q1) An increase in the riskiness of corporate bonds will ________ the price of corporate bonds and ________ the price of Treasury bonds,everything else held constant.
A)increase;increase B)reduce;reduce
C)reduce;increase D)increase;reduce
Q2) The mound-shaped yield curve in the figure above indicates that short-term interest rates are expected to
A)rise in the near-term and fall later on.
B)fall moderately in the near-term and rise later on.
C)fall sharply in the near-term and rise later on.
D)remain unchanged in the near-term and fall later on.
Q3) If a higher inflation is expected,what would you expect to happen to the shape of the yield curve? Why?
Q4) Bonds with no default risk are called A)flower bonds. B)no-risk bonds.
C)default-free bonds. D)zero-risk bonds.
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Chapter 7: The Stock Market, the Theory of
Expectations, and the Efficient Market Hypothesis
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101 Verified Questions
101 Flashcards
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Sample Questions
Q1) On rainy days,Jennifer's commute time to work averages 45 minutes. Before leaving,Jennifer hears on the radio that a street on her route is closed due to high water. She plans to add an additional 15 minutes to her commute because of the detour. This decision represents
A)rational expectations. She is changing her expectations to reflect new information.
B)adaptive expectations. She is adapting her plan to what she heard.
C)irrational expectations. Everyone knows that radio news is unreliable.
D)irrational expectations. She should just call in sick and not get out in the bad weather.
Q2) In the generalized dividend model,if the expected sales price is in the distant future
A)it does not affect the current stock price.
B)it is more important than dividends in determining the current stock price.
C)it is equally important with dividends in determining the current stock price.
D)it is less important than dividends but still affects the current stock price.
Q3) Your best friend calls and gives you the latest stock market "hot tip" that he heard at the health club. Should you act on this information? Why or why not?
Q4) What rights does ownership interest give stockholders?
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Page 9
Chapter 8: An Economic Analysis of Financial Structure
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Sample Questions
Q1) One reason financial systems in developing and transition countries are underdeveloped is
A)they have weak links to their governments.
B)they make loans only to nonprofit entities.
C)the legal system may be poor making it difficult to enforce restrictive covenants.
D)the accounting standards are too stringent for the banks to meet.
Q2) Equity contracts
A)are claims to a share in the profits and assets of a business.
B)have the advantage over debt contracts of a lower costly state verification.
C)are used much more frequently to raise capital than are debt contracts.
D)are not subject to the moral hazard problem.
Q3) The free-rider problem occurs because
A)people who pay for information use it freely.
B)people who do not pay for information use it.
C)information can never be sold at any price.
D)it is never profitable to produce information.
Q4) Explain the principal-agent problem as it pertains to equity contracts.
Q5) How does a mutual fund lower transactions costs through economies of scale?
Q6) Why does the free-rider problem occur in the debt market?
Page 10
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Chapter 9: Banking and the Management of Financial Institutions
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148 Flashcards
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Sample Questions
Q1) Of the following methods that banks might use to reduce moral hazard problems,the one not legally permitted in the United States is the
A)requirement that firms keep compensating balances at the banks from which they obtain their loans.
B)requirement that firms place on their board of directors an officer from the bank.
C)inclusion of restrictive covenants in loan contracts.
D)requirement that individuals provide detailed credit histories to bank loan officers.
Q2) If a bank needs to acquire funds quickly to meet an unexpected deposit outflow,the bank could
A)borrow from another bank in the federal funds market.
B)buy U.S. Treasury bills.
C)increase loans.
D)buy corporate bonds.
Q3) How can specializing in lending help to reduce the adverse selection problem in lending?
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Chapter 10: Economic Analysis of Financial Regulation
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100 Flashcards
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Sample Questions
Q1) Reasons regulators chose to follow regulatory forbearance rather than to close the insolvent S&Ls include all of the following EXCEPT
A)they had insufficient funds to close all of the insolvent S&Ls.
B)they were friends with the S&L owners.
C)they hoped the problem would go away.
D)they did not have the authority to close the insolvent S&Ls.
Q2) When comparing the banking crisis in the United States to the crises in Latin America,cost to the taxpayers of the government bailouts was
A)higher in Latin American than in the United States.
B)higher in the United States than in Latin America.
C)about the same in both Latin America and the United States.
D)positive in Latin America but negative in the United States.
Q3) The chartering process is especially designed to deal with the ________ problem,and regular bank examinations help to reduce the ________ problem.
A)adverse selection;adverse selection
B)adverse selection;moral hazard
C)moral hazard;adverse selection
D)moral hazard;moral hazard
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Page 12
Chapter 11: Banking Industry: Structure and Competition
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138 Flashcards
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Sample Questions
Q1) The spectacular growth in international banking can be explained by
A)the rapid growth in international trade.
