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FIN 320 Week 10 Quiz – Strayer

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Quiz 8 Chapter 19 and 20

Chapter 19: ___________________________________________________________________________

In 2011, U.S. securities represented ______ of the world market for equities.

less than 25%

more than two-thirds

between 30% and 40%

a consistent 50%

_____ has the highest market capitalization of listed corporations among developed markets.

The United States

Japan

The United Kingdom

Switzerland

Total capitalization of corporate equity in the United States in 2011 was about _______ trillion.

$13.9

$23.4

$30.2

$45.5

If you limit your investment opportunity set to only the largest six countries in the world in terms of equity capitalization as a percentage of total global equity capital, you will include about _______ of the world's equity.

34%

44%

54%

64%

Limiting your investments to the top six countries in the world in terms of market capitalization may make sense for _________ investor but probably does not make sense for ________ investor.

an active; a passive

a passive; an active

a security selection expert; a market timer

a fundamental; a technical

WEBS are ____________________.

investments in country-specific portfolios

traded exactly like mutual funds

identical to ADRs

designed to give investors foreign currency exposure to multiple countries

Which one of the following allows you to purchase the stock of a specific foreign company?

WEBS

MSCI

ADR

EAFE

Generally speaking, countries with ______ capitalization of equities ________.

larger; have higher GDP

smaller; are wealthier

larger; have smaller GDP

larger; are higher-growth countries

The 32 "developed" countries with the largest equity capitalization made up about _____ of the world GDP in 2011.

22%

44%

68%

85%

10.

According to a regression of GDP on market capitalization in 2010, virtually all developed countries had _______ per capita GDP than (as) predicted by the regression.

higher

lower

the same

sometimes lower and sometimes higher

11.

If the direct quote for the exchange rate for the U.S. dollar versus the Canadian dollar is .98, what is the indirect quote?

1.98

1.02

.02

1.05

12.

EAFE stands for _______.

Equity And Foreign Exchange

European, Australian, Far East

European, Asian, Foreign Exchange

European, American, Far East

13.

Which one of the following country risks includes the possibility of expropriation of assets, changes in tax policy, and restrictions on foreign exchange transactions?

Default risk

Foreign exchange risk

Market risk

Political risk

14.

The __________ index is a widely used index of non-U.S. stocks.

CBOE

Dow Jones

EAFE

Lehman Index

15.

Suppose that U.S. equity markets represent about 35% of total global equity markets and that the typical U.S. investor has about 95% of her portfolio invested only in U.S. equities. This is an example of _________.

home-country bias

excessive diversification

active management

passive management

16.

The four largest economies in the world in 2010 were ____________.

United States, India, China, and Japan

United States, China, Canada, and Japan

United States, China, Japan, and Germany

China, United Kingdom, Canada, and United States

17.

The proper formula for interest rate parity is ___________.

[1 + rf(foreign)]/[1 + rf(US)] = F1/E0

[1 + rf(US)]/[1 + rf(foreign)] = E0/F1

[1 + rf(US)]/[1 + rf(foreign)] = F0/E0

[1 + rf(foreign)]/[1 + rf(foreign)] = F0/E1

18.

Research indicates that exchange risk of the major currencies has been _________ so far in this century.

relatively high

relatively low

declining slightly

declining rapidly

19.

It appears from empirical work that exchange rate risk ____________.

has been declining for individual investments in recent years

is mostly diversifiable

is mostly systematic risk

is unimportant for an investment in a single foreign country

20.

Passive investors with well-diversified international portfolios _________.

can safely ignore all political risk in emerging markets

can expect very large diversification gains from their international investing

do not need to be concerned with hedging exposure to foreign currencies

can expect returns to be better than the EAFE on a consistent basis

21.

Which stock market has the largest weight in the EAFE index?

Japan

Germany

United Kingdom

Australia

22.

The correlation coefficient between the U.S. stock market index and stock market indexes of major countries is __________.

between -1 and -.5

between -.50 and 0

between 0 and .5

between .5 and 1

23.

In 2010, the ___ countries with the largest capitalization of equities made up approximately 60% of the world equity portfolio.

24.

Investor portfolios are notoriously overweighted in home-country stocks. This is commonly called ________.

local fat

nativism

home-country bias

misleading representation

25.

Corruption is _________ risk variable.

a firm-specific

a political

a financial

an economic

26.

A U.S. hedge fund owns Swiss franc bonds. The fund manager believes that if Swiss interest rates rise relative to U.S. interest rates, the value of the franc will rise. To limit the risk to the fund's dollar return, the fund manager should __________.

sell the Swiss franc bonds now

sell the Swiss franc forward

probably do nothing because the franc move will offset the lower bond price

enter into an interest rate swap to pay variable and receive fixed

27.

The annual inflation rate is ______ risk variable.

a firm-specific

a political

a financial

an economic

28.

A U.S. insurance firm must pay €75,000 in 6 months. The spot exchange rate is $1.32 per euro, and in 6 months the exchange rate is expected to be $1.35. The 6-month forward rate is currently $1.36 per euro. If the insurer's goal is to limit its risk, should the insurer hedge this transaction? If so how?

The insurer need not hedge because the expected exchange rate move will be favorable.

The insurer should hedge by buying the euro forward even though this will cost more than the expected cost of not hedging.

The insurer should hedge by selling the euro forward because this will cost less than the expected cost of not hedging.

The insurer should hedge by buying the euro forward even though this will cost less than the expected cost of not hedging.

29.

A fund has assets denominated in euros and liabilities in yen due in 6 months. The 6-month forward rate for the euro is $1.36 per euro, and the 6-month forward rate for the yen is 121 yen per dollar. The 6-month forward rate for the euro versus the yen should be ________ per euro.

×88.97

×145.34

×154.67

×164.56

30.

You invest in various broadly diversified international mutual funds as well as your U.S. portfolio. The one risk you probably don't have to worry about affecting your returns is __________.

business-cycle risk

beta risk

inflation risk

currency risk

31.

According to the InternationalCountryRiskGuide in 2011, which of the following countries was the riskiest according to the current composite risk rating?

Japan

United States

China

India

32.

Suppose the 6-month risk-free rate of return in the United States is 5%. The current exchange rate is 1 pound = US$2.05. The 6-month forward rate is 1 pound = US$2. The minimum yield on a 6-month risk-free security in Britain that would induce a U.S. investor to invest in the British security is ________.

5.06%

6.74%

8.48%

10.13%

33.

The quoted interest rate on a 3-month Canadian security is 8%. The current exchange rate is C$1 = US$.68. The 3-month forward rate is C$1 = US$.70. The APR (denominated in US$) that a U.S. investor can earn by investing in the Canadian security is __________.

7.25%

20%

22.43%

34.

Suppose the 1-year risk-free rate of return in the United States is 5% and the 1-year risk-free rate of return in Britain is 8%. The current exchange rate is $1 = ₤.50. A 1-year future exchange rate of __________ would make a U.S. investor indifferent between investing in the U.S. security and investing in the British security.

₤.5150

₤.5142

₤.5123

₤.4859

35.

The risk-free interest rate in the United States is 4%, while the risk-free interest rate in the United Kingdom is 9%. If the British pound is worth $2 in the spot market, a 1-year futures rate on the British pound should be worth __________.

$1.83

$1.91

$2.08

$2.18

36.

The risk-free interest rate in the United States is 8%, while the risk-free interest rate in the United Kingdom is 15%. If the 1-year futures price on the British pound is $2.40, the spot market value of the British pound today should be __________.

$1.93

$2.22

$2.56

$2.76

37.

The present exchange rate is C$1 = US$.77. The 1-year futures rate is C$1 = US$.73. The yield on a 1-year U.S. bill is 4%. A yield of __________ on a 1-year Canadian bill will make investors indifferent between investing in the U.S. bill and the Canadian bill.

9.7%

2.9%

2.8%

38.

The yield on a 1-year bill in the United Kingdom is 6%, and the present exchange rate is 1 pound = US$2. If you expect the exchange rate to be 1 pound = US$1.95 a year from now, the return a U.S. investor can expect to earn by investing in U.K. bills is approximately __________.

-3%

3.35%

8.72%

39.

Assume there is a fixed exchange rate between the Canadian and U.S. dollars. The expected return and standard deviation of return on the U.S. stock market are 13% and 15%, respectively. The expected return and standard deviation of return on the Canadian stock market are 12% and 16%, respectively. The covariance of returns between the U.S. and Canadian stock markets is 1.2%. If you invested 50% of your money in the Canadian stock market and 50% in the U.S. stock market, the expected return on your portfolio would be __________.

12%

12.5%

14%

15.5%

40.

Assume there is a fixed exchange rate between the Canadian and U.S. dollars. The expected return and standard deviation of return on the U.S. stock market are 10% and 15%, respectively. The expected return and standard deviation of return on the Canadian stock market are 12% and 16%, respectively. The covariance of returns between the U.S. and Canadian stock markets is .012. If you invested 50% of your money in the Canadian stock market and 50% in the U.S. stock market, the standard deviation of return on your portfolio would be __________.

10.96%

12.25%

13.42%

15.5%

41.

Inclusion of international equities in a U.S. investor's portfolio has historically produced ___________________.

a substantially reduced portfolio variance

a slightly reduced portfolio variance

a substantially poorer portfolio variance

a slightly poorer portfolio variance

42.

WEBS are _____________.

mutual funds marketed internationally on the Internet

synthetic domestic stock indexes

equity indexes that replicate the price and yield performance of foreign stock portfolios

single stock investments in a foreign security

43.

You are a U.S. investor who purchased British securities for 3,500 pounds 1 year ago when the British pound cost $1.35. No dividends were paid on the British securities in the past year. Your total return based on U.S. dollars was __________ if the value of the securities is now 4,200 pounds and the pound is worth $1.15.

-3.8%

2.2%

5.6%

15%

44.

Real U.S. interest rates move above Japanese interest rates. If you believe that Japanese interest rates won't move and that interest rate parity will hold, then ____________.

the yen-per-dollar exchange rate should rise

the dollar-per-yen exchange rate should rise

the exchange rate should stay the same if parity holds

The answer cannot be determined from the information given.

45.

Suppose a U.S. investor wants to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest, and the current exchange rate is $1.40/₤. How many shares can the investor purchase?

140

100

71.43

None of these options

46.

Suppose a U.S. investor wants to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest, and the current exchange rate is $1.40/₤. After 1 year, the exchange rate is unchanged and the share price is ₤55. What is the dollar-denominated return?

14%

10%

9.3%

7.1%

47.

14%

10%

9.3%

7.1%

48.

Suppose a U.S. investor wants to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest, and the current exchange rate is $1.40/₤. After 1 year, the exchange rate is $1.60/₤ and the share price is ₤55. What is the dollar-denominated return?

25.7%

16%

14.3%

9.3%

49.

Suppose a U.S. investor wants to invest in a British firm currently selling for ₤50 per share. The investor has $7,000 to invest, and the current exchange rate is $1.40/₤. After 1 year, the exchange rate is $1.50/₤ and the share price is ₤45. How much of your dollar-denominated return is due to the currency change?

10%

6.43%

4.34%

2.12%

50.

You find that the exchange rate quote for the yen is 121 yen per dollar. This is an example of ________ quote. You also find that the euro is worth $1.33. This second quote is an example of _______ quote.

a direct; an indirect

an indirect; a direct

a foreign; a U.S.

a U.S.; a foreign

51.

Among emerging countries the largest equity market in 2011 was located in _____________.

China

India

C.��

Brazil

Russia

52.

In the PRS country composite risk ratings, a score of ______ represents the least risky and a score of _____ represents the most risky.

0; 100

0; 50

50; 0

100; 0

53.

Which emerging country had the highest percentage growth in market capitalization during the 2000-2011 period?

Brazil

China

Columbia

Turkey

54.

The dollar-per-euro spot rate is 1.2 when an importer of French wines places an order. Six months later, when she takes delivery, the spot rate is 1.3 dollars per euro. If her original invoice was for 30,000 euro, what is her gain or loss due to exchange rate risk?

