International Finance Exam Preparation Guide
Course Introduction
International Finance explores the financial dynamics of the global marketplace, focusing on how multinational corporations, investors, and governments manage financial operations and risks across borders. The course examines key topics such as foreign exchange markets, international monetary systems, currency risk management, international capital flows, and the impact of political and economic developments on global financial strategies. Students will gain an understanding of exchange rate determination, hedging techniques, cross-border investment decisions, and the regulatory environment influencing international financial transactions. Through case studies and real-world examples, the course provides practical insights into the challenges and opportunities faced by organizations operating in an increasingly interconnected financial landscape.
Recommended Textbook
International Economics 9th Edition by Steven Husted
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18 Chapters
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Chapter 1: An Introduction to International Trade
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Sample Questions
Q1) Travel services include purchases of items by residents of one country when they travel to another country.
A)True
B)False
Answer: True
Q2) Barriers to trade
A)include government policies such as tariffs and quotas.
B)have been falling with technological improvements in transportation and communication.
C)have risen since World War II as many countries have imposed higher tariffs.
D)Two of the above are true.
Answer: D
Q3) A country's GNP is always larger than its GDP.
A)True
B)False
Answer: False
Q4) Countries have trade surpluses when they export more than they import.
A)True
B)False
Answer: True
Page 3
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Chapter 2: Tools of Analysis for International Trade Models
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Q1) Per capita real GDP levels provide one possible measure of a country's standard of living.
A)True
B)False
Answer: True
Q2) As of 2009,most countries in the world live in autarky.
A)True
B)False
Answer: False
Q3) If a country is subject to increasing opportunity costs,its national supply curve (i.e.the locus of national output levels of S at various relative prices of S. will have a ________ slope.
A)flat
B)positive
C)negative
D)bowed out
Answer: B
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Page 4
Chapter 3: The Classical Model of International Trade
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Q1) Refer to the table above.The relative price of beer in terms of wine in B is A)$4.50.
B)2.
C)4.5.
D)$2.00.
Answer: C
Q2) Refer to the figure above.In equilibrium,this country produces at point A)B.
B)C.
C)D.
D)E.
Answer: A
Q3) Refer to the table above.For trade to occur along the lines of comparative advantage,wages in A relative to wages in B (measured in the same currency)
A)must be at least twice but less than 3 times as great.
B)must be less than three times as small.
C)must be greater than $2 but less than $3.
D)Need more information to answer.
Answer: A
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Chapter 4: The Heckscher-Ohlin Model
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Q1) According to the HO model,countries with different factor endowments but similar technologies and preferences will have a strong basis for trade with each other.
A)True
B)False
Q2) Refer to the figure above.Which of the following is true?
A)This country is completely specialized in the production of X.
B)This country consumes at point F.
C)The value of this country's consumption equals the value of its production.
D)None of the above.
Q3) Refer to the figure above.If this country is labor abundant,then according to the HO theory good X should be ________ intensive.
A)capital
B)labor
C)both capital and labor
D)Can't tell without more information
Q4) Country A is labor abundant relative to country B if it has a larger labor force than B's.
A)True
B)False
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Chapter 5: Tests of Trade Models: the Leontief Paradox and Its Aftermath
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Q1) The Leontief paradox can be summarized as the finding that U.S.exports tend to come from capital-intensive industries,while U.S.imports are produced using relatively labor-intensive techniques.
A)True
B)False
Q2) Leontief found that
A)U.S. exports are capital intensive relative to U.S. imports.
B)U.S. imports are labor intensive relative to U.S. exports.
C)U.S. exports are neither labor nor capital intensive.
D)None of the above.
Q3) Linder's hypothesis provides an explanation for
A)increasing returns to scale.
B)imperfect competition.
C)intraindustry trade.
D)All of the above.
Q4) A problem with Leontief's methodology is that
A)he had no information on U.S. and foreign factor endowments.
B)he did not use information on foreign factor intensities.
C)he ignored the roles of other factors of production such as natural resources.
D)All of the above are problems.
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Chapter 6: Tariffs
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Q1) In order to provide alternatives to drug-crop production,the Andean Trade Preference Act (ATPA)was created,providing Bolivia,Colombia,Ecuador,and Peru tariff free access to U.S.markets for many goods.
A)True
B)False
Q2) Describe with a graph the effects of an export tariff z. Include in your graph the effect on local prices,exports and local production,as well as the changes in consumer and producer surplus and corresponding changes in deadweight s.
