International Finance Exam Preparation Guide
Course Introduction
International Finance examines the financial dynamics that govern the global economy, focusing on the flow of capital across international borders. The course explores key topics such as exchange rate systems, balance of payments, foreign exchange markets, international financial institutions, and risk management in an international context. Students will learn how multinational corporations manage financial operations across different currencies and economies, and how policy decisions and geopolitical events impact global financial markets. Through case studies and analytical tools, students will develop the skills necessary to understand and navigate the complexities of international financial management.
Recommended Textbook
Introduction to International Economics 3rd Edition by Dominick Salvatore
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16 Chapters
861 Verified Questions
861 Flashcards
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Page 2
Chapter 1: Introduction to the Global Economy
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Q1) In the last decade,Western Europe averaged a _______ percent unemployment rate.
A)15
B)20
C)5
D)10
Answer: D
Q2) Reform policies are being developed in struggling economies to prevent further economic collapses.
A)True
B)False
Answer: True
Q3) Trade restrictions usually benefit a large majority of the ___________ in the nation at the expense of a silent majority of _________________.
A)consumers,producers
B)producers,consumers
C)importers,exporters
D)exporters,importers
Answer: B
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Page 3
Chapter 2: Comparative Advantage
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Q1) According to opportunity cost theory,the cost or price of a commodity is determined by,or can be inferred exclusively from,its labor content.
A)True
B)False
Answer: False
Q2) The analysis of economic forces that justify the existence of trade and its degree between two nations is referred to as:
A)basis for trade
B)losses from trade
C)gains from trade
D)pattern of trade
Answer: A
Q3) In the presence of trade,a nation's consumption frontier is the same as the production possibilities frontier.
A)True
B)False
Answer: False
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Chapter 3: The Standard Trade Model
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Sample Questions
Q1) Equilibrium occurs where a nation's community indifference curve is _________________ to its production possibilities frontier.
A)parallel
B)perpendicular
C)tangent
D)equal
Answer: C
Q2) International trade and specialization in comparative advantage goods leads to:
A)job gains in domestic comparative advantage industries and job losses in industries with a comparative disadvantage.
B)job losses in domestic comparative advantage industries and job gains in industries with a comparative disadvantage.
C)job gains in domestic comparative advantage industries and job gains in industries with a comparative disadvantage.
D)job losses in domestic comparative advantage industries and job losses in industries with a comparative disadvantage.
Answer: A
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Chapter 4: The Heckscher-Ohlin and Other Trade Theories
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Q1) For the difference in factor endowment to be the basis of trade the Heckscher-Ohlin theorem requires that:
A)the two nations in questions have different tastes.
B)trading partners are different in terms of the level of technology.
C)Both nations only have broadly similar tastes because the level of technology is not relevant.
D)both nations have similar tastes and technology.
Q2) Show with a diagram how two countries with identical tastes but different factor endowments can benefit from trade.
Q3) In his empirical test of Heckscher and Ohlin's model,Leontief found that
A)the US imported more labor intensive goods and exported more capital intensive goods.
B)the US imported more capital intensive goods and exported more labor intensive goods.
C)the US imported and exported more labor intensive goods.
D)the US imported and exported more capital intensive goods.
Q4) Transportation cost the extent of trade.Can transportation cost have the potential to completely eliminate any possibility of trade?
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Page 6
Chapter 5: Trade Restrictions: Tariffs
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Q1) When a 10 percent tariff is imposed on commodity X,there is a(n)____________ in consumer surplus and a(n)_________ in producer surplus.
A)decrease,increase
B)increase,decrease
C)decrease,decrease
D)increase,increase
Q2) A specific tariff of $10 would provide the same level of protection for a $100 good as for a $200 good.
A)True
B)False
Q3) The imposition of tariffs on imports results in deadweight losses for the home country.These losses consist of the:
A)Revenue effect and production effect
B)Consumption effect and production effect
C)Redistributive effect and consumption effect
D)Terms of trade effect and consumption effect
Q4) "Using international trade theory,we can unambiguously state that the imposition of a tariff imposes net losses to the imposing nation." Is this statement true or false? Explain.
