Chapter 9 - test bank for international business PDF

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International Business: The New Realities, 4e (Cavusgil) Chapter 9 The International Monetary and Financial Environment 1) Which of the following should an international manager keep in mind about the constantly fluctuating exchange rates? A) The prices the firm charges should be quoted in the firm's currency exclusively. B) The firm and its customers should use the exchange rate as it stands on the date of each transaction, there is no scope for an agreement between them to use any other specific exchange rate. C) If goods are bought from a supplier whose currency is appreciating against the buyer's currency, the buyer will have to pay a lesser amount of their currency to complete the purchase. D) The time taken between placement and delivery of an order can at times go up to a few months, fluctuations in the exchange rate during that time can cost or earn the firm money. Answer: D Diff: 2: Moderate Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking 2) Which of the following is an example of a country that has experienced dollarization? A) Ecuador B) Japan C) France D) Brazil Answer: A Diff: 1: Easy Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking 3) Which of the following terms refers to the price of one currency expressed in terms of another? A) countertrade B) monetization C) credit derivative D) exchange rate Answer: D Diff: 1: Easy Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking

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4) Which of the following statements is true regarding the value of national currencies? A) They cannot be quantified. B) They remain highly stable. C) They fluctuate constantly. D) They change occasionally. Answer: C Diff: 1: Easy Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking 5) Currency risk can best be defined as the risk that occurs when ________. A) currency values remain constant for prolonged periods B) one currency changes in relation to another currency C) buyers and sellers disagree over which currency to use D) fluctuations in the stock market affect all exchange rates Answer: B Diff: 1: Easy Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking 6) Which of the following is an example of a currency risk? A) purchasing products from a nation with appreciating currency B) purchasing products from a country with depreciating currency C) selling products to a country with appreciating currency D) selling products to a nation that has the same currency value as the exporter's Answer: A Diff: 3: Hard Skill: Application Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking 7) A U.S. company buys from a supplier whose currency is increasing against the dollar. Which of the following will the company most likely have to do if the purchasing price is expressed in the supplier's currency? A) pay less in dollars than originally expected B) pay more in dollars than originally expected C) pay the same amount of dollars as originally expected D) pay part of the transaction in the supplier's currency Answer: B Diff: 3: Hard Skill: Application Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking

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8) A French company sells goods to a foreign customer whose currency is depreciating against the euro. Which of the following will the company most likely experience when completing the sale? A) The company will receive fewer euros if the sales price was expressed in the buyer's currency. B) The company will receive more euros if the sales price was expressed in the buyer's currency. C) The company will receive fewer euros if the sales price was expressed in euros originally. D) The company will receive more euros if the sales price was expressed in euros originally. Answer: A Diff: 3: Hard Skill: Application Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking 9) Which of the following statements is true about currencies? A) The British pound is an example of a nonconvertible currency. B) Hard currencies are highly unstable currencies. C) Currencies that are used for international transactions are called nonconvertible. D) Convertible currencies can be readily exchanged for other currencies. Answer: D Diff: 1: Easy Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking 10) The U.S. dollar is an example of ________. A) soft currency B) convertible currency C) nonconvertible currency D) private currency Answer: B Diff: 1: Easy Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking 11) Which of the following terms refers to the type of currency used only for domestic business transactions? A) hard currency B) convertible currency C) nonconvertible currency D) alternative currency Answer: C Diff: 1: Easy Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking 3 Copyright © 2017 Pearson Education, Inc.

12) Which of the following is an effect caused by capital flight? A) It increases the need for domestic investment holdings. B) It decreases the ability of the nation to service debt and pay for imports. C) It reduces harmful currency restrictions. D) It decreases the nation's supply of hard currencies. Answer: B Diff: 2: Moderate Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking 13) Which of the following resolves the problem of making international payments and facilitates international investment and borrowing among firms, banks, and governments? A) foreign exchange B) barter C) capital flight D) buyback Answer: A Diff: 1: Easy Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking 14) If last year one dollar equaled one euro, and then the exchange rate shifted so that today one dollar equals two euros, which of the following would most likely NOT occur? A) European firms would pay more for raw materials imported from the United States. B) European consumers would purchase fewer U.S. products and services. C) Fewer Europeans would travel to the U.S. or study at U.S. universities. D) European firms would lower their prices on goods made with U.S. parts. Answer: D Diff: 2: Moderate Skill: Application Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking

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Plas-Tex Exporting (Scenario) Plas-Tex Plastic Company manufactures plastic storage containers of all different sizes. Plas-Tex has been exporting more storage containers to Europe recently because of the depreciation of the U.S. dollar relative to the euro. Plas-Tex CEO, Wayne Chisholm, has prepared a report for the annual shareholders meeting in which he outlines his manufacturing and sales recommendations for the upcoming year. 15) Which of the following questions would be more important for Chisholm to evaluate before presenting his manufacturing recommendations to shareholders? A) What was the impact of the exchange rate on European exports last year? B) What is the currency risk of exporting additional Plas-Tex products to Europe? C) How effective has the Plas-Tex marketing campaign been in Europe? D) What was the impact on Plas-Tex sales when the euro depreciated last year? Answer: B Diff: 3: Hard Skill: Critical Thinking Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking; Environments and Reflective Thinking 16) Which of the following should be considered closely before Chisholm recommends increasing production to take advantage of the current exchange rate? A) What is the expected outcome of Plas-Tex negotiations with an Asian manufacturer? B) How much revenue did Plas-Tex generate from European sales last year? C) What will be the effect on Plas-Tex if the euro depreciates more than the U.S. dollar? D) What has been the historic impact of capital flight on Plas-Tex revenues? Answer: C Diff: 3: Hard Skill: Critical Thinking Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking; Environments and Reflective Thinking 17) Which of the following supports maintaining the current production status instead of increasing production? A) The euro-dollar exchange rate is unpredictable due to its constant fluctuation. B) Exporters and importers typically profit from currency speculation. C) The euro/dollar exchange rate usually remains steady for long periods of time. D) The cost of living in the U.S. has risen dramatically in the last year. Answer: A Diff: 3: Hard Skill: Critical Thinking Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking; Environments and Reflective Thinking

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18) Companies have a tendency to prefer handling international business transactions with their own country's currency rather than with the currency of another country. Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking 19) If an individual buys from a supplier whose currency is depreciating against the individual's currency, the individual will have to pay a larger amount of his own currency to complete the purchase. Answer: FALSE Diff: 2: Moderate Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking 20) The most universally accepted currencies for international business transactions are the British pound, European euro, Japanese yen, and U.S. dollar, which are all considered hard currencies. Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking 21) The foreign-exchange market is located exclusively in the United States. Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking 22) Capital flight from a country enhances its ability to service debt and pay for imports. Answer: FALSE Diff: 1: Easy Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking 23) The French franc is one of the European currencies which was taken out of circulation and replaced by the euro. Answer: TRUE Diff: 1: Easy Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking 6 Copyright © 2017 Pearson Education, Inc.

24) What is the difference between a convertible currency and a nonconvertible currency? Explain why governments of some countries impose restrictions on currency convertibility. Answer: A convertible currency can be easily exchanged for other currencies. The most easily convertible are called hard currencies, and include the British pound, European euro, Japanese yen, and U.S. dollar. They are strong, stable currencies that are universally accepted and used most often for international transactions. Nations prefer to hold hard currencies as reserves because of their relative strength and stability in comparison to other currencies. A currency is nonconvertible when it is not acceptable for international transactions. Some governments may not allow their currency to be converted into a foreign currency. They prevent this conversion in order to preserve their supply of hard currencies, such as the euro or the U.S. dollar, or to avoid the problem of capital flight. Capital flight is the rapid sell-off by residents or foreigners of their holdings in a nation's currency or other assets. This usually occurs in response to a domestic crisis that causes them to lose confidence in the country's economy. The investors exchange their holdings in the weakening currency for those of another, often a hard currency. Capital flight from a country diminishes its ability to service debt and pay for imports. Diff: 2: Moderate Skill: Concept Objective: 9-1: Learn about exchange rates and currencies in international business AACSB: Analytical Thinking

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25) Explain the concept of currency risk. How can inflation and interest rates create currency risk? Answer: Exchange rate fluctuations and similar complications in international business create currency risk, the potential harm that can arise from changes in the price of one currency relative to another. If you buy from a supplier whose currency is appreciating against yours, you may need to pay a larger amount of your currency to complete the purchase. If you expect payment from a customer whose currency is depreciating against your own, currency risk also arises, because you may receive a smaller amount of your currency if the sale price was expressed in the currency of the customer. Of course, if the foreign currency fluctuates in your favor, you may gain a windfall. Exporters or importers usually are not in the business of making money from currency speculation; rather, they worry about losses that arise from currency fluctuations. Inflation and interest rates can create currency risk. Inflation is an increase in the price of goods and services, so that money buys less than in preceding years. Interest rates and inflation are closely related. In countries with high inflation, interest rates tend to be high because investors expect to be compensated for the inflation-induced decline in the value of their money. If inflation is running at 10 percent, for example, banks must pay more than 10 percent interest to attract customers to open savings accounts. Inflation occurs when (1) demand for money grows more rapidly than supply, or (2) the central bank increases the nation's money supply faster than the national productive output. For instance, triggered by big increases in the national money supply, inflation ran to more than 400 percent per year in Brazil in the mid-1990s. Inflation is a common challenge for developing economies and emerging markets. Inflation directly affects the value of the nation's currency. If it results from an excessive increase in the money supply, all else being equal, the price of that money (expressed in terms of foreign currencies) will fall. The link between interest rates and inflation, and between inflation and the value of currency, implies there is a relationship between real interest rates and the value of currency. Diff: 3: Hard Skill: Synthesis Objective: 9-1, 9-2: Learn about exchange rates and currencies in international business, Explain how exchange rates are determined AACSB: Analytical Thinking 26) The levels of supply and demand for a currency in a free market vary ________ with its price. A) rarely B) occasionally C) directly D) inversely Answer: D Diff: 1: Easy Skill: Concept Objective: 9-2: Explain how exchange rates are determined AACSB: Analytical Thinking