$3,000 gain

$3,000 loss

$6,000 loss

No gain or loss

55.

An importer of televisions from Japan has a contract to purchase a shipment of televisions for 2 million yen. The spot rate increases from 105 yen per dollar to 108 yen per dollar. What is the importer's gain or loss?

$529 gain

$529 loss

$619 gain

$619 loss

56.

A country has a PRS political risk rating of 75, a financial score of 40, and an economic score of 35. The country's composite rating is _________.

57.

The risk-free rate in the United States is 2.5%, and the risk-free rate in Europe is 3.2%. If the spot rate of dollars per euro is 1.32, what is the likely forward rate in terms of dollars per euro?

1.30

1.31

1.32

1.33

58.

The risk-free rate in the United States is 4%, and the risk-free rate in Japan is 1.2%. If the spot rate of yen to dollars is 105, what is the likely yen-per-dollar forward rate?

101

102

105

108

59.

The yen-per-dollar spot rate is 104. The yen-per-dollar forward rate is 107. If the U.S. risk-free rate is 2.4%, what is the likely yen risk-free rate?

1.24%

2.35%

3.98%

5.35%

60.

In the PRS financial risk ratings, the United States rates poorly because of the U.S. ________. I. Large budget deficit II. Large trade deficit III. Large amount of total debt

I only

I and II only

I and III only

I, II, and III

61.

The major participants who directly purchase securities in the capital markets of other countries are predominantly ____________.

large institutional investors

individual investors

government agencies

central banks

62.

Of the following, which is the most commonly used international index?

DJIA

EAFE

Russell 2000

S&P 500

63.

WEBS differ from mutual funds in that: I. WEBS can be shorted. II. WEBS trade continuously on the AMEX. III. WEBS are passively managed.

II only

II and III only

I and III only

I, II, and III

64.

The variation in the betas of emerging markets suggests that ____________.

emerging markets are more uniform than developed markets

beta does not hold in international markets

international diversification may reduce portfolio risk

riskier emerging markets have uniformly lower betas

65.

One year U.S. interest rates are 5%, and European interest rates are 7%. The spot euro direct exchange rate quote is 1.32, and the 1-year forward rate direct quote is 1.35. If you can borrow either $1 million or €1 million to start with, what would be your dollar profits from interest arbitrage based on these data?

$94,322

$55,345

$44,318

$33,595

66.

One year U.S. interest rates are 7%, and European interest rates are 5%. The spot euro direct exchange rate quote is 1.30 and the 1-year forward rate direct quote is 1.25. If you can borrow either $1 million or €1 million to start with, what would be your dollar profits from interest arbitrage based on these data?

$60,384

$42,973

$68,422

$78,500

67.

All exchange rates are expressed as units of foreign currency that can be purchased with one U.S. dollar. Answer the following about decomposing the manager's performance. What is the difference in return of the manager's portfolio due to currency selection?

-5%

-3%

68.

-.60%

-.75%

.12%

.22%

69.

1.15%

3.25%

5.45%

6.13%

Chapter 20: ___________________________________________________________________________

Which of the following are characteristics of a hedge fund? I. Pooling of assets II. Strict regulatory oversight by the SEC III. Investing in equities, debt instruments, and derivative instruments IV. Professional management of assets

I and II only

II and III only

III and IV only

I, III, and IV only

A __________ is a private investment pool open only to wealthy or institutional investors that is exempt from SEC regulation and can therefore pursue more speculative policies than mutual funds.

commingled pool

unit trust

hedge fund

money market fund

Hedge funds are typically set up as _______________.

limited liability partnerships

corporations

REITs

mutual funds

A(n) _______________ hedge fund attempts to profit from situations such as mergers, acquisitions, restructuring, bankruptcy, or reorganization.

multistrategy

managed futures

dedicated short bias

event-driven

______ are private partnerships of a small number of wealthy investors, are often subject to lock-up periods, and are allowed to pursue a wide range of investment activities.

Hedge funds

Closed-end funds

REITs

Mutual funds

Which of the following typically employ(s) significant amounts of leverage? I. Hedge funds II. Equity mutual funds III. Money market funds IV. Income mutual funds

I only

I and II only

III and IV only

I, II, and III only

As of 2012, hedge funds had approximately _____ under management.

$.5 trillion

$1.6 trillion

$2 trillion

$3.2 trillion

A restriction under which investors cannot withdraw their funds for as long as several months or years is called __________.

transparency

a lock-up period

a back-end load

convertible arbitrage

Hedge fund managers are compensated by ___________________.

deducting management fees from fund assets and receiving incentive bonuses for beating index benchmarks

deducting a percentage of any gains in asset value

selling shares in the trust at a premium to the cost of acquiring the underlying assets

charging portfolio turnover fees

10.

Management fees for hedge funds typically range between _____ and _____.

.5%; 1.5%

1%; 2%

2%; 5%

5%; 8%

11.

Hedge funds can invest in various investment options that are not generally available to mutual funds. These include: I. Futures and options II. Merger arbitrage III. Currency contracts IV. Companies undergoing Chapter 11 restructuring and reorganization

I only

I and II only

I, II, and III only

I, II, III, and IV

12.

A typical traditional initial investment in a hedge fund generally is in the range between _____ and _____.

$1,000; $5,000

$5,000; $25,000

$25,000; $250,000

$250,000; $1,000,000

13.

The difference between market-neutral and long-short hedges is that market-neutral hedge funds _________.

establish long and short positions on both sides of the market to eliminate risk and to benefit from security asset mispricing whereas long-short hedges establish positions only on one side of the market

allocate money to several other funds while long-short funds do not

invest in relatively stable proportions of stocks and bonds while the proportions may vary dramatically for long-short funds

invest only in equities and bonds while long-short funds use only derivatives

14.

Convertible arbitrage hedge funds _________.

attempt to profit from mispriced interest-sensitive securities

hold long positions in convertible bonds and offsetting short positions in stocks

establish long and short positions in global capital markets

use derivative products to hedge their short positions in convertible bonds

15.

Assuming positive basis and negligible borrowing cost, which of the following transactions could yield positive arbitrage profits if pursued by a hedge fund?

Buy gold in the spot market, and sell the futures contract.

Buy the futures contract, and sell the gold spot and invest the money earned.

Buy gold spot with borrowed money, and buy the futures contract.

Buy the futures contract, and buy the gold spot using borrowed money.

16.

An example of a neutral pure play is _______.

pairs trading

statistical arbitrage

convergence arbitrage

directional strategy

17.

You believe that the spread between the September S&P 500 future and the S&P 500 Index is too large and will soon correct. To take advantage of this mispricing, a hedge fund should ______________.

buy all the stocks in the S&P 500 and write put options on the S&P 500 Index

sell all the stocks in the S&P 500 and buy call options on the S&P 500 Index

sell S&P 500 Index futures and buy all the stocks in the S&P 500

sell short all the stocks in the S&P 500 and buy S&P 500 Index futures

18.

You believe that the spread between the September S&P 500 future and the S&P 500 Index is too large and will soon correct. This is an example of ______________.

pairs trading

convergence play

statistical arbitrage

a long-short equity hedge

19.

A 1-year oil futures contract is selling for $74.50. Spot oil prices are $68, and the 1-year risk-free rate is 3.25%. The 1-year oil futures price should be equal to __________.

$68

$70.21

$71.25

$74.88

20.

A 1-year oil futures contract is selling for $74.50. Spot oil prices are $68, and the 1-year risk-free rate is 3.25%. The arbitrage profit implied by these prices is _____________.

$6.50

$5.44

$4.29

$3.25

21.

A 1-year oil futures contract is selling for $74.50. Spot oil prices are $68, and the 1-year risk-free rate is 3.25%. Based on the above data, which of the following sets of transactions will yield positive riskless arbitrage profits?

Buy oil in the spot market with borrowed money, and sell the futures contract.

Buy the futures contract, and sell the oil spot and invest the money earned.

Buy the oil spot with borrowed money, and buy the futures contract.

Buy the futures contract, and buy the oil spot using borrowed money.

22.

Assume that you have invested $500,000 to purchase shares in a hedge fund reporting $800 million in assets, $100 million in liabilities, and 70 million shares outstanding. Your initial lockout period is 3 years. How many shares did you purchase?

13,333

25,000

50,000

66,000

23.

$553,600

$625,000

$733,800

$764,000

24.

14.45%

15.18%

16%

17.73%

25.

Which of the following are not managed investment companies?

Hedge funds

Unit investment trusts

Closed-end funds

Open-end funds

26.

You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. How many S&P 500 contracts do you need to sell to hedge your portfolio?

27.

You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. When you hedge your stock portfolio with futures contracts, the value of your portfolio beta is __________.

1.2

The answer cannot be determined from the information given.

28.

You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. What is the expected quarterly return on the hedged portfolio?

29.

You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. How much is the portfolio expected to be worth 3 months from now?

$15,000,000

$15,450,000

$15,600,000

$16,000,000

30.

You manage a $15 million hedge fund portfolio with beta = 1.2 and alpha = 2% per quarter. Assume the risk-free rate is 2% per quarter and the current value of the S&P 500 Index is 1,200. You want to exploit the positive alpha, but you are afraid that the stock market may fall and you want to hedge your portfolio by selling 3-month S&P 500 future contracts. The S&P contract multiplier is $250. Hedging this portfolio by selling S&P 500 futures contracts is an example of ___________.

statistical arbitrage

pure play

a short equity hedge

fixed-income arbitrage

31.

Hedge funds that change strategies and types of securities invested and also vary the proportions of assets invested in particular market sectors according to the fund manager's outlook are called ____________________.

asset allocation funds

multistrategy funds

event-driven funds

market-neutral funds

32.

When a short-selling hedge fund advertises in a prospectus that it is a 120/20 fund, this means that the fund may sell short up to ______ for every $100 in net assets and increase the long position to __________ of net assets.

$120; $20

$20; $120

$20; $20

$120; $120

33.

The collapse of the Long Term Capital Management hedge fund in 1998 was a case of an extremely unlikely statistical event called ________.

statistical arbitrage

an unhedged play

a tail event

a liquidity trap

34.

Which of the following investment styles could be the best description of the Long Term Capital Management market-neutral strategies?

Convergence arbitrage

Statistical arbitrage

Pairs trading

Convertible arbitrage

35.

Consider a hedge fund with $250 million in assets at the start of the year. If the gross return on assets is 18% and the total expense ratio is 2.5% of the year-end value, what is the rate of return on the fund?

15.05%

15.5%

17.25%

18%

36.

Consider a hedge fund with $200 million at the start of the year. The benchmark S&P 500 Index was up 16.5% during the same period. The gross return on assets is 21%, and the expense ratio is 2%. For each 1% above the benchmark return, the fund managers receive a .1% incentive bonus. What was the management cost for the year?

$4,877,000

$4,900,000

$5,929,000

$6,446,000

37.

16.5%

18.04%

18.55%

21%

38.

Consider a hedge fund with $400 million in assets, $60 million in debt, and 16 million shares at the start of the year and with $500 million in assets, $40 million in debt, and 20 million shares at the end of the year. During the year, investors have received an income dividend of $.75 per share. Assuming that the total expense ratio is 2.75%, what is the rate of return on the fund?

6.45%

8.52%

8.95%

9.46%

39.

Market-neutral hedge funds may experience considerable volatility. The source of volatile returns is the use of _________.

pure play

leverage

directional bests

net short positions

40.

A hedge fund has $150 million in assets at the beginning of the year and 10 million shares outstanding throughout the year. Throughout the year assets grow at 12%. The fund charges a 3% management fee on the assets. The fee is imposed on year-end asset values. What is the end-of-year NAV for the fund?

$15

$15.60

$16.30

$17.55

41.

You pay $216,000 to the Capital Hedge Fund, which has a price of $18 per share at the beginning of the year. The fund deducted a front-end commission of 4%. The securities in the fund increased in value by 15% during the year. The fund's expense ratio is 2% and is deducted from year-end asset values. What is your rate of return on the fund if you sell your shares at the end of the year?

