Course Introduction
International Finance Exam Solutions
International Finance explores the fundamentals and complexities of financial interactions and transactions between nations, focusing on the movement of capital across borders, foreign exchange markets, international monetary systems, and the balance of payments. The course examines how global financial markets operate, the risks associated with international investing and lending, currency exchange rate determination, and the roles of international financial institutions. Students will analyze the impact of international financial policies on multinational corporations, governments, and economies, and learn strategies for managing exposure to global financial risks.
Recommended Textbook
International Economics 9th Edition by Steven Husted
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Page 2
Chapter 1: An Introduction to International Trade
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Q1) Large countries tend to be more open than small countries.
A)True
B)False
Answer: False
Q2) As measured by the index of openness,the United States is relatively closed,and yet,it was the world's largest exporter in 2007.
A)True
B)False
Answer: False
Q3) In the last 20 years,all of the countries in Africa have experienced positive economic growth.
A)True
B)False Answer: False
Q4) Growth in per capita GNP in developing countries has tended to be much more variable in recent years than per capita GNP growth rates in industrialized countries.
A)True
B)False
Answer: True
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Chapter 2: Tools of Analysis for International Trade Models
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Q1) ________ analysis by economists refers to the attempt to answer questions such as should a tax be imposed.
A)Positive
B)Negative
C)Normative
D)Investigative
Answer: C
Q2) Production under increasing opportunity costs can result from the two industries using factors of production in different combinations.
A)True
B)False
Answer: True
Q3) Refer to the figure above.In autarky equilibrium,the relative price is given by the slope of the production possibility frontier at point A)D.
B)E.
C)F.
D)Can't answer without more information.
Answer: B
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Chapter 3: The Classical Model of International Trade
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Q1) Once trade begins,a country will tend to specialize completely in the production of its export good.
A)True
B)False
Answer: True
Q2) Refer to the figure above.This country has comparative advantage in good A)S.
B)T.
C)Y.
D)Z. Answer: D
Q3) Countries with low wages will always be able to export to countries with high wages.
A)True
B)False
Answer: False
Q4) A country in autarky does not trade.
A)True
B)False
Answer: True
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Chapter 4: The Heckscher-Ohlin Model
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Q1) Suppose that there are two factors,capital and land,and that the United States is relatively capital abundant while Canada is relatively land abundant.According to the HO model,
A)Canadian landowners should support Canada-U.S. free trade.
B)Canadian capital owners should oppose Canada-U.S. free trade.
C)U.S. capital owners should support Canada-U.S. free trade.
D)All of the above.
Q2) The HO model rules out the classical model's basis for trade by assuming that ________ is (are)identical between countries.
A)factor endowments
B)factor intensities
C)technology
D)opportunity costs
Q3) Refer to the figure above.This country has comparative advantage in A)X.
B)Y.
C)both X and Y.
D)Can't tell without more information.
Q4) Describe the controversy surrounding the HO model and the widening of the American income gap.
Page 6
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Chapter 5: Tests of Trade Models: the Leontief Paradox and Its Aftermath
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Q1) Leontief reconciled his results by arguing that
A)American labor is more efficient than foreign.
B)American capital is more efficient than foreign.
C)Foreign capital is more efficient than American.
D)Foreign labor is more efficient than American.
Q2) Compare and contrast the predictions of the Heckscher-Ohlin and classical models about likely trading partners of various countries with the predictions of the Linder hypothesis.
Q3) The simultaneous export and import of airplanes by the United States is an example of
A)increasing returns to scale.
B)imperfect competition.
C)intraindustry trade.
D)interindustry trade.
Q4) If output more than doubles when all inputs are doubled,production is said to occur under conditions of
A)increasing returns to scale.
B)imperfect competition.
C)intraindustry trade.
D)interindustry trade.
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Chapter 6: Tariffs
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Q1) Although current U.S.tariffs are quite low on average,tariffs remain high for some products.
A)True
B)False
Q2) A country gains from international trade if its post-trade ________ point lies outside its production possibility frontier.
A)production
B)autarky
C)consumption
D)All of the above
Q3) Tariffs tend to escalate with stages of processing.
A)True
B)False
Q4) Refer to the figure above.A tariff of ________ would be purely protective.
A)$0
B)$5
C)$8
D)$10
Q5) Why do governments generally prefer to impose tariffs over quotas?
Q6) Write an essay on the gains from free international trade.