B)the 1988 Basel Agreement.
C)the collapse of the Bretton Woods system.
D)the creation of the World Trade Organization.
Q2) State banks that are not members of the Federal Reserve System are most likely to be examined by the
A)Federal Reserve System.
B)FDIC.
C)FHLBS.
D)Comptroller of the Currency.
Q3) The driving force behind the securitization of mortgages and automobile loans has been
A)the rising regulatory constraints on substitute financial instruments.
B)the desire of mortgage and auto lenders to exit this field of lending.
C)the improvement in information technology.
D)the relaxation of regulatory restrictions on credit card operations.
Q4) What financial innovations helped banks to get around the bank branching restrictions of the McFadden Act?
Q5) Why did the interest rate volatility of the 1970s spur financial innovation?
Page 13
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Chapter 12: Financial Crises
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48 Flashcards
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Sample Questions
Q1) Dodd-Frank addressed many of the issues that led to the financial crisis. Which of the following was NOT addressed by Dodd-Frank regulations?
A)stricter consumer protection laws
B)privately owned,government-sponsored enterprises (GSEs)such as Fannie Mae and Freddie Mac
C)resolution authority over the large financial institutions
D)higher requirements on firms dealing in derivatives
Q2) The recession caused by the global financial crisis was severe,but much smaller in magnitude than the Great Depression. because
A)of massive intervention by governments to prop up financial markets.
B)the larger world population.
C)modern technological inventions makes sustaining a crisis difficult.
D)the Federal Reserve stayed out of the way during the most recent crisis.
Q3) If mortgage brokers do not make a strong effort to evaluate whether the borrower can pay off a loan,this creates a
A)severe adverse selection problem.
B)decline in mortgage applications.
C)call to deregulate the industry.
D)decrease in the demand for houses.
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Page 14
Chapter 13: Central Banks and the Federal Reserve System
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Sample Questions
Q1) The Depository Institutions Deregulation and Monetary Control Act of 1980
A)established higher reserve requirements for nonmember than for member banks.
B)established higher reserve requirements for member than for nonmember banks.
C)abolished reserve requirements.
D)established uniform reserve requirements for all banks.
Q2) The Governing Council usually meets ________ times a year.
A)four
B)six
C)eight
D)twelve
Q3) The Federal Open Market Committee's "balance of risks" is an assessment of whether,in the future,its primary concern will be
A)higher exchange rates or higher unemployment.
B)higher inflation or a stronger economy.
C)higher inflation or a weaker economy.
D)lower inflation or a stronger economy.
Q4) Make the case for and against an independent Federal Reserve.
Q5) Why does the Federal Reserve Bank of New York play a special role within the Federal Reserve System?
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Chapter 14: The Money Supply Process
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Sample Questions
Q1) Suppose that from a new checkable deposit,First National Bank holds two million dollars in vault cash,eight million dollars on deposit with the Federal Reserve,and one million dollars in required reserves. Given this information,we can say First National Bank has ________ million dollars in excess reserves.
A)three
B)nine
C)ten
D)eleven
Q2) The simple deposit multiplier can be expressed as the ratio of the A)change in reserves in the banking system divided by the change in deposits. B)change in deposits divided by the change in reserves in the banking system.
C)required reserve ratio divided by the change in reserves in the banking system.
D)change in deposits divided by the required reserve ratio.
Q3) Individuals that lend funds to a bank by opening a checking account are called A)policyholders.
B)partners.
C)depositors.
D)debt holders.
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Chapter 15: Tools of Monetary Policy
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Sample Questions
Q1) In the market for reserves,when the federal funds interest rate is below the discount rate,the supply curve of reserves is
A)vertical.
B)horizontal.
C)positively sloped.
D)negatively sloped.
Q2) If float is predicted to increase because of bad weather,the manager of the trading desk at the New York Fed bank will likely conduct ________ open market operations to ________ reserves.
A)defensive;inject
B)defensive;drain
C)dynamic;inject
D)dynamic;drain
Q3) The Federal Reserve will engage in a repurchase agreement when it wants to ________ reserves ________ in the banking system.
A)increase;permanently
B)increase;temporarily
C)decrease;temporarily
D)decrease;permanently
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Page 17
Chapter 16: The Conduct of Monetary Policy: Strategy and Tactics
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Sample Questions
Q1) Since the early 1990s,the Fed has conducted monetary policy by setting a target for the
A)level of borrowed reserves.
B)monetary base.
C)federal funds rate.
D)inflation rate.