5.35%

7.23%

8.19%

10%

42.

A hedge fund owns a $15 million bond portfolio with a modified duration of 11 years and needs to hedge risk, but T-bond futures are available only with a modified duration of the deliverable instrument of 10 years. The futures are priced at $105,000. The proper hedge ratio to use is ______.

143

157

196

218

43.

Unlike market-neutral hedge funds, which have betas near ________, directional long funds exhibit highly _______ betas.

zero; positive

positive; negative

positive; zero

negative; positive

44.

Portfolio A has a beta of .2 and an expected return of 14%. Portfolio B has a beta of .5 and an expected return of 16%. The risk-free rate of return is 10%. If you manage a long-short equity fund and want to take advantage of an arbitrage opportunity, you should take a short position in portfolio ______ and a long position in portfolio __________.

A; A

A; B

B; A

B; B

45.

According to a model that was estimated using monthly excess returns from January 2005 through November 2011, average returns of equity hedge funds are __________ the S&P 500 Index.

equal to

considerably higher than

slightly lower than

slightly higher than

46.

Research by Aragon (2007) indicates that lock-up restrictions tend to hold ____________ portfolios.

less liquid

more liquid

event-driven

shorter-maturity

47.

Higher returns of equity hedge funds as compared to the S&P 500 Index reflect positive compensation for __________ risk.

market

liquidity

systematic

interest rate

48.

Portfolio A has a beta of 1.3 and an expected return of 21%. Portfolio B has a beta of .7 and an expected return of 17%. The risk-free rate of return is 9%. If a hedge fund manager wants to take advantage of an arbitrage opportunity, she should take a short position in portfolio __________ and a long position in portfolio __________.

A; A

A; B

B; A

B; B

49.

In a 2011 study, Agarwal, Daniel, and Naik documented that hedge funds tend to report average returns in ____________ that are __________ than their average returns in other months.

September; lower

January; higher

January; lower

December; higher

50.

To attract new clients, hedge funds often include past returns of funds only if they were successful. This is called __________.

long-short bias

survivorship bias

backfill bias

incentive bias

51.

Some argue that abnormally high returns of hedge funds are tainted by __________, which arises when unsuccessful funds cease operations, leaving only successful ones.

reporting bias

survivorship bias

backfill bias

incentive bias

52.

Malkiel and Saha (2005) estimate that the survivorship bias for hedge funds equals 4.4%, which is __________ the survivorship bias for mutual funds.

about the same as

much lower than

much higher than

only slightly lower than

53.

Hedge fund managers receive incentive bonuses when they increase portfolio assets beyond a stipulated benchmark but lose nothing when they fail to perform. This is equivalent to __________.

writing a call option

receiving a free call option

writing a put option

receiving a free put option

54.

A typical hedge fund incentive bonus is usually equal to ________ of investment profits beyond a predetermined benchmark index.

10%

20%

25%

55.

The fastest-growing category of hedge funds is feeder funds. These funds invest in ________.

other hedge funds

convertible securities and preferred stock

equities and bonds

managed futures and options

56.

A high water mark is a limiting factor of hedge fund manager compensation. This means that managers can't charge incentive fees ________.

when a fund stays flat

when a fund falls and does not recover to its previous high value

when a fund falls by 10% or more

none of these options. (Managers can always charge incentive fees.)

57.

If the risk-free interest rate is rf and equals the fund's benchmark, the portfolio's net asset value is S0, and the hedge fund manager incentive fee is 20% of profit beyond that, the incentive fee is equivalent to receiving ______ call(s) with exercise price ________.

.2; S0

1; S0(1 + rf)

1.2; S0

.2; S0(1 + rf)

58.

$100

$105

$110

$115

59.

Assume the risk-free interest rate is 10% and is equal to the fund's benchmark, the portfolio's net asset value is $100, and the fund's standard deviation is 20%. Also assume a time horizon of 1 year. What is the Black-Scholes value of the call option on the management incentive fee?

$6.67

$8.18

$9.74

$10.22

60.

Assume the risk-free interest rate is 10% and is equal to the fund's benchmark, the portfolio's net asset value is $100, and the fund's standard deviation is 20%. Also assume a time horizon of 1 year. Assuming a 2% management fee and a 20% incentive bonus, what is the expected management compensation per share if the fund's net asset value exceeds the stated benchmark?

$4.24

$3.84

$2.20

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Week 10 Discussion

"Long-Term Investment and Cost-Benefit Analysis" Please respond to the following:

Long Term Investment--How about Ethical bankers for a change class! 4 short videos on --"Micro-credit" in Bangladesh and developing nations. also now in U.S.

Ethical banking --Prof. Muhammad Yunus Nobel Peace Prize Announcement for Micro-Credit http://www.youtube.com/watch?v=kBBemklV5vU

President Obama giving Prof. Yunus Medal of Freedom http://www.youtube.com/watch?v=L2P8DcHh6T0&feature=related

Yunus- Microcredit in Bangladesh http://www.youtube.com/watch?v=veaVikY3u98

Yunus - Microcredit for "beggars" http://www.youtube.com/watch?v=T8lMhj2w874

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Quiz 8 Chapter 15 and 16

Chapter 15

Taxation of Corporate Income

True/False Questions

1. The corporate income tax in the United States is levied only on economic profits.

2. Imputed interest from retained earnings are not deducted when computing taxable corporate income.

3. In general, the shorter the depreciation period allowed for tax purposes, the higher the tax burden on corporations.

4. Accelerated depreciation allows a firm to deduct more than the actual economic depreciation from its income each year.

5. Inflation causes an understatement of true depreciation cost.

6. If a corporation maximizes profits, an ad valorem tax on its profits will result in a reduction in output in the short run.

7. Assuming that the corporate income tax is not shifted to consumers in the short run, the long-run effect will be a reduction in the return to investment in both the corporate and noncorporate sector.

8. The excess burden of the corporate income tax stems from a misallocation of investment between the corporate and noncorporate sectors when the supply of savings is perfectly inelastic.

9. When the supply of savings is not perfectly inelastic, the corporate income tax can be shifted to workers.

10. In the long run the corporate income tax has no effect on the price of products produced by corporations.

11. The corporate income tax in the United States is levied on the sum of economic and normal profits.

12. The corporate income tax is levied only on retained earnings with dividends paid out exempt from taxation.

13. Because the corporate income tax base includes dividends, those dividends are taxed twice if they are also included in the personal income tax base.

14. Because the opportunity cost of a corporate equity is not tax deductible, the corporate income tax encourages borrowing, which allows interest cost to be deducted from corporate income.

15. If the corporate income tax is not shifted in the short run, then in the long run it will reduce the return to capital in the corporate sector only.

16. Depreciation is based on historic cost.

17. During periods of inflation historic cost overstates replacement cost.

18. Corporate dividends are paid from post-tax income.

Multiple Choice Questions

1. The tax base for the corporate income tax in the United States is:

a. the sum of normal and economic profits of corporations.

b. economic profits of corporations.

c. normal profits of corporations.

d. retained earnings of corporations.

2. Accelerated depreciation allows corporations to:

a. earn more interest on their capital costs.

b. reduce capital costs to zero.

c. reduce labor costs.

d. increase the time period over which assets are depreciated.

3. If corporations maximize profits, the short-run incidence of a tax on its profits will be borne by:

a. consumers.

b. all investors.

c. corporate shareholders.

d. workers.

4. Assuming that corporations maximize profits and investors seek to maximize the return to their investments, the long-run impact of a corporate income tax is to:

a. reduce the incomes of corporate shareholders only.

b. reduce the incomes of workers only.

c. reduce the incomes of all investors.

d. increase the price of both corporate and noncorporate goods.

5. Assuming that the supply of savings is perfectly inelastic, the corporate income tax prevents the attainment of efficiency by:

a. reducing annual savings.

b. reducing annual investment.

c. reducing wages.

d. causing a misallocation of investment between the corporate and noncorporate sectors

6. Assuming that corporations maximize profits and investors maximize the return from their investment, a corporate income tax is likely to:

a. increase the price of corporate goods.

b. decrease the price of noncorporate goods.

c. both (a) and (b)

d. have no effect on output prices.

7. Inflation affects corporate income by:

a. understating depreciation and inventory costs.

b. overstating capital gains.

c. both (a) and (b)

d. always increasing taxes.

8. Assuming that corporations maximize profits, that investors maximize the return to their investments, and that the supply of savings is not perfectly inelastic, in the long run a corporate income tax will:

a. not prevent investment markets from achieving efficiency.

b. reduce investment.

c. reduce wages.

d. both (b) and (c)

9. Which of the following is true about the economic effects of the corporate income tax?

a. Its incidence is likely to be borne entirely by workers.

b. Its incidence is likely to be borne only by shareholders of corporations.

c. Its incidence is likely to be borne only by consumers of corporate products.

d. Its incidence is likely to be shared by owners of capital, workers, and consumers of corporate products.

10. According to the Harberger model of the incidence of the corporate income tax, the tax:

a. reduces the return to capital in the corporate sector of the economy only.

b. reduces the return to capital in all uses.

c. has no effect on the return to capital.

d. increases the return to capital.

11. If corporations maximize profit, a corporate income tax:

a. has no affect on the profit-maximizing output in the short run.

b. reduces the profit, maximizing output in the short run.

c. increase the profit, maximizing output in the short run.

d. increases the supply of corporate output in the short run.

12. Under the corporation income tax in the United States,

a. interest on borrowed money cannot be deducted from the tax base.

b. only economic profits are taxed.

c. only normal profit is taxed.

d. the opportunity cost of equity cannot be deducted from the tax base.

13. If the supply of savings is not perfectly elastic, the corporate income tax is likely to:

a. increase investment.

b. decrease investment.

c. increase the supply of labor.

d. decrease the supply of labor.

14. In the long run a corporate income tax that initially reduces the return to investment in the corporate sector will also:

a. reduce the return to capital in noncorporate sectors.

b. increase the output of corporate goods.

c. decrease the output of noncorporate goods.

d. both (b) and (c)

15. Under the corporate income tax,

a. dividends paid out to shareholders are deducted from corporate income.

b. dividends are included in corporate income.

c. retained earnings are included in corporate income.

d. both (b) and (c)

16. The double taxation of dividends under U.S. tax code means:

a. dividends are taxed while not being adjusted for inflation.

b. dividends are paid from after-tax corporate income and then taxed again as personal income

c. dividends are deducted as an expense at the corporate level, but as a gain at the personal level

d. both (a) and (b)

17. If an all-equity firm has after-tax income of $100,000 based on a 34% income tax, what is the after-tax income of an equivalent firm that pays $15,000 in interest that is tax deductible?

a. $85,000.00

b. $105,100.00

c. $90,100.00

d. $100,000.00

18. If interest on corporate debt is tax deductible, a firm’s return on equity increases because:

a. after-tax income increases with the presence of debt.

b. generally, the presence of debt reduces the amount of equity to a greater effect than the reduction in after-tax.

c. debt reduces equity and increases after-tax income.

d. the presence of debt to lead to increases in dividends.

19. Assuming no change in the payout structure, what measure would reduce corporate financing costs?

a. allowing dividends to be deducted from income prior to assessing tax.

b. a reduction in the tax rate.

c. limiting the amount of interest that can be deducted from income prior to assessing tax.

d. both (a) and (b)

20. The effective tax rate is:

a. the same as the statutory tax rate.

b. based on real economic profits.

c. based on the nominal profits.

d. not inflation adjusted.

Chapter 16

Taxes on Consumption and Sales

True/False Questions

1. Comprehensive consumption is measured by excluding increments in net worth from comprehensive income.

2. If two persons have equal labor earnings over their lifetimes and never receive any gifts or inheritances, then the discounted present value of income taxes that they pay will be the same despite any differences in their rates of saving.

3. A tax on comprehensive consumption will not prevent the attainment of efficiency in investment markets.

4. Under a comprehensive consumption tax, liability for payment of taxes on the amount of income saved in any year is deferred rather than eliminated.

