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Q:
When the demand is ________, an increase in price will decrease the total revenue.
a. Elastic
b. Inelastic
c. Contracted
d. Expanded
Q:
Suppose that a country devalues the domestic currency. For a period of time the balance of trade deficit worsens before improving. This is an example of:
a. Absorption period
b. The J-Curve effect
c. Elasticity period
d. Full employment effect
Q:
Which of the following policy examples does NOT reduce the domestic absorption?
a. Collect higher taxes on luxurious goods.
b. Raise interest rates on loans.
c. Give income tax rebates to households.
d. Cut government employees pension payments.
Q:
Which of the following statements is correct about the absorption approach?
I. If a country is operating below its full-employment level, it cannot improve trade balance by a currency devaluation.
II. If a country is operating at its full-employment level, the only way to improve trade balance is by reducing the domestic absorption.
a. Only I is correct.
b. Only II is correct.
c. Both I and II are correct.
d. Neither I nor II is correct.
Q:
According to the absorption approach, if the domestic income is greater than the domestic absorption, then:
a. A country is experiencing trade surplus.
b. A country is experiencing trade deficit.
c. A country is experiencing balanced trade.
d. A country is always at its full-employment level of production.
Q:
When the domestic demand for imports is perfectly inelastic, a devaluation will _______ prices of imports in domestic currency and _________ the total domestic import value.
a. decrease, decrease
b. increase, increase
c. decrease, have no effect on
d. increase, have no effect on
Q:
When the exchange rate S/$ was 100, a U.S. firm imports one Toyota automobile at 1,000,000 and agrees to make payments 60 days from the day of contract signing. On day 45, the exchange rate value changes to S/$ = 80, what would happen to the U.S. import value from this exchange rate change?
a. If the contract is written in dollar, the import value decreases.
b. If the contract is written in dollar, the import value increases.
c. If the contract is written in yen, the import value decreases.
d. If the contract is written in yen, the import value increases.
Q:
The elasticity approach to the balance of trade:
a. focuses on the effects of changing relative prices of domestic and foreign goods on the balance of trade.
b. indicates that the elasticity of demand for exports is always perfectly inelastic.
c. assumes a flexible exchange rate regime.
d. All of the above are correct.
Q:
The J-curve illustrates which of the following?
a. The effect of a devaluation on an economys income.
b. The immediate increase in the current account after a devaluation.
c. The gradual adjustment of the trade balance in response to a devaluation.
d. The gradual adjustment of prices after currency devaluation.
Q:
The main reason(s) why governments sometimes chose to devalue their currencies is (are):
a. devaluation allows the government to fight domestic unemployment by stimulating export sector.
b. devaluation improves the current account balance.
c. devaluation preserves foreign reserves held by the central bank.
d. All of the above.
Q:
If the sum of elasticities of demands for both imports and exports is less than 1, then:
a. the Marshall-Lerner condition is met and trade balance improves.
b. the Marshall-Lerner condition is met and trade balance decreases.
c. the Marshall-Lerner condition is not met and trade balance improves.
d. the Marshall-Lerner condition is not met and trade balance decreases.
Q:
Suppose that an economy is experiencing large trade deficits. According to pass-through effects, a devaluation could improve trade balance, when:
a. both demand for domestic imports and exports are perfectly inelastic.
b. both supply of domestic imports and exports are perfectly inelastic.
c. the demand for domestic imports is perfectly inelastic and the supply of domestic exports is perfectly inelastic.
d. the supply of domestic imports is perfectly inelastic and the demand for domestic exports is perfectly inelastic.
Q:
During the currency contract period, if a devaluation happens after the contracts have been signed,
a. There is no change in quantity of traded goods.
b. The value of exports depends on which currency contracts agreed upon.
c. The value of imports depends on which currency contracts agreed upon.
d. All of a, b, and c are correct.
Q:
A domestic currency devaluation could lead to an immediate negative effect on the trade balance, if the domestic:
a. import and export contracts are written in dollar.
b. import and export contracts are written in foreign currency.
c. import contracts are written in domestic currency and the domestic export contracts are written in foreign currency.
d. import contracts are written in foreign currency and the domestic export contracts are written in domestic currency.
Q:
The U.S. economy is experiencing large trade deficits. Suppose that the U.S. considers devaluing its dollar against a foreign currency to improve the trade balance. What type of currency contracting would improve the U.S. trade deficit?
a. The U.S. import contracts are written in foreign currency and the U.S. export contracts are written in dollar.
b. The U.S. import contracts are written in dollar and the U.S. export contracts are written in foreign currency.
c. Both of the U.S. import and export contracts are written in dollar.
d. Both of the U.S. import and export contracts are written in foreign currency.