Q2) The goal for high employment should be a level of unemployment at which the demand for labor equals the supply of labor. Economists call this level of unemployment the
A)frictional level of unemployment.
B)structural level of unemployment.
C)natural rate level of unemployment.
D)Keynesian rate level of unemployment.
Q3) The European Central Bank (ECB)pursues a hybrid monetary policy strategy that has elements in common with the ________-targeting strategy previously used by the Bundesbank but also includes some elements of ________ targeting.
A)monetary;inflation
B)inflation;monetary
C)monetary;exchange rate
D)monetary;nominal GDP
Page 18
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Chapter 17: The Foreign Exchange Market
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Sample
Questions
Q1) If the 2005 inflation rate in Canada is 4 percent,and the inflation rate in Mexico is 2 percent,then the theory of purchasing power parity predicts that,during 2005,the value of the Canadian dollar in terms of Mexican pesos will
A)rise by 6 percent.
B)rise by 2 percent.
C)fall by 6 percent.
D)fall by 2 percent.
Q2) Everything else held constant,when a country's currency depreciates,its goods abroad become ________ expensive while foreign goods in that country become ________ expensive.
A)more;less
B)more;more
C)less;less
D)less;more
Q3) When domestic real interest rates rise,the domestic currency ________.
A)appreciates
B)depreciates
C)appreciates or depreciates depending on the change in nominal interest rates
D)does not change
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Page 19
Chapter 18: The International Financial System
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Sample Questions
Q1) A foreign exchange intervention with an offsetting open market operation that leaves the monetary base unchanged is called
A)an unsterilized foreign exchange intervention.
B)a sterilized foreign exchange intervention.
C)an exchange rate feedback rule.
D)a money neutral foreign exchange intervention.
Q2) Assume that a fixed exchange rate is overvalued. Describe the situation of a speculative crisis against this currency. What can the central bank do to defend the currency? Why might the alternative of devaluation be preferable?
Q3) Under an exchange-rate targeting rule for monetary policy,a crawling peg
A)fixes the value of the domestic currency to a commodity such as gold.
B)fixes the value of the domestic currency to that of a large,low-inflation country.
C)allows the domestic currency to depreciate at a steady rate so that inflation in the pegging country can be higher than that of the anchor country.
D)allows the domestic currency to depreciate at a steady rate so that inflation in the pegging country can be lower than that of the anchor country.
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Page 20
Chapter 19: Quantity Theory, inflation and the Demand for Money
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Sample Questions
Q1) If the money supply is $600 and nominal income is $3,000,the velocity of money is A)1/50.
B)1/5.
C)5.
D)50.
Q2) The speculative motive for holding money is closely tied to what function of money?
A)store of wealth
B)unit of account
C)medium of exchange
D)standard of deferred payment
Q3) In the liquidity trap,monetary policy
A)has a large impact on interest rates.
B)has a small impact on interest rates.
C)has no impact on interest rates.
D)has a proportionate impact on interest rates.
Q4) What factors determine the demand for money in the Baumol-Tobin analysis of transactions demand for money? How does a change in each factor affect the quantity of money demanded?
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Chapter 20: The Is Curve
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Sample Questions
Q1) A decrease in unplanned inventory investment for the entire economy equals the excess of
A)output over aggregate supply.
B)output over aggregate demand.
C)aggregate supply over output.
D)aggregate demand over output.
Q2) In the Keynesian cross diagram,an increase in autonomous consumer expenditure causes the aggregate demand function to shift up,the equilibrium level of aggregate output to ________,and the IS curve to shift to the ________,everything else held constant.
A)rise;left
B)rise;right
C)fall;left
D)fall;right
Q3) If actual output is greater than equilibrium output,firms will ________ output to keep from ________ inventories.
A)increase;accumulating
B)increase;depleting
C)decrease;depleting
D)decrease;accumulating
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Chapter 21: The Monetary Policy and Aggregate Demand
Curves
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Sample Questions
Q1) The monetary policy (MP)curve indicates the relationship between
A)the Federal Funds Rate and the real interest rate.
B)the Federal Funds Rate and the inflation rate.
C)the inflation rate and the expected inflation rate.
D)the real interest rate the central bank sets and the inflation rate.
Q2) The Fed's policy actions of reacting to higher inflation by raising the real interest rate during 2004-2006 were
A)upward movements along the monetary policy curve.
B)downward movement along the monetary policy curve.
C)upward shifts of the monetary policy curve.
D)downward shifts of the monetary policy curve.
Q3) When the financial crisis started in August 2007,inflation was rising and the Fed began an aggressive easing lowering of the federal funds rate,which indicated that
A)there was an upward movement along the monetary policy curve.