5. Under a consumption tax, borrowing money will increase taxes that are due in the year the funds are borrowed.

6. If a flat-rate tax on comprehensive consumption yields the same revenue as a flat-rate tax on comprehensive income, the tax rate for the two taxes must be equal.

7. Substituting a comprehensive consumption tax for an equal-yield comprehensive income tax will reduce excess burden in the labor market.

8. Sales taxes in the United States generally tax all personal services.

9. The value-added tax as used in Western Europe generally exempts investment goods from taxation.

10. The value-added tax, collected through the invoice method, exempts intermediate purchases from taxation.

11. A comprehensive income tax is more favorable to the incentive to save than a comprehensive consumption tax.

12. A comprehensive consumption tax is equivalent to a comprehensive tax on labor income.

13. A comprehensive consumption tax will not prevent labor markets from attaining efficiency.

14. The retail sales tax is a major source of revenue for the federal government in the United States.

15. As used in Europe, the value-added tax typically excludes services from the tax base.

16. A consumption tax is the same as an income tax.

17. Annual comprehensive consumption is equal to annual comprehensive income if there is no annual savings.

18. A sales tax encourages saving and discourages consumption.

Multiple Choice Questions

1. A flat-rate tax on comprehensive consumption:

a. will reduce the market rate of interest.

b. will reduce net interest received by savers in any given year.

c. will not result in any difference between the gross interest rate paid by borrowers and the net interest rate received by savers.

d. causes no loss of efficiency in labor markets.

2. Assuming that a person never receives any cash gifts or bequests, a tax on comprehensive consumption is equivalent to a(n):

a. tax on capital income.

b. tax on labor income.

c. income tax.

d. wealth tax.

3. A tax on comprehensive consumption:

a. will not influence a taxpayer’s work-leisure choice.

b. will not affect the incentive to save in ways that cause losses in efficiency.

c. is likely to reduce saving.

d. will exempt consumption of personal services from taxation.

4. Substitution of an equal-yield general consumption tax for an income tax will:

a. improve efficiency in investment markets.

b. impair efficiency in the labor market.

c. increase taxes paid by those earning interest on income.

d. both (a) and (b)

e. both (b) and (c)

5. The differential incidence of substituting a tax on comprehensive consumption for a tax on comprehensive income is likely to be:

a. regressive.

b. progressive.

c. proportional.

d. uncertain.

6. Suppose two individuals earn the same salary each year over their lifetimes. One individual saves 25 percent of his income each year, while the other saves nothing. Over their lifetimes under a comprehensive income tax,

a. the discounted present value of taxes paid will be the same for both.

b. the discounted present value of taxes paid will be greater for the saver.

c. the discounted present value of taxes paid will be greater for the nonsaver.

d. the saver will pay no tax on his interest income.

7. In most states, the retail sales tax can be regarded as equivalent to a:

a. comprehensive tax on consumption.

b. comprehensive tax on income.

c. set of selective excise taxes.

d. tax on the profits of retailers.

8. A consumption-type, value-added tax:

a. will not cause losses in efficiency in labor markets.

b. will not cause losses in efficiency in investment markets.

c. both (a) and (b)

d. taxes interest income.

9. The invoice method of collecting the value-added tax:

a. requires firms to compute value added.

b. taxes a firm’s sales at a fixed rate but allows a credit for taxes paid on purchases of intermediate goods.

c. requires firms to pay a fixed rate of taxation on both sales and purchases.

d. taxes only intermediate purchases at a fixed rate.

10. Which of the following statements about taxes on consumption are true?

a. Taxes on consumption do not distort choices between current and future consumption in ways that impair efficiency.

b. Taxes on consumption have the same economic effects as taxes on income.

c. Taxes on consumption are likely to reduce saving.

d. Taxes on consumption have no effect on real wages.

11. Comprehensive consumption is:

a. equal to comprehensive income.

b. is comprehensive income plus savings.

c. is comprehensive income minus savings.

d. excludes services.

12. A direct tax on comprehensive consumption:

a. requires taxpayers to report their annual income.

b. requires taxpayers to report their annual savings.

c. taxes savings.

d. both (a) and (b)

13. Which of the following taxes is likely to be most favorable for capital accumulation?

a. a comprehensive income tax

b. a comprehensive tax on wealth

c. a comprehensive tax on consumption

d. an excise tax on gasoline

14. As administered in most states in the United States, the retail sales tax:

a. has zero excess burden.

b. distorts the choice between taxed goods and untaxed services, resulting in some efficiency loss.

c. taxes all services.

d. discourages saving.

15. The value-added tax used in the European Union:

a. generally exempts services from taxation.

b. requires all taxpayers to report value added.

c. exempts investment purchases from taxation.

d. taxes all transactions at the same low rate.

16. Nicholas Kaldor argued:

a. consumption is a better index of the ability to pay than income.

b. savings entails sacrifice and results in no increase in well-being.

c. consumption provides little personal satisfaction and should be taxed for that reason.

d. both (a) and (b)

17. An adult’s life cycle is considered to begin:

a. 18 years old.

b. 21 years old.

c. upon earning fulltime employment.

d. none of the above

18. Consumption-in-kind:

a. is exemplified by services provided and consumed in the household.

b. is the same as income-in-kind

c. is easily determined.

d. both (a) and (b)

19. What below is taxable under a consumption tax system?

a. savings

b. contributions to social security

c. contributions to retirement funds

d. a bequest at death

20. A cash-flow tax is:

a. a modified version of a consumption tax.

b. a modified version of an income tax.

c. a tax that allows some savings to be excluded from tax.

d. both (a) and (c)

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Quiz 9 Chapter 17 and 18

Foreign Direct Investment and Political Risk

17.1 Sustaining and Transferring Competitive Advantage

Multiple Choice

1) An example of economies of scale in financing include:

A) being able to access the Euroequity, Eurobond, and Eurocurrency markets.

B) being able to ship product in shiploads or carloads.

C) being able to use large-scale plant and equipment.

D) all of the above

2) Which of the following is NOT a factor of Porter's "diamond of national advantage"?

A) factor conditions

B) demand conditions

C) related and supporting industries

D) All of the above are factors of the diamond of national advantage.

3) The OLI paradigm is an attempt to create a framework to explain why MNEs choose ________ rather than some other form of international venture.

A) licensing

B) joint ventures

C) foreign direct investment

D) strategic alliances

4) The O in OLI refers to an advantage in a firm's home market that is:

A) operator independent.

B) owner-specific.

C) open-market.

D) official designation.

5) The owner-specific advantages of OLI must be:

A) firm-specific.

B) not easily copied.

C) transferable to foreign subsidiaries.

D) all of the above

6) A/An ________ would be an example of an owner-specific advantage for an MNE.

A) patent

B) economy of scale

C) economy of scope

D) all of the above

7) The L in OLI refers to an advantage in a firm's home market that is a:

A) liability in the domestic market.

B) location-specific advantage.

C) longevity in a particular market.

D) none of the above

8) A/An ________ would be an example of a location-specific advantage for an MNE.

A) patent

B) economy of scale

C) unique source of raw materials

D) possession of proprietary information

9) The I in OLI refers to an advantage in a firm's home market that is an:

A) internalization.

B) industry-specific advantage.

C) international abnormality.

D) none of the above

10) A/An ________ would be an example of an internalization advantage for an MNE.

A) patent

B) economy of scale

C) unique source of raw materials

D) possession of proprietary information

True/False

1) MNEs that are resident in liquid and unsegmented capital markets are more likely to be able to demonstrate financial strength by achieving and maintaining a global cost and availability of capital.

2) A strongly competitive home market tends to dull the competitive advantage relative to firms located in less competitive home markets.

3) The authors were unable to identify in lesser developed countries specific firms that are nearing the status of global MNE.

Essay

1) List and explain three strategic motives why firms become multinationals and give an example of each.

2) What does the OLI Paradigm propose to explain? Define each component and provide an example of each.

17.2 Deciding Where to Invest

Multiple Choice

1) Which of the following is NOT true regarding behavioral observations of firms making a decision to invest internationally?

A) MNEs initially invest in countries with a similar "national psychic."

B) Firms eventually take greater risks in terms of the national psychic of countries in which they invest.

C) Initial investments tend to be much larger than subsequent ones.

D) All of the above have been observed.

True/False

1) In practice, when expanding into other countries, firms have been observed to follow a sequential search pattern as described in the behavioral theory of the firm.

2) As a general rule, the decision about where to invest abroad for the first time is the same as the decision about where to reinvest abroad.

17.3 How to Invest Abroad: Modes of Foreign Involvement

Multiple Choice

1) Which of the following is NOT an advantage to exporting goods to reach international markets rather than entering into some form of FDI?

A) fewer political risks

B) greater agency costs

C) lower front-end investment

D) All of the above are advantages.

2) Which of the following is an advantage to exporting goods to reach international markets rather than entering into some form of FDI?

A) fewer agency costs

B) fewer direct advantages from research and development

C) a greater risk of losing markets to copycat goods producers

D) an inability to exploit R&D as effectively as if also invested abroad

3) Which of the following is NOT a form of FDI?

A) wholly-owned affiliate

B) joint venture

C) exporting

D) greenfield investment

4) With licensing the ________ is likely to be lower than with FDI because of lower profits; however, the ________ is likely to be higher due to a greater return per dollar invested.

A) IRR; NPV

B) NPV; IRR

C) cost of capital; NPV

D) IRR; cost of capital

5) Which of the following is NOT a potential disadvantage of licensing relative to FDI?

A) possible loss of quality control

B) establishment of a potential competitor in third-country markets

C) possible improvement of the technology by the local licensee, which then enters the original firm's home market

D) All of the above are potential disadvantages to licensing.

6) A ________ is a shared ownership in a foreign business.

A) licensing agreement

B) greenfield investment

C) joint venture

D) wholly-owned affiliate

7) Which of the following is NOT an advantage to a joint venture?

A) Possible loss of opportunity to enter the foreign market with FDI later.

B) The local partner understands the customs and mores of the foreign market.

C) The local partner can provide competent management at many levels.

D) May be a realistic alternative when 100% foreign ownership is not allowed.

8) Greenfield investments are typically ________ and ________ than cross-border acquisition.

A) slower; more uncertain

B) faster; of greater certainty

C) slower; of greater certainty

D) faster; more uncertain

9) All of the following may be justification for a strategic alliance EXCEPT:

A) takeover defense.

B) a joint venture to pool resources for research and development.

C) joint marketing and serving agreements.

D) All of the above are legitimate reasons for strategic alliances.

True/False

1) Licensing is a popular form of foreign investment because it does not need a sizable commitment of funds, and political risk is often minimized.

2) MNEs typically used licensing with independent firms rather than with their own foreign subsidiaries.

3) Joint ventures are a more common FDI than wholly owned subsidiaries.

4) Local partners in a foreign country and in a joint venture with an MNE are likely to make decisions that maximize the value of the subsidiary. Such actions probably will not maximize the value of the entire firm.

17.4 Political Risk

Multiple Choice

1) ________ risks are those that affect the MNE at the local or project level, but originate at the country level.

A) Country-specific

B) Firm-specific

C) Global-specific

D) none of the above

2) Which of the following is NOT an example of a country-specific risk?

A) transfer risk

B) war and ethnic strife

C) cultural and religious heritage

D) All of the above are examples of country-specific risk.

3) According to your authors, MNEs can anticipate government regulations that are discriminatory or wealth depriving from a/an ________ or ________ level view.

A) foreign; domestic

B) micro; macro

C) internal; external

D) local; global

4) ________ is the ability to exercise effective control over a foreign subsidiary within a country's legal and political environment.

A) Political risk

B) Portfolio risk

C) Interest rate risk

D) Governance risk

5) Of the following, which would NOT be considered an issue for an investment agreement prior to investing in a foreign country?

A) the basis for setting transfer prices

B) the right to export to third-country markets

C) provision for arbitration of disputes

D) All of the above could be negotiated prior to investing.

6) OPIC stands for:

A) Organization for the Prevention of Insufficient Capitalization.

B) Organization of Petroleum Importing Countries.

C) Overseas Private Investment Corporation.