Q:
The IMF has included a clause of anti-corruption into its lending process.
Q:
The IMF uses conditionality to punish lender countries following financial crises.
Q:
When a government seizes foreign investment, it is called capital flight.
Q:
The motives for ownership of foreign operations can be explained by perfectly competitive market conditions and inferior expertise of the domestic firm.
Q:
In international finance, the spending by a domestic firm to establish foreign operating units is called direct domestic investment
Q:
Which of the following are considered in country risk analyses?
I. Economic growth
II. Amount of natural resources
III. Diversity of exports
IV. Quality of education
a. I only
b. II only
c. I and III
d. II and IV
Q:
The evaluation of a countrys overall political and financial situations that may influence the countrys ability to repay its loans is called:
a. Country risk analysis
b. Foreign investment forecasting
c. Capital budgeting
d. Investment projecting
Q:
Both ________ have included anticorruption policies as part of their lending process to countries.
a. NATO and the UN
b. The UN and the World Bank
c. The IMF and the World Bank
d. The IMF and UNESCO
Q:
Country risk analysis is used to:
a. Establish negotiations with the IMF.
b. Set borrowing conditions with the domestic banks.
c. Assess the risk of international deals.
d. Forecast currency exchange conditions in the future.
Q:
Suppose Country X experienced a financial crisis. One contributing factor to the crisis was the sudden increase in the cost of fuel in the country. This is an example of a(n):
a. Chronic current account deficits
b. External shock
c. Fixed exchange system
d. Over dependence on foreign capital
Q:
In general, the more competitive a countrys markets are, the fewer the opportunities for ________.
a. Corruption
b. Free trade
c. Profits
d. Government seizures
Q:
Which of the following were not present in the 1997 Asian Financial crisis?
a. Weak financial markets
b. External shocks
c. Overvalued currencies
d. Current account surpluses
Q:
What did the Great Recession in 2007 show about financial markets?
a. Financial markets throughout the world are highly connected.
b. Segmented markets are those most exposed to risk during financial crises.
c. The IMF failed to target corruption in financial markets before 2007 effectively.
d. The housing bubble only affected investors with a direct connection to the housing market.
Q:
A contributing factor in the Latin American Debt Crisis 1982 was:
a. The significant devaluation of the dollar.
b. Declining expectations led to capital flight.
c. Falling oil prices lead to defaults by oil companies.
d. A sudden increase of capital inflows leading to currency devaluation.
Q:
Which of the following is not a benefit of FDI to the host country?
a. FDI promotes competition in domestic input markets
b. FDI allows the transfer of technology
c. FDI contributes to economic development
d. FDI limits human capital
Q:
The IMF has been criticized for imposing conditions on loans because:
a. Borrowing governments should not be expected to repay the loans.
b. Most of the conditions are unnecessary and unrelated to the economy.
c. Borrowing countries will borrow from someone else if the conditions are too difficult.
d. The conditions tend to harm short-term growth and raise unemployment.
Q:
Which of the following is not a likely example of IMF conditionality?
a. Reduce current account deficit to 3% of GDP
b. Lower taxes 5%
c. Forced closure of unviable banks
d. Cap inflation at 5%
Q:
The policies the IMF imposes on a member is expected to follow to ensure that the member will overcome its payment problems and able to repay back the funds are called:
a. Regulations
b. Conditionality
c. Enforcement
d. Rules of the loan
Q:
Capital flight is characterized by
a. Investment in the aviation industry
b. Sudden inflow of funds
c. Sudden outflow of funds
d. Seizure of capital by foreign governments
Q:
In international finance, the spending by a domestic firm to establish foreign operating units is called:
a. Capital flight
b. Domestic investment
c. Offshoring
d. Direct foreign investment
Q:
Corruption practices by government officials threatens market integrity, distorts competition, and endangers economic development.
Q:
Factors considered in the country risk analysis include political risk, diversity of exports, and quantity of natural resources.
Q:
Country risk analysis is the evaluation of a countrys overall political and financial situations that may influence the countrys ability to repay its loans.
Q:
The rapid increase of capital inflow has the potential to harm the economy.
Q:
Direct foreign investment is the capital flow of investment to acquire 10% or more of voting stocks of a firm abroad.
Q:
When seeking financial support from the IMF, country authorities describe their economic policies in a(n):
a. Exchange proposal
b. Conditionality
c. Letter of credit
d. Letter of Intent
Q:
Which of the following are considered in country risk analyses?
