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Incoterms 2010 and International Business - Wild - Chapter 10 - QUIZ Incoterms 2010 and International Business - 101

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International Business, 8e (Wild/Wild) Chapter 10 International Monetary System

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1) When a country's currency is weak, the price of its ________.

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1. A) exports and imports on world markets declines 2. B) exports and imports on world markets increases

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3. C) exports on world markets declines and the price of its imports increases

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4. D) exports on world markets increases and the price of its imports declines

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Answer: C AACSB: Application of knowledge Skill: Concept

Incoterms 2010 and International Business - 101 - ... Incoterms 2010 and International Business - 101 - ...

Difficulty: Moderate LO: 10.1: Describe the importance of exchange rates to business activities.

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2) A company selling in a country with a strong currency while sourcing from a country with a weak currency ________.

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1. A) practices unethical conduct

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2. B) experiences a trade deficit

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3. C) ends up bankrupt 4. D) improves its profits Answer: D AACSB: Application of knowledge

Incoterms 2010 and International Business - Wild -... Incoterms 2010 and International Business - Wild -...

Skill: Concept

Incoterms 2010 and International Business - Wild -...

Difficulty: Moderate

Incoterms 2010 and International Business - Wild -...

LO: 10.1: Describe the importance of exchange rates to business activities.

Incoterms 2010 and International Business - Wild -... Incoterms 2010 and International Business - Wild -...

3) Which of the following is the intentional lowering of a currency's value by its government?

1. A) revaluation 2. B) devaluation 3. C) currency hedging 4. D) currency arbitrage

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Answer: B

Incoterms 2010 and International Business - Wild -...

AACSB: Application of knowledge

Incoterms 2010 and International Business - Wild -...

Skill: Concept Difficulty: Easy LO: 10.1: Describe the importance of exchange rates to business activities.

Incoterms 2010 and International Business - Wild -... Incoterms 2010 and International Business - Wild -... Incoterms 2010 and International Business - Wild -...

4) Which of the following is true of inflation?

1. A) It occurs when money is injected into an economy that is experiencing greater output. 2. B) It is the result of supply and demand for a currency. 3. C) It increases people's purchasing power. 4. D) It is not particularly affected by the unemployment in a country.

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Answer: B

Incoterms 2010 and International Business - Wild -...

AACSB: Application of knowledge

Incoterms 2010 and International Business - Wild -...

Skill: Concept

Incoterms 2010 and International Business - Wild -...

Difficulty: Moderate

Incoterms 2010 and International Business - Wild -...

LO: 10.1: Describe the importance of exchange rates to business activities. 5) ________ is an activity under the monetary policy of a nation.

1. A) Increasing taxes 2. B) Lowering taxes 3. C) Increasing government spending 4. D) Selling government securities

Incoterms 2010 and International Business - Wild -... Incoterms 2010 and International Business - Wild -... Incoterms 2010 and International Business - Wild -...

Answer: D AACSB: Application of knowledge Skill: Concept

Incoterms 2010 and International Business - Wild -... Incoterms 2010 and International Business - Wild -...

Difficulty: Easy

Incoterms 2010 and International Business - Daniel...

LO: 10.1: Describe the importance of exchange rates to business activities.

Incoterms 2010 and International Business - Daniel... Incoterms 2010 and International Business - Daniel...

6) The French government buying its own securities on the open market is part of the ________ of France.

1. A) fiscal policy 2. B) monetary policy 3. C) industrial policy 4. D) investment policy Answer: B AACSB: Analytical thinking

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Skill: Application

International Business - Daniels - 15th Edition - ...

Difficulty: Hard

International Business - Daniels - 15th Edition - ...

LO: 10.1: Describe the importance of exchange rates to business activities.

International Business - Daniels - 15th Edition - ... International Business - Daniels - 15th Edition - ...

7) The lowering of taxes in the U.S. by its government is an example of the ________.