D) Overseas Public Insurance Commission.

7) ________ is a type of political risk that OPIC does NOT cover.

A) Inconvertibility

B) Expropriation

C) War

D) OPIC covers all of the above.

8) ________ is the risk that the host government will take specific steps that prevent the foreign affiliate from exercising control over the firm's assets.

A) Inconvertibility

B) Expropriation

C) Business income risk

D) none of the above

9) ________ is NOT one of the three main country-specific risks as outlined by your authors.

A) Transfer risk

B) Cultural differences

C) Thin equity base

D) Protectionism

10) Of the following, which was NOT identified by the authors as a type of cultural difference that MNEs must consider when expanding to foreign countries?

A) differences in human resource norms

B) differences in religious heritage

C) differences in allowable ownership structures

D) All of the above must be considered.

11) An alternative strategy to engaging in bribery in international investments include:

A) refuse bribery outright.

B) retain local advisors to diffuse requests for bribes.

C) educate management and local employees about the firm's bribery policy.

D) all of the above

12) ________ industries are NOT typically "protected" by government policy.

A) Textiles

B) Defense

C) Agriculture

D) "Infant" industries

13) Forming regional alliances is one way to help mitigate the practice of government protectionism. Which of the following is NOT a regional trade organization formed by government treaty?

A) EU

B) NAFTA

C) NATO

D) MERCOSUR

14) Terrorism, cyber attacks, and the anti-globalization movement are each examples of ________ risks.

A) firm-specific

B) country-specific

C) institutional

D) global-specific

15) Governance risk due to goal conflict between an MNE and its host government is the main political ________ risk.

A) firm-specific

B) country-specific

C) global-specific

D) cultural-specific

16) The speed at which inventory moves through a manufacturing process is known as:

A) supply chain management.

B) working capital management.

C) inventory velocity.

D) warp speed.

17) As a result of the terrorist attacks of September 11, 2001, many firms have employed a wide range of tactics to ensure continued flow of inventory in the face of government steps to curb terrorism. Which of the following is an inventory sourcing strategy response (as opposed to an inventory management response, or a transportation response)?

A) carrying more inventory on-hand

B) minimizing cross-border exposure from suppliers

C) shifting to air cargo shipments instead of co-habitation of products and passengers on commercial air flights

D) increasing the on-hand supply of critical parts

18) Blocked funds are cash flows that:

A) come in regular intervals in standardized amounts or blocks.

B) have been restricted in transfer out of a local country.

C) come from a certain sector or region of the world.

D) none of the above

19) A ________ loan, also known as ________ is a parent-to-affiliate loan channeled through a financial intermediary such as a large commercial bank.

A) fronting; link financing

B) parallel; a back-to-back loan

C) fronting; a back-to-back loan

D) link financing; parallel loan

20) Which of the following is NOT a typical characteristic of a fronting loan made to an international subsidiary?

A) The parent makes a deposit equal to the size of the desired loan into a large commercial bank.

B) The bank lends to the subsidiary firm an amount equal to the parent deposit at a slightly higher interest rate.

C) The lending bank is located in the subsidiary's country.

D) All of the above are typical characteristics of a fronting loan.

21) Which of the following could be considered an example of forced reinvestment if the blockage of funds was expected to be temporary?

A) vertical reinvestment by an automobile manufacturer to buy parts suppliers and showrooms

B) A lumber cutting company subsequently builds a paper mill with blocked funds.

C) purchase of local money market instruments and short-term loans

D) all of the above

True/False

1) When faced with additional risk from a foreign investment, firms typically account for the additional risk by adjusting the discount rates or by adjusting cash flows.

2) A number of institutional services provide updated country risk ratings on a regular basis. This is an example of micro-risk information for MNEs using this data.

3) A country can react to the potential for blocked funds prior to making an investment, during operations, or by investing in the local country in assets than maintain their value.

4) Banks are very hesitant to engage in fronting loans because of the low probability of repayment and thus their risk exposure up to a 100% loss.

5) Many problems such as poverty, environmental concerns, and cyber attacks are beyond the capabilities of MNEs alone to correct and require government participation as well.

6) Business risk can be measured through sensitivity analysis but from only the project viewpoint.

Essay

1) What are blocked funds? List and explain two of the three methods the authors list in this chapter for dealing with blocked funds.

Chapter 18 Multinational Capital Budgeting and Cross-Border Acquisitions

18.1 Complexities of Budgeting for a Foreign Project

Multiple Choice

1) The traditional financial analysis applied to foreign or domestic projects, to determine the project's value to the firm is called:

A) cost of capital analysis.

B) capital budgeting.

C) capital structure analysis.

D) agency theory.

2) Which of the following is NOT a basic step in the capital budgeting process?

A) Identify the initial capital invested.

B) Estimate the cash flows to be derived from the project over time.

C) Identify the appropriate interest rate at which to discount future cash flows.

D) All of the above are steps in the capital budgeting process.

3) Of the following capital budgeting decision criteria, which does NOT use discounted cash flows?

A) net present value

B) internal rate of return

C) accounting rate of return

D) All of these techniques typically use discounted cash flows.

4) Which of the following is NOT a reason why capital budgeting for a foreign project is more complex than for a domestic project?

A) Parent cash flows must be distinguished from project cash flows.

B) Parent firms must specifically recognize remittance of funds due to differing rules and regulations concerning remittance of cash flows, taxes, and local norms.

C) Differing rates of inflation exist between the foreign and domestic economies.

D) All of the above add complexity to the international capital budgeting process.

5) For purposes of international capital budgeting, which of the following statements is NOT true?

A) Managers must evaluate political risk because political events can drastically reduce the value or availability of expected cash flows.

B) Parent cash flows must be distinguished from project cash flows. Each of these two types of flows contributes to a different view of value.

C) An array of nonfinancial payments can generate cash flows from subsidiaries to the parent, including payment of license fees and payments for imports from the parent.

D) All of the above are true statements.

True/False

1) When engaged in international capital budgeting, the analyst must identify the initial amount of capital invested or put at risk.

2) In international capital budgeting, the appropriate discount rate for determining the present value of the

expected cash flows is always the firm's domestic WACC.

3) For purposes of international capital budgeting, it is NOT important to distinguish between parent and total project cash flows.

4) For purposes of international capital budgeting, parent cash flows often depend on the form of financing. Thus, we cannot clearly separate cash flows from financing decisions, as we can in domestic capital budgeting.

18.2 Project Versus Parent Valuation

Multiple Choice

1) Project evaluation from the ________ viewpoint serves some useful purposes and/but should ________ the ________ viewpoint.

A) local; be subordinated to; parent's

B) local; not be subordinated to; parent's

C) parent's; be subordinated to; local

D) none of the above

2) For financial reporting purposes, U.S. firms must consolidate the earnings of any subsidiary that is over ________ owned.

A) 20%

B) 40%

C) 50%

D) 75%

3) A foreign firm that is 20% to 49% owned by a parent is called a/an:

A) subsidiary.

B) affiliate.

C) partner.

D) rival.

4) Affiliate firms are consolidated on the parent's financial statements on a ________ basis.

A) pro rated

B) 50%

C) 75%

D) 100%

True/False

1) There are no important differences between domestic and international capital budgeting methods.

2) It is important that firms adopt a common standard for the capital budgeting process for choosing among foreign and domestic projects.

3) The only proper way to estimate the NPV of a foreign project is to discount the appropriate cash flows first and then convert them to the domestic currency at the current spot rate.

4) When dealing with international capital budgeting projects, the value of the project is NOT sensitive to the firm's cost of capital.

5) For purposes of international capital budgeting, evaluation of a project from the PARENT viewpoint serves some useful purposes, but it should be subordinated to evaluation from the LOCAL's viewpoint.

6) Multinational firms should invest only if they can earn a risk-adjusted return greater than locally based competitors can earn on the same project.

Essay

1) The authors highlight a strong theoretical argument in favor of analyzing any foreign project from the viewpoint of the parent. Provide at least three reasons why the parent's viewpoint is superior to the local viewpoint and give an example of when the local viewpoint fails to maximize the value of the firm.

2) Explain how political risk and exchange rate risk increase the uncertainty of international projects for the purpose of capital budgeting.

18.3 Illustrative Case: Cemex Enters Indonesia

Multiple Choice

1) Which of the following is NOT an example of political risk?

A) Expropriation of cash flows by a foreign government.

B) The U.S. government restricts trade with a foreign country where your firm has investments.

C) The foreign government nationalizes all foreign-owned assets.

D) All of the above are examples of political risk.

2) Real option analysis allows managers to analyze all of the following EXCEPT:

A) the option to defer.

B) the option to abandon.

C) the option to alter capacity.

D) All of the above may be analyzed using real option analysis.

3) Given a current spot rate of 8.10 Norwegian krone per U.S. dollar, expected inflation rates of 6% in Norway and 3% per annum in the U.S., use the formula for relative purchasing power parity to estimate the one-year spot rate of krone per dollar.

A) 7.87 krone per dollar

B) 8.10 krone per dollar

C) 8.34 krone per dollar

D) There is not enough information to answer this question.

4) When evaluating capital budgeting projects, which of the following would NOT necessarily be an indicator of an acceptable project?

A) an NPV > $0

B) an IRR > the project's required rate of return

C) an IRR > $0

D) All of the above are correct indicators.

5) Given a current spot rate of 8.10 Norwegian krone per U.S. dollar, expected inflation rates of 3% in Norway and 6% per annum in the U.S., use the formula for relative purchasing power parity to estimate the one-year spot rate of krone per dollar.

A) 7.87 krone per dollar

B) 8.10 krone per dollar

C) 8.34 krone per dollar

D) There is not enough information to answer this question.

6) When determining a firm's weighted average cost of capital (wacc) which of the following terms is NOT necessary?

A) the firm's tax rate

B) the firm's cost of debt

C) the firm's cost of equity

D) All of the above are necessary.

7) When determining a firm's weighted average cost of capital (WACC) which of the following terms is NOT necessary?

A) the firm's weight of equity financing

B) the risk-free rate of return

C) the firm's weight of debt financing

D) All of the above are necessary to determine a firm's WACC.

Instruction 18.1:

Use the information to answer the following question(s).

The Velo Rapid Revolutions Inc., a company that produces bicycles, elliptical trainers, scooters and other wheeled non-motorized recreational equipment is considering an expansion of their product line to Europe. The expansion would require a purchase of equipment with a price of euro 1,200,000 and additional installation of euro 300,000 (assume that the installation costs cannot be expensed, but rather, must be depreciated over the life of the asset). Because this would be a new product, they will not be replacing existing equipment. The new product line is expected to increase revenues by euro 600,000 per year over current levels for the next 5 years, however; expenses will also increase by euro 200,000 per year. (Note: Assume the after-tax operating cash flows in years 1-5 are equal, and that the terminal value of the project in year 5 may change total after-tax cash flows for that year.) The equipment is multipurpose and the firm anticipates that they will sell it at the end of the five years for euro 500,000. The firm's required rate of return is 12% and they are in the 40% tax bracket. Depreciation is straight-line to a value of euro 0 over the 5-year life of the equipment, and the initial investment (at year 0) also requires an increase in NWC of euro 100,000 (to be recovered at the sale of the equipment at the end of five years). The current spot rate is $0.95/euro , and the expected inflation rate in the U.S. is 4% per year and 3% per year in Europe.

8) Refer to Instruction 18.1. What is the initial investment for the Velo Rapid Revolutions project?

A) $1,500,000

B) €1,600,000

C) $1,600,000

D) €1,500,000

9) Refer to Instruction 18.1. What are the annual after-tax cash flows for the Velo Rapid Revolutions project?

A) €400,000

B) €240,000

C) €120,000

D) €360,000

10) Refer to Instruction 18.1. What is the NPV of the European expansion if Velo Rapid Revolutions first computes the NPV in euros and then converts that figure to dollars using the current spot rate?

A) $1,520,000

B) $1,684,210

C) -$75,310

D) -$71,544

11) Refer to Instruction 18.1. In euros, what is the NPV of the Velo Rapid Revolutions expansion?