Page 8
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Chapter 7: Nontariff Barriers and Arguments for Protection
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Q1) Which of the following is a<u> valid</u> argument for protection?
A)national defense
B)fair trade
C)creation of employment
D)All of the above
Q2) Which of the following are used as nontariff barriers?
A)health and safety standards
B)government procurement policies
C)domestic content laws
D)All of the above
Q3) Most tariffs around the world are collected on an ad valorem basis.
A)True
B)False
Q4) Export subsidies lead to
A)greater production of exportables and higher internal prices for these goods.
B)greater production of exportables and lower internal prices for these goods.
C)greater production of importables and higher internal prices for these goods.
D)None of the above.
Q5) Are tariffs and quotas equivalent in their economic effects? Demonstrate.
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Chapter 8: Commercial Policy: History and Practice
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Q1) The ________ is an international organization that sets rules of conduct for international commerce.
A)International Trade Commission (ITC)
B)World Trade Organization (WTO)
C)International Trade Agreement (ITA)
D)World Bank
Q2) What is meant by predatory dumping? How likely is it for this to occur in the United States? Discuss.
Q3) The Constitution of the United States expressly forbids A)import tariffs. B)export tariffs.
C)import quotas.
D)export quotas.
Q4) What has happened to the free trade agenda in the last few years,and in particular to the fate of the Doha Round of trade negotiations?
Q5) Write an essay on the role of Congress in U.S.trade policy since 1930.
Q6) Write an essay on the role of the WTO in today's international economy.
Q7) Briefly describe some of the current policies the United States has in place to limit both fairly and unfairly traded goods.
Page 10
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Chapter 9: Preferential Trade Agreements
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Q1) Russia is a member of the European Union.
A)True
B)False
Q2) One of the more unique aspects of NAFTA compared with other preferential trade arrangements is the fact that the NAFTA countries have
A)similar cultures.
B)fixed exchange rates.
C)common borders.
D)very different standards of living.
Q3) An argument in favor of multilateral trade liberalization (multilateralism)over preferential trade agreements (regionalism)is that multilateralism results in less trade diversion.
A)True
B)False
Q4) Refer to the figure above.If A forms a customs union with C,A's welfare will change by
A)$a + $e
B)$a + $b + $c + $d + $e
C)$a + $e - $b - $c - $d
D)$a + $e - $h - $i - $j
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Chapter 10: International Trade and Economic Growth
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Q1) If the expansion of an export industry leads to the provision of infrastructure such as roads or airports,this is called a(n)
A)secondary effect.
B)linkage effect.
C)elementary effect.
D)None of the above.
Q2) The way in which a country grows affects the pattern of trade of a country.True or false.Discuss.
Q3) A government program that relies on high barriers to imported goods in order to stimulate domestic production of competing goods is an example of a(n)________ policy.
A)primary-export-led
B) import-substitution development
C) outward-looking development
D) linkage-effect
Q4) The Dutch Disease refers to a deadly outbreak of influenza that destroyed all international trade for the Netherlands in the 1960s.
A)True
B)False
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Chapter 11: The Balance of Payments
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Q1) ________ is necessary to "balance" the BOP statement.
A)Reserve inflow
B)Statistical discrepancy
C)Debit transaction
D)Credit transaction
Q2) Define the official settlements balance. Is there any difference between the United States and other countries in terms of what this balance measures? How does this affect the ability of the countries to run current account deficits?
Q3) With fixed exchange rates,central banks must finance trade deficits,allow a devaluation,or else use trade restrictions to restore equilibrium.
A)True
B)False
Q4) The payment of a dividend by a foreign company to an American stockholder represents
A)a debit in the U.S. capital account.
B)a credit in the U.S. current account.
C)a credit in the U.S. official reserve account.
D)a debit in the U.S. current account.
Q5) How are the current account and the financial account related?
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Chapter 12: The Foreign Exchange Market
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Q1) Both a parallel market and a black market are free markets permitted to coexist with the official market.
A)True
B)False
Q2) A pair of shoes manufactured in Milan,Italy cost 195 euros.What is the dollar value of the shoes if the exchange rate is $0.89 per euro?
A)$173.55
B)$195.00
C)$219.00
D)$890.00
Q3) In general,the lower the exercise price relative to the current spot rate price of the currency,the more valuable
A)the put option.
B)the call option.
C)the arbitrage operation.
D)the triangular arbitrage.