1. A) fiscal policy 2. B) monetary policy 3. C) social policy 4. D) foreign affairs policy

International Business - Daniels - 15th Edition - ... International Business - Daniels - 15th Edition - ... International Business - Daniels - 15th Edition - ...

Answer: A

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AACSB: Analytical thinking

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Skill: Concept Difficulty: Hard LO: 10.1: Describe the importance of exchange rates to business activities.

International Business - Daniels - 15th Edition - ... International Business - Daniels - 15th Edition - ... International Business - Daniels - 15th Edition - ...

8) To cool off an inflationary economy, a government might ________.

1. A) lower interest rates 2. B) raise interest rates 3. C) lower foreign exchange rates 4. D) raise foreign exchange rates Answer: B

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AACSB: Application of knowledge

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Skill: Concept

International Business - Daniels - 15th Edition - ...

Difficulty: Easy LO: 10.1: Describe the importance of exchange rates to business activities.

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9) The exchange rate at the beginning of a year between the Indian Rupee (R) and the U.S. dollar is R43.125/$. The annual inflation rates in India and in the United States are 19 percent and 3 percent respectively. What would be the new exchange rate at the end of the year?

49. A) R49.8224/$ 50. B) R37.327/$ 51. C) R0.0267/$ 52. D) $37.327/R Answer: A AACSB: Reflective thinking Skill: Critical Thinking Difficulty: Hard LO: 10.1: Describe the importance of exchange rates to business activities.

10) The inefficient market view holds that prices of financial instruments ________.

1. A) are dependent on political efficiency 2. B) are not dependent on political efficiency 3. C) do not reflect all publicly available information 4. D) reflect all publicly available information at any given time Answer: C AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 10.1: Describe the importance of exchange rates to business activities.

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11) Which of the following forecasting techniques employs statistical models based on key economic indicators to forecast exchange rates?

1. A) financial analysis 2. B) fundamental analysis 3. C) probability bounds analysis 4. D) technical analysis Answer: B AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.1: Describe the importance of exchange rates to business activities.

12) Which of the following forecasting techniques employs charts of past trends in currency prices and other factors to forecast exchange rates?

1. A) financial analysis 2. B) fundamental analysis 3. C) value chain analysis 4. D) technical analysis

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Answer: D AACSB: Application of knowledge Skill: Concept

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Difficulty: Easy LO: 10.1: Describe the importance of exchange rates to business activities. Scenario: Sam Dearing, Budding International Financier Sam Dearing is a summer intern in the arbitrage department at a prestigious Wall Street firm. Sam is hoping to be offered a full-time position at the firm after he graduates from college, and therefore, Sam knows that he must demonstrate a strong understanding of how exchange rates work.

13) Sam already knows that the ________ tells us how much of one currency we must pay to receive a certain amount of another.

1. A) exchange rate 2. B) par value 3. C) law of one price 4. D) purchasing power parity theory Answer: A AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.1: Describe the importance of exchange rates to business activities.

14) Sam's mentor at the firm told him that the ________ stipulates that an identical product must have an identical price in all countries when the price is expressed in a common currency.

1. A) exchange price 2. B) law of one price 3. C) fixed exchange-rate system 4. D) floating exchange-rate system Answer: B AACSB: Analytical thinking Skill: Application Difficulty: Easy LO: 10.1: Describe the importance of exchange rates to business activities.

15) A company can improve its profits by selling in a country with a strong currency and sourcing from a country with a weak currency. Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate

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LO: 10.1: Describe the importance of exchange rates to business activities.

16) Translating subsidiary earnings from a strong host currency into a weak home currency increases stated earnings in the home currency. Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 10.1: Describe the importance of exchange rates to business activities.

17) The intentional lowering of the value of a currency by a nation's government is called revaluation. Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.1: Describe the importance of exchange rates to business activities. 18) Devaluation lowers the price of a country's exports in the global market and increases the price of its imports. Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 10.1: Describe the importance of exchange rates to business activities.

19) Currency devaluation increases consumers' buying power. Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.1: Describe the importance of exchange rates to business activities.