A) €1,524,690

B) $1,611,317

C) -€75,310

D) -€111,317

12) Refer to Instruction 18.1. What is the IRR of the Velo Rapid Revolutions expansion?

A) 14.4%

B) 10.3%

C) 12.0%

D) 8.6%

13) If a firm undertakes a project with ordinary cash flows and estimates that the firm has a positive NPV, then the IRR will be:

A) less than the cost of capital.

B) greater than the cost of capital.

C) greater than the cost of the project.

D) cannot be determined from this information

14) When estimating a firm's cost of equity capital using the CAPM, you need to estimate:

A) the risk-free rate of return.

B) the expected return on the market portfolio.

C) the firm's beta.

D) all of the above

15) ________ is the risk that a foreign government will place restrictions such as limiting the amount of funds that can be remitted to the parent firm, or even expropriation of cash flows earned in that country.

A) Exchange risk

B) Foreign risk

C) Political risk

D) Unnecessary risk

16) Generally speaking, a firm wants to receive cash flows from a currency that is ________ relative to their own, and pay out in currencies that are ________ relative to their home currency.

A) appreciating; depreciating

B) depreciating; depreciating

C) appreciating; appreciating

D) depreciating; appreciating

17) When assessing the additional risk that can occur from investing abroad firms may choose to account for risk via:

A) adjusting the cash flows.

B) adjusting the discount rates.

C) adjusting both cash flows and discount rates.

D) adjusting all of the above.

True/False

1) When a multinational firm invests abroad, it is common to develop two capital budgets: one from the project viewpoint, and one from the parent viewpoint.

2) When estimating a capital budget, it is common to separate cash flows into: 1) the initial investment, 2) incremental cash flows over the life of the project, and 3) a terminal value.

3) Because international capital budgeting is so difficult, time consuming, expensive, and uncertain, firms generally forego any type of additional sensitivity analysis after completing a base-case scenario.

4) A criticism of adjusting the discount rate to account for political risk is that adjusting the discount rate for political risk penalizes early cash flows too heavily while not penalizing distant cash flows enough.

18.4 Project Financing

Multiple Choice

1) Which of the following is NOT a factor critical to the success of project financing?

A) separability of the project from its investors

B) long-lived and capital intensive singular projects

C) cash flow predictability from third part commitments

D) All of the above are critical factors for project financing.

2) Which of the following is NOT a characteristic of international long-term capital project financing?

A) The projects are large in scale.

B) The projects are long in life.

C) The projects are generally high in risk.

D) The projects may be all of the above.

3) Which of the following is NOT a reason given for international mergers and acquisitions?

A) gaining access to strategic proprietary assets

B) gaining market power and dominance

C) diversifying and spreading their risks wider

D) All of the above are commonly cited reasons for international mergers and acquisitions.

4) The process of acquiring an enterprise anywhere in the world has three common elements EXCEPT:

A) identification and valuation of the target.

B) execution of the acquisition offer and purchase—the tender.

C) management of the post-acquisition transition.

D) All of the above are common elements in acquiring an enterprise anywhere in the world.

True/False

1) Project financing is the arrangement of financing for very large individual long-term capital projects.

2) Currency risk is a concern for any international merger and acquisition activity. For instance, the initial bid, if denominated in a foreign currency, creates a contingent foreign currency exposure for the bidder.

3) Currency risk is a concern for any international merger and acquisition activity. For instance, once the bidder has successfully won the acquisition, the exposure evolves from a transaction exposure to a contingent exposure.

4) The drivers of international merger and acquisitions are only MACRO in scope.

5) As opposed to greenfield investment, a cross-border acquisition is typically quicker.

#ECO 410 Week 10 Quiz – Strayer

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ECO 405 Week 10 Quiz – Strayer

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Quiz 9 Chapter 13

Unemployment And Inflation: Can We Find A Balance?

Multiple Choice Questions

1. A Person Is Considered Unemployed If The Person Is A. Seeking A Job Requiring Greater Qualifications Than The Person Possesses And No One Is Willing To Hire The Person For Such A Job B. Offered A Job For Which The Person Is Qualified But Prefers Not To Work C. Qualified For A Job, Willing To Work, But Unable To Find Work For Over 30 Days D. Out Of School During Christmas Vacation And Cannot Find Work During That Period E. All Of The Above

2. Which Of The Following People Is Considered Unemployed? A. A Truck Driver With A High School Education Who Has Been Laid Off His Job And Is Now Training To Be A Computer Programmer B. An Individual Who Is Currently Not Working Nor Actively Seeking Employment C. A Secretary Who Is Currently Not Working And Who Seeks Employment Using Secretarial Skills D. All Of The Above E. None Of The Above

3. An Auto Factory Worker Who Is Unemployed Because A Robot Now Has His Job Is A Victim Of A. Structural Unemployment B. Cyclical Unemployment C. Underemployment D. Frictional Unemployment E. Seasonal Unemployment

4. Which Of The Following Individuals Is Considered Part Of The Labor Force? A. An Unemployed Farmer B. A College Graduate Looking For His First Job C. A Retired Teacher Working As A Sales Clerk D. A Department Store Santa During December E. All Of The Above

5. When Individuals Want To Work, But Give Up Looking For A Job Because They Feel There Will Never Be One Available, They Are Considered A. Pessimistic B. Lazy C. Discouraged D. Part Of The Labor Force E. Unemployed

6. Which Of The Following Individuals Is Part Of The Labor Force? A. A 15-Year-Old Worker At A Fast Food Restaurant B. A Paid Prison Worker At The Prison Carpentry Shop C. A College Student Attending School Full-Time D. A Stay-At-Home Dad E. None Of The Above

7. The Unemployment Rate A. For Blacks Is Roughly Twice The Rate For Whites B. For Women Is Lower Than That Of Men C. For Teenagers Is Below The Rate For The Labor Force As A Whole D. Is Equal For Males And Females, Blacks And Whites, And Young And Old Workers E. Is None Of The Above

8. Technological Change In An Industry That Historically Required Specific Labor Skills Will Lead To A. Frictional Unemployment B. Structural Unemployment C. Cyclical Unemployment D. Seasonal Unemployment E. No Changes In Unemployment

9. People Who Are In The Process Of Changing Jobs Are Classified In The Category Of A. Frictional Unemployment B. Involuntary Unemployment C. Structural Unemployment D. Cyclical Unemployment E. Seasonal Unemployment

10. A College Graduate Looking For Her First Job Is Considered A. Frictionally Unemployed B. Involuntarily Unemployed C. Structurally Unemployed D. Cyclically Unemployed E. Seasonally Unemployed

11. A Farmer Who Has Lost His Farm Due To Increased Agricultural Productivity Is Considered A. Frictionally Unemployed B. Involuntarily Unemployed C. Structurally Unemployed D. Cyclically Unemployed E. Seasonally Unemployed

12. A Factory Worker Who Loses A Job Because Of A Decrease In Aggregate Demand Is A. Frictionally Unemployed B. Involuntarily Unemployed C. Structurally Unemployed D. Cyclically Unemployed E. Seasonally Unemployed

13. The Full-Employment Unemployment Rate Is A. 0 B. Inconsistent With Price Stability C. The Rate That Reflects Cyclical Unemployment D. 10% E. None Of The Above

14. Between 1960 And 2011, The Unemployment Rate Has A. Steadily Increased B. Steadily Fallen C. Been Below 6% Over The Entire Period D. Ranged From 1% To 12% E. None Of The Above

15. Unemployment Rates Tend To Rise When A. Inflation Rates Rise B. Aggregate Demand Is High C. The Economy Goes Through An Expansion D. There Is A Recession E. Interest Rates Are Low

16. A Major Cause Of Involuntary Unemployment Is A. A Wage Rate Below Equilibrium B. Not Enough Demand For Labor C. Too Much Supply Of Labor D. Laziness E. A Wage Rate Above Equilibrium

17. The Unemployment Rate Will Not Fall To Zero Because Of A. Cyclical Unemployment B. Frictional Unemployment C. Welfare D. Voluntary Unemployment E. All Of The Above

18. Which Of The Following Types Of Unemployment Is Considered Long-Term, Hardcore Unemployment? A. Cyclical B. Structural C. Frictional D. Seasonal E. None Of The Above

19. A Poorly Educated, Unskilled Teenager Currently Unemployed Is An Example Of A. Frictional Unemployment B. Cyclical Unemployment C. Structural Unemployment D. Seasonal Unemployment E. None Of The Above

20. People Who Are Unemployed Due To A Downturn In Economic Activity Are Classified In The Category Of A. Frictional Unemployment B. Structural Unemployment C. Seasonal Unemployment D. Cyclical Unemployment E. Voluntary Unemployment

21. When General Motors Lays Workers Off Because Of A Decrease In Aggregate Demand, It Causes A. Cyclical Unemployment B. Frictional Unemployment C. Seasonal Unemployment D. Structural Unemployment E. None Of The Above

22. Unemployment Below The Full Employment Rate Is A Measure Of A. Underemployment B. Structural Unemployment C. Cyclical Unemployment D. Seasonal Unemployment E. None Of The Above

23. The Highest Unemployment Rate Is Found Among A. People Between The Ages Of 16 And 19 B. Females C. Ethnic Groups D. The Elderly E. Children

24. Which Of The Following Best Describes When The Economy Is Experiencing Inflation? When A. The Price Of An Essential Good Increases Dramatically B. The Prices Of Many Goods Go Up C. There Is A Rise In The General Level Of Prices D. All Prices Remain The Same Or Increase; No Prices Fall E. The Value Of The Dollar Increases

25. Which Price Index Is Also Known As The Cost-Of-Living Index? A. Consumer Price Index B. Wholesale Price Index C. Implicit Price Deflator D. Gdp Deflator E. All Of The Above

26. If Inflation Is Not Observable In The Form Of Rising Prices, It Is Called A. Suppressed B. Repressed C. Deflation D. Dynamic E. None Of The Above

27. Price Index Numbers For A Series Of Years Show A. If Money Gdp Is Growing B. If Real Gdp Is Growing C. If All Prices Are Rising D. The Average Price Level For Each Year As A Percentage Of The Base Year E. None Of The Above

28. If The Consumer Price Index Is 100 In 2010 And Is 120 In 2012, Then The Rate Of Inflation Between 2010 And 2012 Is A. 10% B. 20% C. 15% D. 5% E. Unable To Be Calculated Without Further Information

29. The Best Description Of The Growth Of The Money Supply Since 1960 Is That It Has A. Increased Steadily B. Increased Rapidly During The 1980's C. Decreased Steadily D. Decreased Rapidly During The 1960's E. Shown Patterns Of Both Fast And Slow Growth Over The Decades

30. When Inflation Redistributes Income From One Group In The Economy To Another, It Is An Example Of Which Effect? A. Equity B. Efficiency C. Output D. Input E. None Of The Above

31. If Inflation Causes The Demand For Houses To Increase More Rapidly Than The Demand For Other Goods, The Economy Has Experienced Which Effect Of Inflation? A. Equity B. Efficiency C. Output D. Input E. None Of The Above

32. If Inflation Stimulates Production And Employment, The Economy Experiences Which Of The Following Effects Of Inflation? A. Equity B. Efficiency C. Output D. Input E. None Of The Above

33. Which Of The Following Is Most Likely Be Hurt By Inflation? A. People On Fixed Incomes B. People Whose Wages Rise Faster Than Prices C. Landholders D. Borrowers E. None Of The Above

34. Suppose A Family Spends $20,000 On A Basket Of Goods In 2011. Suppose The Same Basket Costs $22,000 In 2012. Using 2011 As The Base Year, The Price Index For 2012 Is A. 105 B. 102 C. 111 D. 110 E. None Of The Above

35. The Effect Of Inflation On Production And Employment Is Known As A. An Incomes Policy B. The Equity Effects Of Inflation C. The Efficiency Effects Of Inflation D. The Output Effects Of Inflation E. Fiscal Policy