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Chapter 6: Nontariff Trade Barriers and the Political
Economy of Protectionism
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Q1) Strategic trade policy argues that an activist trade policy in oligopolistic markets subject to extensive external economies can increase a nation's welfare.
A)True
B)False
Q2) The Uruguay Round provides for tougher and quicker action to resolve disputes resulting from the use of __________,but does not ban their use.
A)Tariffs
B)Anti-dumping laws
C)Quotas
D)Subsidies
Q3) The US government introduced the trigger-price mechanism in the 1970's in response to dumping in what industry?
A)Steel
B)Cotton
C)Automobiles
D)Consumer Electronics
Q4) When it comes to quota and tariff,how are the effects on the economy different?
Q5) Scientific Tariff seems to be a good thing.What are the problems with it?
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Chapter 7: Economic Integration
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Q1) After the customs union is formed and trade barriers among the member nations are enacted,the member nations may become less efficient due to the joined union.
A)True
B)False
Q2) Why do countries engage in economics integration? Doesn't it have a reduced welfare effect as opposed to free trade?
Q3) With free trade,the supply curve faced by a small importing country will be:
A)perfectly inelastic
B)perfectly elastic
C)upward sloping
D)downward sloping
Q4) Which of the following barriers are imposed by the EU to equalize the price of imported agricultural products and agricultural prices set by the EU?
A)orderly market agreements
B)export quotas
C)variable import levies
D)import quotas
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9
Chapter 8: Growth and Development With International Trade
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Q1) What type of international commodity agreement involves the purchase of the commodity when its price falls below an agreed minimum price,and the sale of the commodity when its price rises above the established maximum price?
A)Buffer stock
B)Export controls
C)Purchase contracts
D)Marketing Board
Q2) Briefly discuss the three most serious problems facing developing countries today.
Q3) During the 1950s,1960s,and 1970s,developing countries relied upon industrialization for faster technological progress.
A)True
B)False
Q4) During the 1970s and 1980s,the total foreign debt that developing countries accumulated was in the range of $150 billion to $200 billion.
A)True
B)False
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Page 10
Chapter 9: International Resource Movements and Multinational Corporations
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Q1) When a multinational corporation controls the raw material used in the production of its final good through a vertical integration,which of the following is most likely to happen?
A)The MNC will obtain an uninterrupted supply of the raw material at the lowest possible cost.
B)Consumers will pay lower prices for the good.
C)The MNC will face anti-trust charges for owning firms that produce both the raw material and the final good.
D)Consumers will pay higher prices for the good.
Q2) The two main types of foreign investments are portfolio and direct investments.
A)True
B)False
Q3) A portfolio including both domestic and foreign securities tends to have lower risks than a portfolio containing only domestic securities.
A)True
B)False
Q4) In reality,investors always know precisely the average return on stocks.
A)True
B)False
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Chapter 10: Balance of Payments
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Q1) In a country's balance of payments,which of the following transactions are debits?
A)Domestic bank balances owned by foreigners are decreased
B)Foreign bank balances owned by domestic residents are decreased
C)Assets owned by domestic residents are sold to nonresidents
D)Securities are sold by domestic residents to nonresidents
Q2) The official settlements balance is the net credit or debit balance in the official reserve account.
A)True
B)False
Q3) Gifts are not accounted for in a nation's balance of payments because no currency changes hands.
A)True
B)False
Q4) Which of the following is classified as a credit in the US balance of payments?
A)US exports
B)US gifts to other countries
C)A flow of gold out of the US
D)Foreign loans made by US companies
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Page 12
Chapter 11: The Foreign Exchange Market and Exchange Rates
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Q1) Assume there is an increase in the American demand for Japanese cameras.This results in:
A)An increase in the demand for yen
B)An decrease in the demand for yen
C)An increase in the supply of yen to the US
D)An decrease in the supply of yen to the US
Q2) Exchange rates are not free to fluctuate in response to market forces.
A)True
B)False
Q3) A _______________ is a contract giving the purchaser the right,but not the obligation,to buy or to sell a standard amount of a traded currency on a stated date or at any time before a stated date and at a stated price.