I. Political stability
II. External debt
III. Labor supply
IV. International reserve holdings
a. I and III
b. I, II, and IV
c. II, III, and IV
d. I, II, III, and IV
Q:
The abuse of public authority or trust for private benefit is considered:
a. Corruption
b. Conditionality
c. Seizure
d. Political risk
Q:
Which of the following is a warning indicator of a potential financial crisis?
a. Transparency in government operations
b. Floating exchange system
c. Decline in foreign reserves
d. All of the above are warning indicators
Q:
What are Mortgage Backed Securities (MBS)?
a. Investments packaged by banks to discourage homeownership
b. A category of mortgages that receive financial support from financial institutions.
c. Securities that combine mortgages and existing company stock to raise new capital.
d. Investments that bundle mortgages to be sold to investors with different risk levels.
Q:
Which of the following was not a contributing factor in the 1997 Asian Financial Crisis?
a. Currencies fixed to the U.S. dollar
b. Large capital inflows
c. Significantly undervalued currencies
d. Current account deficits
Q:
The IMFs view of conditionality is that:
a. The adjustments required are those that promote long-run growth.
b. Borrowing countries should be penalized during the borrowing period.
c. Adjustments ensure that the IMF can earn a profit.
d. The support of the IMF will encourage growth.
Q:
An increase in capital inflow could harm the economy by:
a. Causing an appreciation of the recipient countrys currency.
b. Increasing the political risk in the recipient country.
c. Creating congestion in the financial market.
d. Lowering tax receipts on capital outflows
Q:
Policy in the IMF is determined by voting, and votes are allocated by:
a. Population
b. Annual GDP
c. GDP per capita
d. Financial contributions
Q:
In the U.S. balance of payments, direct foreign investment is distinguished by portfolio investment by:
a. The type of capital investment
b. Type of industry
c. Size of investment
d. Percentage of ownership
Q:
Which of the following is NOT the root cause of the 1997 Asian financial crisis?
a. A sudden capital flight
b. Chronic trade surplus in Asian countries before the crisis year
c. Close relations between business, banks, and government agencies, which led to risky lending decisions.
d. A fixed exchange rate system
Q:
IMF conditionality refers to:
a. policy changes that government in a borrowing country has to make in order to borrow from the IMF.
b. the IMFs guidelines to disburse foreign aid to developing countries.
c. conditions that a country has to follow in order to become a member in the IMF.
d. the rescue package that the IMF gives out for free to country in crisis.
Q:
The 1997 Asian financial crisis first struck in:
a. Hong Kong
b. Thailand
c. Singapore
d. South Korea
Q:
Suppose that an emerging economy has its currency pegged to the $. Its currency is under pressure to depreciate. To maintain a fixed exchange rate, the central bank of this economy has to intervene by:
a. selling its currency, causing it to gain dollar reserves.
b. selling its currency, causing it to lose dollar reserves.
c. buying its currency, causing it to gain dollar reserves.
d. buying its currency, causing it to lose dollar reserves.
Q:
Which of the following factors triggered the 1994-95 Mexican Peso crises?
a. A rise in oil price
b. A decline in the price of semiconductor, Mexicos major exporting goods
c. A sharp devaluation of peso
d. A flexible exchange rate regime
Q:
A main difference of U.S. financial crisis in year 2008-09 from crises in emerging market economies such as Mexico is that:
a. U.S. financial crisis have not resulted in substantial bank failures.
b. U.S. financial crisis tend to be of shorter duration.
c. speculative currency attacks have not played a dominant role in U.S. financial crisis.
d. U.S. authorities have not permitted insolvent financial institutions to stay in operation.
Q:
Which of the following factors potentially increased the vulnerability to the 1997 Asian financial and currency crisis?
a. trade account surplus.
b. massive reverse outflows of capital.
c. technological transfer from advanced countries.
d. symmetric information in financial market.
Q:
Initial conditions in the year before the crisis in Thailand, Indonesia, Malaysia, the Philippines, and Korea in 1997 indicate that
I. capital inflows/GDP were very low.
II. nonperforming bank loan ratios were high.
III. current account deficits were high.
IV. credit growth was fast.
a. I and IV only.
b. II and III only.
c. I, II, and III only.
d. II, III and IV only.
Q:
In a portfolio investment,
a. investors are directly involved in managing the operations.
b. as in direct investment, investors export goods and services abroad.
c. investors transfer the technology to local investors.
d. investors have little control over operations.