B)there was a downward movement along the monetary policy curve.
C)the monetary policy curve shifted upward.
D)the monetary policy curve shifted downward.
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Page 23
Chapter 22: Aggregate Demand and Supply Analysis
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Sample Questions
Q1) Suppose the economy is producing at the natural rate of output. An open market purchase of bonds by the Fed will cause ________ in real GDP in the long run and ________ in inflation in the long run,everything else held constant.
A)an increase;an increase
B)a decrease;a decrease
C)no change;an increase
D)no change;a decrease
Q2) Everything else held constant,when actual output exceeds the natural rate of output ________ aggregate supply ________.
A)short-run;decreases
B)short-run;increases
C)long-run;increases
D)long-run;decreases
Q3) Everything else held constant,an increase in financial frictions ________ aggregate ________.
A)increases;demand
B)decreases;demand
C)decreases;supply
D)increases;supply
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24
Chapter 23: Monetary Policy Theory
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Sample Questions
Q1) When the policy rate hits its lower bound and inflation keeps falling,this portion of the aggregate demand curve is
A)downward sloping.
B)upward sloping.
C)flat.
D)undetermined.
Q2) If the economy suffers a permanent negative supply shock because there is an increase in regulations that permanently reduce the level of potential output,then
A)potential output falls.
B)the long-run aggregate supply curve shifts leftward.
C)the short-run aggregate supply curve shifts upward.
D)all of the above.
Q3) The combination of a successful wage push by workers and the government's commitment to high employment leads to
A)demand-pull inflation.
B)supply-side inflation.
C)supply-shock inflation.
D)cost-push inflation.
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25
Chapter 24: The Role of Expectations in Monetary Policy
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Q1) Arguments for adopting a policy rule include
A)the time-inconsistency problem can lead to poor economic outcomes.
B)discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run.
C)policy makers and politicians cannot be trusted.
D)all of the above.
Q2) Arguments for discretionary policies include
A)policy rules can be too rigid because they cannot foresee every contingency.
B)the time-inconsistency problem can lead to poor economic outcomes.
C)discretionary policies pursue overly expansionary monetary policies to boost employment in the short run but generate higher inflation in the long run.
D)all of the above.
Q3) The U.S. government can play an important role in establishing the credibility of anti-inflation policy by
A)demonstrating fiscal responsibility.
B)monitoring the Fed.
C)conducting fiscal policy.
D)all of the above.
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Chapter 25: Transmission Mechanisms of Monetary Policy
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Sample Questions
Q1) Since Regulation Q has been abolished,there have been doubts raised about the size of the effect of the ________ channel.
A)balance sheet
B)bank lending
C)cash flow
D)unanticipated price level
Q2) A contractionary monetary policy decreases net exports by ________ interest rates and ________ the value of the dollar.
A)lowering real;decreasing
B)lowering real;increasing
C)raising nominal;increasing
D)raising real;increasing
Q3) Economic theory suggests that ________ interest rates are ________ important than ________ interest rates in explaining investment behavior.
A)nominal;more;real
B)real;less;nominal
C)real;more;nominal
D)market;more;real
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27
Chapter 26: Financial Crises in Emerging Market Economies
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Sample Questions
Q1) Severe fiscal imbalances can directly trigger a currency crisis since
A)investors fear that the government may not be able to pay back the debt and so begin to sell domestic currency.
B)the government may stop printing money.
C)the government may have to cut back on spending.
D)the currency must surely increase in value.
Q2) The mismanagement of financial liberalization in emerging market countries can be understood as a severe
A)principal/agent problem.
B)asymmetric information problem.
C)lemons problem.
D)free-rider problem.
Q3) A feature of debt markets in emerging-market countries is that debt contracts are typically
A)very short term.
B)long term.
C)intermediate term.
D)perpetual.
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28
Chapter 27: The ISLM Model
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Sample Questions
Q1) Using the long-run ISLM model,explain and demonstrate graphically the neutrality of money,for the case of an increase in the money supply.
Q2) The rate of output at which the price level has no tendency to rise or fall is called the
A)natural rate of output.
B)potential level of income.
C)bliss point.
D)efficient level of output.
Q3) If the economy is characterized by a stable IS curve and an unstable LM curve,then ________ target produces ________ fluctuations in aggregate output.
A)an interest rate;larger
B)a money supply;smaller
C)a money supply;larger
D)an exchange rate;smaller
Q4) Macroeconomic equilibrium requires
A)equilibrium in the goods market.
B)equilibrium in the money market.
C)equilibrium in both the goods and money markets.
D)equilibrium in neither the goods nor the money market.
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