Q4) Foreign exchange activity is dominated by the spot and swaps markets.
A)True
B)False
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Chapter 13: International Monetary Systems
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Q1) Which of the following is not a composite currency?
A)The SDR
B)The ECU
C)The U.S. dollar
D)All of the above
Q2) Before World War I,most countries belonged to a system of fixed exchange rates in which currencies were tied to which of the following assets?
A)The U.S. dollar
B)The British pound
C)Silver
D)Gold
Q3) Which of the currencies below does not serve a role as an international reserve currency?
A)European euro
B)Japanese yen
C)U.S. dollar
D)Mexican peso
Q4) What was the Bretton Woods agreement about? Why did it break down? Briefly explain.
Q5) What is a currency board?
Page 15
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Chapter 14: Exchange Rates in the Short Run
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Q1) Derive the interest parity condition and interpret it.
Q2) In order to infer expected future exchange rates,we must have a forward exchange market in a currency.
A)True
B)False
Q3) Interest differentials cause exchange rate changes.
A)True
B)False
Q4) Given that real interest rates are constant,an increase in the expected rate of inflation will tend to
A)decrease the nominal rate of interest.
B)increase the nominal rate of interest.
C)cause lower inflation rates.
D)cause no change in the nominal rate of interest.
Q5) Interest rate parity is more likely to hold in the short run than purchasing power parity.
A)True B)False
Q6) How are interest rates and inflation rates related?
Page 16
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Chapter 15: Exchange Rates in the Long Run
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Q1) The establishment of the Euro as a unit of account in 1999 meant that from then on the currencies of the participating countries traded at a fixed rate,until the Euro completely replaced these currencies in the year 2002.
(a) How would the inflation rates of these countries have to had been in these transition years for PPP to hold?
(b)If the inflation of Italy was twice as high as that of Germany a year between 1999 and 2002,what can we say then about the Italian lira against the German mark?
(c)What does the concept of PPP thus tells us about what needs to happen for such this monetary agreement to work for a long period of time?
Q2) PPP holds better for low-inflation countries.
A)True
B)False
Q3) The law of one price should hold well for
A)differentiated products.
B)any individual goods traded internationally.
C)homogeneous goods.
D)All of the above.
Q4) Is PPP a theory of exchange rate determination? Explain why or why not?
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Chapter 16: Theories of the Current Account Balance
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Q1) There is evidence that the exchange-rate pass-through effect to import prices has been declining in developed economies,especially for the United States.
A)True
B)False
Q2) Write down a model that will allow you to analyze the BOP and exchange rate in a monetary framework. Then,discuss the consequences of an increase in the foreign inflation rate under fixed,flexible,and managed floating systems.
Q3) The reported reduction in the exchange-rate pass through to import prices means that U.S.inflation will be relatively insensitive to exchange rate changes.
A)True
B)False
Q4) The elasticities approach and the absorption approach are theories of the balance of trade that emphasize trade in real goods and have little to say about the capital account.
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) With flexible exchange rates,perfect asset substitutability,and perfect capital mobility,expansionary monetary policy will cause
A)income to rise, interest rates to fall, and the domestic currency to depreciate.
B)income to fall, interest rates to rise, and the domestic currency to appreciate.
C)income to rise, interest rates to remain unchanged, and the domestic currency to appreciate.
D)income to rise, interest rates to remain unchanged, and the domestic currency to depreciate.
Q2) The world of flexible exchange rates and perfect capital mobility is often called the A)Keynesian model.
B)Mundell-Fleming model.
C)Monetarist model.
D)Melvin model.
Q3) The LM curve will shift to the right when government expenditures increase.
A)True
B)False
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Chapter 18: International Banking, debt and Risk
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Q1) Eurodollar deposits arising from OPEC trade surpluses are called
A)OECD-dollars.
B)OPEC-dollars.
C)petrodollars.
D)None of the above.
Q2) To measure the amount of credit actually extended through the Eurobanks,we use
A)the net size of the market.
B)the gross size of the market.
C)total deposits minus interbank activities
D)Both A and C.
Q3) What does LIBOR stand for?
A)London Interbank Offer Rate
B)Least Integral Borrowing Order Rate
C)Local Interest Bank Ongoing Rate
D)Liberalized Interoffer Borrowing Rate
Q4) Voting power in the IMF is determined by a country's A)political power.
B)quota.
C)size.
D)All of the above.
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