A)foreign exchange option
B)futures transaction
C)spot transaction
D)forward transaction
Q4) Please explain what is meant by Covered Interest Arbitrage.
Q5) If it takes 116.57 yen to buy one dollar,it takes $.0085785 to buy one yen.
A)True
B)False
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Chapter 12: Exchange Rate Determination
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Q1) Absolute purchasing-power parity theory postulates that the percentage change in the exchange rate is equal to the difference in the percentage change in the price level in the two countries.
A)True
B)False
Q2) According to the monetary approach,expectation can play a major role in the determination of exchange rate.If between US and EMU there is a significant interest rate differential (US interest rate is significantly higher than the EMU interest rate)but at the same time dollar is also expected to depreciate in the future by more than the positive interest differential,then which of the following is most likely to happen?
A)Dollar will depreciate
B)Dollar will appreciate
C)There will be a significant increase in the supply of Euro in the US
D)There will be a significant decrease in the demand for Euro
Q3) The real exchange rate is the observed exchange rate or the domestic currency price of the foreign currency.
A)True
B)False
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Chapter 13: Automatic Adjustments With Flexible and Fixed Exchange Rates
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Q1) The price elasticity of the US demand for imports in euros is represented by the symbol <sub>M</sub>.
A)True
B)False
Q2) The proportion of an exchange rate change that is reflected in export and import price changes is called:
A)J-curve effect
B)Pass-through
C)Marshall-Lerner condition
D)Unstable foreign exchange market
Q3) The equilibrium level of income in an open economy is where:
A)Savings + Investment = Imports + Exports
B)Consumption + Savings = Imports + Exports
C)Savings + Exports = Investment + Imports
D)Savings + imports = Investment + Exports
Q4) The closed economy multiplier is equal to _____________.
A)The reciprocal of the marginal propensity to save
B)The reciprocal of the marginal propensity to consume
C)The slope of the savings function
D)The ratio of savings to investment
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Chapter 14: Adjustment Policies
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Q1) The current account deficit and the budget deficit move together; therefore,the budget deficit can be used to fully explain the account deficit.
A)True
B)False
Q2) To achieve internal balance under a fixed exchange rate system,what policies should be used?
A)Expenditure-changing policies
B)Devaluation policies
C)Revaluation polices
D)Expenditure-switching policies
Q3) Which of the following is an organization that works towards international economic development?
A)GAB
B)OECD
C)GSP
D)OPEC
Q4) External balance is usually a nation's most important economic objective.
A)True
B)False
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Chapter 15: Flexible Versus Fixed Exchange Rates,european
Monetary Systems,and Macroeconomic Policy
Coordination
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Q1) In 1997,the ________________ was negotiated to further tighten the fiscal constraint of participating countries in European Monetary Union.
A)Maastricht Treaty
B)Stability and Growth Pact
C)European Currency Unit
D)European Monetary System
Q2) The second stage of the monetary union,approved at a meeting in Maastricht in December 1991,called for the creation of the________________.
A)European Currency Unit
B)European Monetary Cooperation Fund
C)Supranational Monetary Agency
D)European Monetary Institute
Q3) Under a flexible exchange rate system,monetary policies must be changed in order to correct the nation's balance of payments disequilibrium.
A)True
B)False
Q4) What is dollarization? What are some of the benefits and cost that go along with it?
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Chapter
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Q1) After the recent global financial crisis,which group or bloc essentially replaced the Group of Seven (G-7)as the steering committee of the world economy?
A)Central American trading bloc
B)South African trading bloc
C)Asian block
D)Group of Twenty (G-20)
Q2) The international monetary system refers to all of the following except?
A)Rules for effecting international payments
B)Customs,instruments and facilities for effecting international payments
C)Organizations for effecting international payments
D)Tariff,Quota and NTBs affecting the volume of international trade.
Q3) After 1958,which of the following was a measure undertaken by the United States to correct the rapidly growing balance-of-payments deficits?
A)Increased unconditional foreign aid
B)There was an increase in military spending
C)Direct controls were placed on capital outflows
D)Discouraged Exports and Imports
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Page 18