36. Federal Income Taxes Are Levied On The Basis Of Nominally Stated Tax Brackets, And There Is A Nominal Upward Adjustment In Salaries And Wages During Inflation. Therefore, What Is Of Federal Tax Collections During Inflation? They Will A. Decrease In Both Real And Nominal Terms B. Increase In Both Real And Nominal Terms C. Increase In Real Terms D. Increase In Nominal Terms E. Stay The Same

37. Which Of The Following Statements Is Correct? Inflation A. Benefits Creditors At The Expense Of Debtors B. Increases The Purchasing Power Of The Dollar C. Increases The Real Value Of Savings D. Arbitrarily "Taxes" Fixed Income Groups E. Increases Real Wages

38. The Effects Of Inflation On The Distribution Of Income Are Called A. An Incomes Policy B. The Equity Effects Of Inflation C. The Efficiency Effects Of Inflation D. The Output Effects Of Inflation E. None Of The Above

39. The Effect That Inflation Has On The Allocation Of Resources Is Known As A. An Incomes Policy B. The Equity Effects Of Inflation C. The Efficiency Effects Of Inflation D. The Output Effects Of Inflation E. None Of The Above

40. In The Circular Flow Diagram, Economic Units Are Classified As A. Imports And Exports B. Households And Producers C. Taxpayers And Governments D. Subsidy Receivers And Taxpayers E. Producers And Sellers

41. The Circular Flow Of Economic Activity Developed In The Text Is A Model Of The A. Flow Of Goods, Resources, Payments And Expenditures Between The Sectors Of The Economy B. Influence Of Government On Business Behavior C. Influence Of Business On Consumers D. Role Of Unions And Government In The Economy E. Interaction Among Taxes, Prices, And Profits

42. Which Of The Following Statements Concerning The Circular Flow Is ? A. The Circular Flow Of Economic Activity Shows How The Overall Economy Operates B. The Circular Flow Emphasizes The Independence Of Economic Variables C. There Are Two Circular Flows Involved In The Economy D. The Circular Flow Shows That Real Income Is Determined By Physical Goods And Services Produced In The Economy E. None Of The Above

43. Aggregate Demand A. Represents The Sum Of The Demands By All Purchasers Of Goods And Services In An Economy B. Is Comprised Of The Purchases Of Goods And Services Only By Consumers C. Excludes Imports And Exports D. Assumes That Governments Do Not Purchase Goods And Services E. None Of The Above

44. The Aggregate Demand Curve Will Shift To The Right

A. When The Government Raises Taxes B. If Investors Reduce Their Purchases Of Plant And Equipment C. If Consumer Confidence Increases D. If Prices Fall E. None Of The Above

45. The Marginal Propensity To Consume Is

A. Consumption Divided By Income

B. The Change In Consumption

C. The Change In Consumption Divided By The Change In Income

D. Unaffected By Changes In Income

E. All Of The Above

46. The Marginal Propensity To Consume Plus The Marginal Propensity To Save

A. Represents What Happens As A Result Of Income Changes

B. Must Always Sum To 1

C. Must Always Sum To 0

D. A And B

E. None Of The Above

47. Investment Spending Is Sensitive To

A. Interest Rates

B. Expectations By Producers About The Return On Investment

C. The Confidence Of Investors

D. All Of The Above

E. None Of The Above

48. A Trade Deficit Will Occur In An Economy

A. When Spending Exceeds Income

B. When The Value Of Exports Exceeds The Value Of Imports

C. When The Value Of Exports Is Less Than The Value Of Imports

D. When An Economy Is Expanding

E. When An Economy Is In Recession

49. Assuming A Marginal Propensity To Consume Three-Fourths, The Spending Multiplier Is A. 1 B. 2 C. 3 D. 4 E. None Of The Above

50. Assume That The Spending Multiplier Is 3. The Government Has Decided To Purchase New Computers To Improve Productivity And Will Spend $50 Billion On The Computer Equipment. The Resulting Increase In National Income Will Be A. Zero B. $200 Billion C. $100 Billion D. $150 Billion E. It Cannot Be Determined

51. The Determinants Of Aggregate Supply Are A. Resources, Prices, And Technology B. Interest Rates C. Consumer Wealth D. Real Income E. All Of The Above

52. Ameeta Spends $400 When Her Income Is $500. When She Receives A $100 Raise (Bringing Her Total Income To $600), She Spends $480. Her Mpc Is A. 0.4 B. 0.5 C. 0.6 D. 0.8 E. 1.0

53. The Psychological Law Of Consumption Tells Us The Marginal Propensity To Consume Will Be A. Less Than 0 B. Greater Than 0 But Less Than 1 C. Equal To 1 D. Greater Than 1 But Less Than 10 E. Greater Than 10

54. If The Mpc Is 0.8, The Spending Multiplier Equals A. 0.2 B. 0.8 C. 1.25 D. 5.0 E. 8.0

55. If The Mps Is .4, The Spending Multiplier Equals A. 0.4 B. 0.6 C. 1.67 D. 2.5 E. 4.0

56. Which Of The Following Is A Component Of Aggregate Demand? A. Consumption B. Investment C. Government Spending D. Exports And Imports E. All Of The Above

Questions 57 - 62 Refer To The Graph Below.

57. Given Short Run Aggregate Supply S0, What Level Of Aggregate Demand Is Necessary For The Economy To Reach Full Employment? A. Lower Than D1 B. D0 C. D1 D. D2 E. Higher Than D2

58. Given D0 And S0, An Increase In Aggregate Demand Would Lead To Which Of The Following? A. Higher Unemployment B. Lower Unemployment C. Inflation D. Deflation E. Recession

59. Given S1 And D1, Which Of The Following Changes Reduces Unemployment? A Shift To A. D0 B. D2 C. S0 D. All Of The Above E. None Of The Above

60. Which Of The Following Would Cause A Shift From D1 To D2? A. An Increase In Investment B. A Decrease In Consumption C. An Increase In Imports D. An Increase In Saving E. All Of The Above

61. Which Of The Following Would Cause A Shift From S1 To S0? A. A Decrease In Resource Prices B. An Decrease In Unemployment C. An Increase In The Price Of Labor D. An Increase In Consumption E. All Of The Above

62. Demand-Pull Inflation Is Illustrated By A Movement From A. S0 To S1 B. S1 To S0 C. D0 To D2 D. D1 To D0 E. Q1 To Q0

63. If The Economy Is Initially At Full Employment, An Increase In Aggregate Demand Will Result In A. Demand-Pull Inflation B. Profit-Push Inflation C. Cost-Push Inflation D. Unemployment E. Underemployment

64. To Expand The Level Of Economic Activity, It Is Necessary That A. Total Leakages Exceed Total Injections B. Government Expenditures Exceed Tax Collections C. Total Injections Exceed Total Leakages D. Imports Exceed Exports E. (C) And (D) Above

65. Leakages In The Circular Flow Consist Of A. Savings, Taxes, And Exports B. Savings, Investment, And Exports C. Government Spending, Investment, And Exports D. Savings, Taxes, And Imports E. Investment, Taxes, And Imports

66. Injections In The Circular Flow Consist Of A. Savings, Exports, And Investments B. Savings, Exports, And Taxes C. Government Spending, Savings, And Exports D. Government Spending, Investment, And Exports E. None Of The Above

67. Aggregate Supply Can Be Increased By A. Reduced Incentives To Save

B. Higher Taxes

C. Increases In Government Spending

D. Policies To Induce More Saving

E. None Of The Above

68. The Phillips Curve Depicts The Relationship Between A. Output And Inflation B. Savings And Investment C. Unemployment And Inflation D. Imports And Exports E. None Of The Above

69. Economists In The 1960s Believed That The Phillips Curve Relationship Would A. Allow Governments To End Inflation B. Provide Governments A Means To Control Recessions C. Discourage Imports D. Provide Policies That Would Trade Off Unemployment For Inflation E. None Of The Above

70. Economic Policy Makers In The 1960s Held That Governments Could A. Engage In Expansionary And Contractionary Policies To Manage The Economy B. Spend Their Way Out Of Business Cycles C. Eliminate Unemployment D. Choose How Much To Produce E. None Of The Above

71. After The Events Of The 1970s, Economists Learned That A. Attempts To Trade Off Unemployment And Inflation Would Only Work For A Short Period Of Time B. Shocks To The Aggregate Supply Could Alter The Relationships Between Unemployment And Inflation C. The Phillips Curve Relationship Was Not Stable D. The Phillips Curve Shifted Over Time E. All Of The Above

72. By How Much Must Investment Spending Increase To Increase Output By $500 If The Mpc Is 0.8? A. $100 B. $300 C. $400 D. $500 E. More Than $500

73. A Useful Measure Of The Size Of The Workforce, That Is, The Number Of Individuals Who Are Willing And Able To Work, Is A. The Current Population Survey B. The Unemployment Rate C. The Rate Of Job Growth D. The Labor Force Participation Rate E. There Are No Useful Measures Of This Information, Due To The Difficulties Of Gathering The Sample

74. In An Economy Like That Of The Us, Due To A Variety Of Institutional And Social Factors, Wages Tend To Be A. Very Flexible B. Flexible During Recessions C. Highly Rigid D. Affected Only By Congressional Legislation E. Sticky

75. Which Of The Following Factors In An Economy Contribute To “Sticky” Wages? A. Flexible Working Conditions B. Competitive Labor Markets C. Collective Bargaining Agreements D. Highly Mobile Capital Equipment E. Investment Flexibility

True / False Questions

76. Unemployment Affects Both The Current And Future Production Of Goods And Services.

77. If Leakages Exceed Injections, Unemployment Will Result.

78. Involuntary Unemployment Occurs When Wage Rates Are Too Low, I.E., Below Competitive Levels.

79. Cyclical Unemployment Is Due Primarily To A Decline In Aggregate Supply.

80. Structural Unemployment Results From People Changing Jobs.

81. Frictional Unemployment Refers To Persons Who Are Unemployed Because The Economy Is In A Recession.

82. As An Economy Approaches Full Employment, Real Output Declines.

83. Frictional Unemployment Is A Long-Run Event For Particular Individuals.

84. The Unemployment Rate Is The Same For All Demographic Groups.

85. Full Employment Means That Everyone In The Labor Force Has A Job.

86. An Equilibrium Level Of National Income Implies The Economy Is Operating At Full Employment.

87. Frictional Unemployment Is Involuntary.

88. Structural Unemployment Results From The Economy Experiencing A Recession.

89. Cyclical Unemployment Occurs Because Workers Have No Marketable Job Skills.

90. A Certain Amount Of Frictional And Structural Unemployment Occurs Even At Full Employment.

91. Frictional Unemployment Can Be Reduced By Education And Training.

92. An Economy Reaches Full Employment When There Is No Cyclical Unemployment.

93. Full Employment May Be Reached Even Though There Is Frictional And Structural Unemployment.

94. Structural Unemployment Is A Long Run Event For Particular Individuals.

95. Frictional Unemployment Could Be Reduced By Decreasing The Minimum Wage.

96. All Unemployed Workers Are Unemployed For The Same Reason.

97. Cyclical Unemployment Is Involuntary.

98. When Frictional Unemployment Exists, Labor Services Are Voluntarily Unemployed.

99. As A Group, Women Suffer From The Highest Unemployment Rate.

100. The Lowest Unemployment Rate Is Found For Those Between The Ages Of 16 And 19.

101. Economic Growth Or Improved Technology Would Be Shown On An Aggregate Demand - Aggregate Supply Diagram As An Increase In Ad, As Remaining Constant.

102. An Increase In Government Purchases Financed By An Equal Increase In Tax Collections Will Increase National Income.

103. An Increase In The Marginal Propensity To Consume Will Increase The Size Of The Multiplier.

104. The Marginal Propensity To Consume Is Usually Greater Than One.

105. An Increase In Trade Deficit Will Increase Unemployment In The U.S.

106. An Increase In The Federal Budget Deficit Will Increase Unemployment.

107. An Increase In Imports Would Expand The Level Of Employment.

108. The Ad-As Relationship Is Not Affected By Circular Flow Relationships.

109. Inflation Means That Prices Are Too High.

110. A Price Index Shows The Absolute Changes In Price That Occur Over Time In A List Of Different Products And Services.