Q:
When some troubled emerging-market nations experience a currency crisis, it affects other healthy emerging-market nations by raising risk premia and reducing investor confidence in the whole region portfolios. As a result, healthy emerging-market nations also prone to have a currency crisis as well. This phenomenon is known as:
a. experiential learning
b. contagion
c. moral hazard
d. emerging market dysfunction
Q:
Which of the following is NOT a contributory factor in the 2008-09 Great Recession?a. The use of low introductory mortgage rates in sub-prime lending; when they expired, the mortgagees were unable to pay the increased payments.b. Mortgages being sold on by their originating organization and not being kept on its books.c. Chinese government bought too many U.S. government bonds.d. The increasing complexity and interconnectivity of financial instruments such as credit default swaps.
Q:
Typically, a financial crisis tends to happen after:
a. massive influx of capital flows
b. chronic balance of trade deficits
c. a large depreciation causing a sudden increase in the local currency value of international debts denominated in other currencies.
d. All of the above
Q:
When maintaining a pegged exchange rate (fixed exchange rate), if the central bank runs out of foreign currency reserves, then:
a. it can always print more of domestic currency.
b. it can back the money supply by buying domestic assets.
c. it can sell its own currency and buy foreign currency reserves.
d. it must allow the domestic currency to float.
Q:
Security A and Security B have a correlation coefficient of 1.0. If Security As return is expected to increase by 10 percent,
a. Security Bs return should also increase by 10 percent.
b. Security Bs return should decrease by 10 percent.
c. Security Bs return should be zero.
d. Security Bs return is impossible to determine from the above information.
Q:
Security A and Security B have a correlation coefficient of 0. If Security As return is expected to increase by 10 percent,
a. Security Bs return should also increase by 10 percent.
b. Security Bs return should decrease by 10 percent.
c. Security Bs return should be zero.
d. Security Bs return is impossible to determine from the above information.
Q:
Company specific risk is also known as:
a. market risk.
b. systematic risk.
c. non-diversifiable risk.
d. nonsystematic risk.
Q:
If interest rates are equalized between two countries, why would we still observe two-way capital flow between these two countries?
a. Investors are irrational.
b. Investors want to diversify their portfolios.
c. Immigrants always invest in their home countrys assets.
d. Assets across countries are homogeneous.
Q:
A globalized market is a stock market where domestic investors can hold both domestic and foreign stocks.
Q:
When the covariance of two assets is negative, then the two variables move in opposite directions: when one rises the other falls.
Q:
The smaller the variance of variability of returns on a portfolio, the more uncertain the returns on the portfolio.
Q:
Portfolio diversification explains the two-way flow of capital between countries.
Q:
Use the following information for 14-15. Assume that you have a choice of two assets, A and B, and a portfolio of an equal share of the two assets. Assume also that the assets have the following statistics: Table 10.1: Return Variance Covariance Asset A 20 % 10 -0.01 Asset B 16 % 0.02 See Table 10.1. If your portfolio includes a combination of 20% Asset A and 80% Asset B, then your expected return is: a. 16.8 % b. 18 % c. 19.2 % d. 24 %
Q:
Which of the following are reasons for foreign firms to list their shares in the United States?
I. Ability to raise new capital in worlds largest financial base
II. Enlarged investor base
III. Lower transactions costs
IV. Eliminate foreign exchange risk
a. I and II
b. I, III, and IV
c. I, II, and III
d. I, II, III, and IV
Q:
A GDR is similar to the ADR except that it is:
a. Sold only to preferred investors
b. Available in more than one market
c. A high variance investment
d. A low variance investment
Q:
A stock market in which foreign investors are not allowed to buy domestic stocks and domestic investors are not allowed to buy foreign stocks is called a(n):
a. International market
b. Segmented market
c. Domestic market
d. Globalized market
Q:
Consider the following variances of different stocks all with the same expected returns. Which stock represents the best choice for a risk averse investor?
a. Stock A: 0.03
b. Stock B: 0.25
c. Stock C: 0.005
d. Stock D: 0.22
Q:
Consider the following variances of different stocks all with the same expected returns. Which stock represents the riskiest choice?
a. Stock A: 0.03
b. Stock B: 0.25
c. Stock C: 0.005
d. Stock D: 0.22
Q:
Consider two securities known as Security A and B. If returns on Security A decrease 10% while returns on Security B increase 10%, then the correlation coefficient is:
a. Positive
b. Negative
c. Zero
d. Impossible to determine
Q:
Which of the following are possible explanations for incomplete portfolio diversification?
I. Risk aversion
II. Home bias
III. Foreign bias
IV. Political risk
a. I and II
b. II and IV
c. I, III, and IV
d. I, II, and IV
Q:
The weighted average of the returns on the individual assets is know as the
a. Diversification process
b. Covariance average
c. Return on the portfolio
d. Systematic risk