Q3) Most tariffs have
A)only revenue effects.
B)only protective effects.
C)both protective and revenue effects.
D)neither protective nor revenue effects.
Q4) Refer to the figure above.Domestic producers gain ________ because of the tariff.
A)$5
B)$62,500
C)$15
D)$125,000
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Chapter 7: Nontariff Barriers and Arguments for Protection
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Q1) The welfare effects of a quota depend,to considerable extent,upon A)who has the quota license.
B)the size of the quota.
C)elasticities of domestic demand and supply.
D)all of the above.
Q2) Refer to the figure above.If the government was to auction quota licenses competitively,it could earn up to A)$2000.
B)$5000.
C)$6000.
D)$10000.
Q3) A less costly alternative to protection of national defense industries would be a production subsidy.
A)True
B)False
Q4) Like tariffs,quotas tend to lead to A)higher prices and reduced imports.
B)increased government revenue.
C)increased consumer surplus.
D)All of the above.
Page 9
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Chapter 8: Commercial Policy: History and Practice
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Sample Questions
Q1) It is ________ profit maximizing for firms to dump in foreign markets.
A)never
B)sometimes
C)always
Q2) Briefly describe some of the current policies the United States has in place to limit both fairly and unfairly traded goods.
Q3) As of 2008,the members of the WTO account for 97 percent of the world's international trade.
A)True
B)False
Q4) Section 301 cases involve allegations of
A)foreign monopoly pricing.
B)foreign export subsidies.
C)foreign barriers to U.S. exports.
D)All of the above.
Q5) Recently,there has been a sharp reduction in the use of antidumping and countervailing duty laws in the United States.
A)True
B)False
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Chapter 9: Preferential Trade Agreements
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Q1) The ________ is the chief executive body of the European Union (EU).
A)European Parliament
B)European Executive Branch
C)European Trade Body
D)European Commission
Q2) Compare and contrast NAFTA and the EU in terms of the types of agreements that they are,the institutions that operate under the agreement,and the long term goals of the arrangements.
Q3) Membership in a customs union may be either welfare improving or welfare worsening.Illustrate and explain.
Q4) Prior to agreeing to join NAFTA,Mexico had followed a free trade policy for more than 30 years.
A)True
B)False
Q5) If a customs union leads to a large amount of trade creation relative to trade diversion,it may be beneficial to world welfare.
A)True
B)False
Q6) Why is NAFTA controversial? Briefly describe both sides of this controversy.
Page 11
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Chapter 10: International Trade and Economic Growth
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Q1) Over time,countries grow in a fashion so that their production possibility frontiers always retain the same shape.
A)True
B)False
Q2) The way in which growth occurs affects the pattern of trade of a country.
A)True
B)False
Q3) ________ economic growth occurs when,after growth,exports and imports rise by the same proportion.
A)Rising
B)Neutral
C)Biased
D)Technological
Q4) ________ would gain from expanded immigration.
A)Domestic labor
B)Domestic capital
C)Both domestic labor and capital
D)Neither domestic labor nor capital
Q5) The way in which a country grows affects the pattern of trade of a country.True or false.Discuss.
12
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Chapter 11: The Balance of Payments
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Q1) Credit entries on the Balance of Payments are the entries that would
A)mean a loss of foreign exchange.
B)bring foreign exchange into the country.
C)indicate a surplus exists.
D)exist at the bottom line after all accounts are totaled.
Q2) ________ is the largest international debtor in the world.
A)Brazil
B)Mexico
C)Italy
D)The United States
Q3) The excess of total credits over total debits in the current and private capital accounts is called the
A)BOP deficit.
B)BOP surplus.
C)official settlements account surplus.
D)official settlements account deficit.
Q4) International Reserve assets are comprised of gold,foreign exchange,and IMF special drawing rights.
A)True
B)False
Page 13
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Chapter 12: The Foreign Exchange Market
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Q1) If the bank is selling euros for $0.74,then what is the implied euro price of the dollar?
A)1.35
B)1.74
C)2.48
D)None of these values are correct.
Q2) An investor can write any size contract in both forward and futures markets as long as the other party involved is in agreement.
A)True
B)False
Q3) A bottle of wine manufactured in Paris,France cost 45 euros.What is the dollar value of the wine if the exchange rate is $0.80 per euro?
A)$36.00
B)$56.25
C)$40.00
D)None of these dollar values is correct.
Q4) There is no limit for domestic central bank intervention.