20) In order to capture the gains from currency translation, managers prefer exchange rates that are volatile and unpredictable. Answer: FALSE AACSB: Application of knowledge Skill: Concept

Difficulty: Easy LO: 10.1: Describe the importance of exchange rates to business activities.

21) As the unpredictability of exchange rates increases, so does the cost of insuring against the accompanying risk. Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 10.1: Describe the importance of exchange rates to business activities.

22) Predictable exchange rates increase the need for currency hedging. Answer: FALSE AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 10.1: Describe the importance of exchange rates to business activities.

23) Inflation is a result of the supply and demand for a currency. Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.1: Describe the importance of exchange rates to business activities.

24) Low unemployment rates can lead to higher inflation. Answer: TRUE AACSB: Application of knowledge Skill: Concept Difficulty: Easy LO: 10.1: Describe the importance of exchange rates to business activities. 25) Inflation in an economy can be controlled by lowering the interest rates. Answer: FALSE Skill: Concept Difficulty: Easy LO: 10.1: Describe the importance of exchange rates to business activities.

26) Briefly describe how exchange rates influence business activities. Answer: Movement in a currency's exchange rate affects the activities of both domestic and international companies. For example, exchange rates influence demand for a company's products in the global marketplace. A country with a currency that is weak (valued low relative to other currencies) will see a decline in the price of its exports and an increase in the price of its imports. Lower prices for the country's exports on world markets can give companies the opportunity to take market share away from companies whose products are priced high in comparison. Furthermore, a company improves profits if it sells its products in a country with a strong currency (one that is valued high relative to other currencies) while sourcing from a country with a weak currency. For example, if a company pays its workers and suppliers in a falling local currency and sells its products in a rising currency, the company benefits by generating revenue in the strong currency while paying expenses in the weak currency. Yet managers must take care not to view this type of price advantage as permanent because doing so can jeopardize a company's longterm competitiveness. Exchange rates also affect the amount of profit a company earns from its international subsidiaries. The earnings of international subsidiaries are typically integrated into the parent company's financial statements in the home currency. Translating subsidiary earnings from a weak host country currency into a strong home currency reduces the amount of these earnings when stated in the home currency. Likewise, translating earnings into a weak home currency increases stated earnings in the home currency. AACSB: Application of knowledge Skill: Concept Difficulty: Moderate LO: 10.1: Describe the importance of exchange rates to business activities.

27) Explain how exchange rates adjust to inflation. Answer: An important component of the concept of purchasing power parity is that exchange rates adjust to different rates of inflation in different countries. Such adjustment is necessary to maintain purchasing power parity between nations. Suppose that at the beginning of the year the exchange rate between the Mexican peso and the U.S. dollar is 8 pesos/$ (or $0.125/peso). Also suppose that inflation is pushing consumer prices higher in Mexico at an annual rate of 20 percent, whereas prices are rising just 3 percent per year in the United States. To find the new exchange rate (Ee) at the end of the year, the following formula can be used: Ee=Eb(1+i1)/(1+i2), where Eb is the exchange rate at the beginning of the period, i1 is the inflation rate in country 1, and i2 is the inflation rate in country 2. Plugging the numbers for this example into the formula, gives the following value: Ee=8pesos/$[(1+0.20)/(1+0.03)]=9.3pesos/$ Because the numerator of the exchange rate is in pesos, the inflation rate for Mexico must also be placed in the numerator for the ratio of inflation rates. Thus, it can be noticed that the exchange rate adjusts from 8 pesos/$ to 9.3 pesos/$ because of the higher inflation rate in Mexico and the corresponding change in currency values. Higher inflation in Mexico reduces the number of U.S. dollars that a peso will buy and increases the number of pesos that a dollar will buy. In other words, whereas it had cost only 8 pesos to buy a dollar at the beginning of the year, it now costs 9.3 pesos. For example, companies based in Mexico must pay more in pesos for any supplies ...