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27) Which of the following statements is most likely to be true regarding a currency's price if the supply of the currency increases? A) The price of the currency fluctuates randomly. B) The price of the currency remains constant. C) The price of the currency lowers. D) The price of the currency increases. Answer: C Diff: 2: Moderate Skill: Concept Objective: 9-2: Explain how exchange rates are determined AACSB: Analytical Thinking 28) If demand for the dollar is low, the price of the dollar is most likely to ________. A) rise B) remain stable C) fall, then rise D) fall Answer: D Diff: 2: Moderate Skill: Concept Objective: 9-2: Explain how exchange rates are determined AACSB: Analytical Thinking 29) Which of the following does the central bank perform in order to accommodate a nation's economic growth? A) enforce strict regulations on foreign direct investment B) increase the nation's money supply C) establish a voluntary export restraint D) restrict innovation and entrepreneurship Answer: B Diff: 2: Moderate Skill: Concept Objective: 9-2: Explain how exchange rates are determined AACSB: Analytical Thinking 30) ________ is the tendency of investors to mimic each others' actions. A) Switch trading B) Dumping C) Momentum trading D) Herding Answer: D Diff: 1: Easy Skill: Concept Objective: 9-2: Explain how exchange rates are determined AACSB: Analytical Thinking

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31) Which of the following is a characteristic of momentum trading? A) Investors buy stocks as prices fall. B) Investors sell stocks when others sell. C) Investors buy stocks as prices rise. D) Investors buy and sell stocks spontaneously. Answer: C Diff: 1: Easy Skill: Concept Objective: 9-2: Explain how exchange rates are determined AACSB: Analytical Thinking 32) Which of the following statements is true of trade surplus? A) It is a negative balance of trade. B) It occurs when there is a net outflow of domestic currency to foreign markets. C) It occurs when a nation imports as much as it exports. D) It occurs when a nation's exports exceed its imports. Answer: D Diff: 2: Moderate Skill: Concept Objective: 9-2: Explain how exchange rates are determined AACSB: Analytical Thinking 33) Each of the following factors significantly affects the balance of trade EXCEPT ________. A) exchange rate B) market share C) prices of goods D) trade barriers Answer: B Diff: 1: Easy Skill: Concept Objective: 9-2: Explain how exchange rates are determined AACSB: Analytical Thinking 34) Which of the following terms refers to the government reduction of its currency value relative to the other currency values? A) devaluation B) hyperinflation C) depreciation D) fluctuation Answer: A Diff: 1: Easy Skill: Concept Objective: 9-2: Explain how exchange rates are determined AACSB: Analytical Thinking

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35) Which of the following terms refers to the difference between the total amount of money flowing into and out of a nation over the course of a year? A) momentum trading B) trade surplus C) exchange rate system D) balance of payments Answer: D Diff: 1: Easy Skill: Concept Objective: 9-2: Explain how exchange rates are determined AACSB: Analytical Thinking High Inflation (Scenario) Country X primarily exports coffee beans, and in the last two years the demand for coffee beans has caused economic growth in Country X. To accommodate the economic growth, the central bank of Country X increased the nation's money supply. Country X is now experiencing inflation of over 200 percent. A group of economic experts, government representatives, and business owners have gathered for a conference in Country X to discuss the situation. 36) Which of the following questions would be more important to evaluate in determining the reason behind the inflation in Country X? A) Has momentum trading of agricultural commodities been occurring in Country X? B) What is the exchange rate between Country X currency and the euro? C) How quickly was the money supply increased by the central bank of Country X? D) How many pounds of coffee beans are being imported annually to Country X? Answer: C Diff: 3: Hard Skill: Critical Thinking Objective: 9-2: Explain how exchange rates are determined AACSB: Analytical Thinking; Environments and Reflective Thinking 37) Which of the following is most likely an additional problem faced by Country X due to its inflation? A) high interest rates B) herding behavior C) balance of trade D) country risk Answer: A Diff: 2: Moderate Skill: Application Objective: 9-2...