A)True
B)False
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Page 14
Chapter 13: International Monetary Systems
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Sample Questions
Q1) The degree that PPP may hold in the short- or in the long-run is very much related to the choice of an exchange rate regime.
A)True
B)False
Q2) The global financial crisis that started in 2008 has reestablished the continuing relevance of the IMF.
A)True
B)False
Q3) Which currency below currently serves as a dominant reserve currency?
A)European euro
B)U.S. dollar
C)Japanese yen
D)British pound
Q4) What is a currency board?
Q5) Given the currencies below,which was not replaced by the Euro?
A)German mark
B)Irish pound
C)British pound
D)French franc
Q6) Explain what a dual exchange rate system is.
Page 15
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Chapter 14: Exchange Rates in the Short Run
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Q1) The relationship that implies that the nominal interest rate is equal to the real interest rate plus expected inflation is called the
A)exchange rate equation.
B)Fisher equation.
C)interest rate equation.
D)term structure of interest rates.
Q2) If the nominal interest rate is 5.6 percent and the rate of inflation is 7.1 percent in a given year,then what is the corresponding real rate of return?
A)12 .7 percent
B)1.5 percent
C)-1.5 percent
D)-12.7 percent
Q3) When one country has higher nominal interest rates than another country,the high-interest-rate currency is expected to ________ relative to the low-interest-rate currency.
A)depreciate
B)appreciate
C)stay constant
D)None of the above
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Chapter 15: Exchange Rates in the Long Run
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Q1) Which of the following statements is correct?
A)PPP is a theory of exchange rate determination.
B)Inflation differentials cause changes in exchange rates.
C)PPP is an equilibrium relationship between two endogenous variables.
D)PPP, or the law of one price, should hold well for individual goods.
Q2) If absolute PPP holds,then the real exchange rate must equal 1.
A)True
B)False
Q3) PPP holds better for ________ countries.
A)low-inflation
B)poor
C)rich
D)high-inflation
Q4) The domestic currency is said to be ________ if it has appreciated at a lower rate than the difference between the domestic inflation rate and the higher foreign inflation rate.
A)undervalued
B)overvalued
C)appreciated
D)risky
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Chapter 16: Theories of the Current Account Balance
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Q1) An increase in real income with constant prices and domestic credit leads to the same effects under both fixed and purely flexible exchange rates.
A)True
B)False
Q2) If U.S.export contracts are written in terms of foreign currency and import contracts are denominated in domestic currency,a devaluation of the dollar during the currency contract period
A)should increase the dollar value of exports.
B)should not have any effect on the dollar value of U.S. imports.
C)must increase the BOT.
D)All of the above
Q3) What is the difference between the monetary approach to the exchange rate and monetary approach to the balance of payments? Briefly summarize the policy implications of the monetary approach.
Q4) "Pricing-to-market" is a business practice that was common in the twentieth century,but has now all but disappeared.
A)True
B)False
Q5) What is pricing to market? Where is it most prevalent?
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Chapter 17: Open Economy Macroeconomics
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Q1) The BP curve presents combinations of y and i that yield balance of trade equilibrium.
A)True
B)False
Q2) Internal balance describes
A)equilibrium in the goods market.
B)a desired level of trade or capital flows.
C)where the IS and BP curve intersect.
D)a domestic rate of growth consistent with a low unemployment rate.
Q3) Many economists argue that the sharp reduction in U.S.net exports in the mid 1980s was due to
A)expansionary U.S. monetary policy.
B)contractionary U.S. monetary policy.
C)expansionary U.S. fiscal policy.
D)contractionary U.S. fiscal policy.
Q4) Points to the left of the IS curve represent excess demand for goods.
A)True
B)False
Q5) What policies would you recommend to the U.S.government to lower the balance of trade deficit and decrease net capital inflows?
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Chapter 18: International Banking, debt and Risk
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Q1) Regarding IBFs,which of the following is correct?
A)not subject to reserve requirements
B)not subject to interest rate regulations
C)were created to permit U.S. banking offices to compete with offshore banks without having to use an offshore banking office
D)All of the above.
Q2) Briefly discuss the following:
(a)Debt-equity swaps
(b)IMF "conditionality"
(c)LIBOR
(d)Petrodollars
Q3) Which of the following is a factor that is relevant to country risk analysis?
A)political uncertainty
B)external debt
C)economic growth
D)all of the above.
Q4) Country risk analysis involves a consideration of only economic factors.
A)True
B)False
Q5) What is Islamic Banking?
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