111. If The Economy Is Operating At A Less-Than-Full Employment Level, An Increase In Aggregate Demand May Result In An Increase In The Price Level As Well As An Increase In The Level Of Employment.

112. Inflation May Affect The Distribution Of Income In The Economy And May Increase National Output.

113. Inflation Is Not Equitable Because It Arbitrarily Changes The Pattern Of Income Distribution.

114. The Consumer Price Index Is A Cost-Of-Living Index.

115. Demand-Pull Inflation Ends Once Full Employment Is Reached.

116. During Inflation, Some Prices May Be Rising And Some May Be Falling.

117. The Effects Of Inflation On Resource Allocation Are The Equity Effects Of Inflation.

118. Inflation May Have A Stimulating Effect On Production And Employment.

119. The Labor Force Participation Rate Has Been Steadily Increasing In Recent Years.

120. Unemployment Rates Since 2007 Have Increased Due To Rising Structural Unemployment.

121. Since 1960, Inflation Rates Were Highest During The 1970s.

122. When A Phillips Curve Is Drawn, It Shows An Inverse Relationship Between Inflation And Unemployment Rates.

123. The Phillips Curve Is Another Name For A Production Possibilities Curve.

124. The Phillips Curve Has Displayed A Stable Relationship Between Inflation And Unemployment Since The 1960s.

125. Expansionary And Contractionary Policies Have Not Proved To Be Effective Tools To Control Unemployment And Inflation In The American Economy.

126. The Oil Embargo During The Early 1970s Showed How Stable The Relationship Is Between Unemployment And Inflation Rates.

127. Shifts In The Aggregate Supply Function Can Cause Shifts In The Phillips Curve.

128. The Relationship Shown By The Phillips Curve, Which Implies A Tradeoff Between Inflation And Unemployment Rates, Is A Long-Run Phenomenon.

#ECO 405 Week 10 Quiz – Strayer

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ECO 305 Week 10 Quiz – Strayer

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Quiz 9 Chapter 14 and 15

EXCHANGE-RATE ADJUSTMENTS AND THE BALANCE OF PAYMENTS

MULTIPLE CHOICE

1. According to the absorption approach, the economic circumstances that best warrant a currency devaluation is where the domestic economy faces:

a. Unemployment coupled with a payments deficit

b. Unemployment coupled with a payments surplus

c. Full employment coupled with a payments deficit

d. Full employment coupled with a payments surplus

2. According to the J-curve effect, when the exchange value of a country's currency appreciates, the country's trade balance:

a. First moves toward deficit, then later toward surplus

b. First moves toward surplus, then later toward deficit

c. Moves into deficit and stays there

d. Moves into surplus and stays there

3. Assume that Brazil has a constant money supply and that it devalues its currency. The monetary approach to devaluation reasons that one of the following tends to occur for Brazil:

a. Domestic prices rise--purchasing power of money falls--consumption falls

b. Domestic prices rise--purchasing power of money rises--consumption rises

c. Domestic prices fall--purchasing power of money rises--consumption falls

d. Domestic prices fall--purchasing power of money rises--consumption rises

4. According to the Marshall-Lerner approach, a currency depreciation will best lead to an improvement on the home country's trade balance when the:

a. Home demand for imports is inelastic--foreign export demand is inelastic

b. Home demand for imports is inelastic--foreign export demand is elastic

c. Home demand for imports is elastic--foreign export demand is inelastic

d. Home demand for imports is elastic--foreign export demand is elastic

5. Assume an economy operates at full employment and faces a trade deficit. According to the absorption approach, currency devaluation will improve the trade balance if domestic:

a. Interest rates rise, thus encouraging investment spending

b. Income rises, thus stimulating consumption

c. Output falls to a lower level

d. Spending is cut, thus freeing resources to produce exports

6. An appreciation of the U.S. dollar tends to:

a. Discourage foreigners from making investments in the United States

b. Discourage Americans from purchasing foreign goods and services

c. Increase the number of dollars that could be bought with foreign currencies

d. Discourage Americans from traveling overseas

7. The Marshall-Lerner condition deals with the impact of currency depreciation on:

a. Domestic income

b. Domestic absorption

c. Purchasing power of money balances

d. Relative prices

8. According to the J-curve concept, which of the following is false--that the effects of a currency depreciation on the balance of payments are:

a. Transmitted primarily via the income adjusted mechanism

b. Likely to be adverse or negative in the short run

c. In the long run positive, given favorable elasticity conditions

d. Influenced by offsetting devaluations made by other countries

9. Which of the following is true for the J-curve effect? It:

a. Applies to the interest rate effects of currency depreciation

b. Applies to the income effects of currency depreciation

c. Suggests that demand tends to be most elastic over the long run

d. Suggests that demand tends to be least elastic over the long run

10. American citizens planning a vacation abroad would welcome:

a. Appreciation of the dollar

b. Depreciation of the dollar

c. Higher wages extended to foreign workers

d. Lower wages extended to foreign workers

11. Assume the Canadian demand elasticity for imports equals 0.2, while the foreign demand elasticity for Canadian exports equals 0.3. Responding to a trade deficit, suppose the Canadian dollar depreciates by 20 percent. For Canada, the depreciation would lead to a:

a. Worsening trade balance--a larger deficit

b. Improving trade balance--a smaller deficit

c. Unchanged trade balance

d. None of the above

12. Assume the Canadian demand elasticity for imports equals 1.2, while the foreign demand elasticity for Canadian exports equals 1.8. Responding to a trade deficit, suppose the Canadian dollar depreciates by 10 percent. For Canada, the depreciation would lead to a(n):

a. Worsening trade balance--a larger deficit

b. Improving trade balance--a smaller deficit

c. Unchanged trade balance

d. None of the above

13. From 1985 to 1988 the U.S. dollar depreciated over 50 percent against the yen, yet Japanese export prices to Americans did not come down the full extent of the dollar depreciation. This is best explained by:

a. Partial currency pass-through

b. Complete currency pass-through

c. Partial J-curve effect

d. Complete J-curve effect

14. Because of the J-curve effect and partial currency pass-through, a depreciation of the domestic currency tends to increase the size of a:

a. Trade surplus in the short run

b. Trade surplus in the long run

c. Trade deficit in the short run

d. Trade deficit in the long run

15. According to the Marshall-Lerner condition, a currency depreciation is least likely to lead to an improvement in the home country's trade balance when:

a. Home demand for imports is inelastic and foreign export demand is inelastic

b. Home demand for imports is elastic and foreign export demand is inelastic

c. Home demand for imports is inelastic and foreign export demand is elastic

d. Home demand for imports is elastic and foreign export demand is elastic

16. If foreign manufacturers cut manufacturing costs and profit margins in response to a depreciation in the U.S. dollar, the effect of these actions is to:

a. Shorten the amount of time in which the depreciation leads to a smaller trade deficit

b. Shorten the amount of time in which the depreciation leads to a smaller trade surplus

c. Lengthen the amount of time in which the depreciation leads to a smaller trade deficit

d. Lengthen the amount of time in which the depreciation leads to a smaller trade surplus

17. The shift in focus toward imperfectly competitive markets in domestic and international trade questions the concept of:

a. Official exchange rates

b. Complete currency pass-through

c. Exchange arbitrage

d. Trade-adjustment assistance

18. The extent to which a change in the exchange rate leads to changes in import and export prices is known as:

a. The J-curve effect

b. The Marshall-Lerner effect

c. The absorption effect

d. Pass-through effect

19. Complete currency pass-through arises when a 10 percent depreciation in the value of the dollar causes U.S.:

a. Import prices to fall by 10 percent

b. Import prices to rise by 10 percent

c. Export prices to rise by 10 percent

d. Export prices to rise by 20 percent

20. Which approach predicts that if an economy operates at full employment and faces a trade deficit, currency devaluation (depreciation) will improve the trade balance only if domestic spending is cut, thus freeing resources to produce exports?

a. The absorption approach

b. The Marshall-Lerner approach

c. The monetary approach

d. The elasticities approach

21. Which approach analyzes a nation's balance of payments in terms of money demand and money supply?

a. Expenditures approach

b. Absorption approach

c. Elasticities approach

d. Monetary approach

22. The ____ effect suggests that following a currency depreciation a country's trade balance worsens for a period before it improves.

a. Marshall-Lerner

b. J-curve

c. Absorption

d. Pass-through

23. The J-curve effect implies that following a currency appreciation, a country's trade balance:

a. Worsens before it improves

b. Continually worsens

c. Improves before it worsens

d. Continually improves

24. Which analysis considers the extent by which foreign and domestic prices adjust to a change in the exchange rate in the short run:

a. Monetary analysis

b. Absorption analysis

c. Expenditures analysis

d. Pass-through analysis

25. The longer the currency pass-through period, the ____ required for currency depreciation to have the intended effect on the trade balance.

a. Shorter the time period

b. Longer the time period

c. Larger the spending cut

d. Smaller the spending cut

26. The shorter the currency pass-through period, the ____ required for currency depreciation to have the intended effect on the trade balance.

a. Shorter the time period

b. Longer the time period

c. Larger the spending cut

d. Smaller the spending cut

27. Assume that Ford Motor Company obtains all of its inputs in the United States and all of its costs are denominated in dollars. A depreciation of the dollar's exchange value:

a. Enhances its international competitiveness

b. Worsens its international competitiveness

c. Does not affect its international competitiveness

d. None of the above

28. Assume that Ford Motor Company obtains all of its inputs in the United States and all of its costs are denominated in dollars. An appreciation of the dollar's exchange value:

a. Enhances its international competitiveness

b. Worsens its international competitiveness

c. Does not affect its international competitiveness

d. None of the above

29. Assume that Ford Motor Company obtains some of its inputs in Mexico (foreign sourcing). As the peso becomes a larger portion of Ford's total costs, a dollar appreciation leads to a ____ in the peso cost of a Ford vehicle and a ____ in the dollar cost of a Ford compared to the cost changes that occur when all input costs are dollar denominated.

a. Smaller increase, larger decrease

b. Smaller increase, smaller decrease

c. Larger increase, smaller decrease

d. Larger increase, larger decrease

30. Assume that Ford Motor Company obtains some of its inputs in Mexico (foreign sourcing). As the peso becomes a larger portion of Ford's total costs, a dollar depreciation leads to a (an) ____ in the peso cost of a Ford vehicle and a (an) ____ in the dollar cost of a Ford compared to the cost changes that occur when all input costs are dollar denominated.

a. Decrease, increase

b. Increase, decrease

c. Decrease, decrease

d. Increase, increase

31. Given favorable elasticity conditions, an appreciation of the yen results in

a. A smaller Japanese trade deficit

b. A larger Japanese trade surplus

c. Decreased prices for imported products for Japan

d. Increased prices for imported products for Japan

32. Given favorable elasticity conditions, a depreciation of the lira tends to result in:

a. Lower prices of imported products for Italy

b. Higher prices of imported products for Italy

c. A larger trade deficit for Italy

d. A smaller trade surplus for Italy

33. According to the J-curve effect, a depreciation of the pound's exchange value has:

a. No impact on a U.K. balance-of-trade deficit in the short run

b. No impact on a U.K. balance-of-trade deficit in the long run

c. An immediate negative effect on the U.K. balance of trade

d. An immediate positive effect on the U.K. balance of trade

34. According to the J-curve effect, an appreciation of the yens exchange value has:

a. No impact on the Japanese trade balance in the short run

b. No impact on the Japanese trade balance in the long run

c. An immediate negative effect on the Japanese trade balance

d. An immediate positive effect on the Japanese trade balance

35. According to the Marshall-Lerner condition, currency depreciation has no effect on a country's trade balance if the elasticity of demand for its exports plus the elasticity of demand for its imports equals:

a. 0.1

b. 0.5

c. 1.0

d. 2.0

36. According to the Marshall-Lerner condition, currency depreciation would have a positive effect on a country's trade balance if the elasticity of demand for its exports plus the elasticity of demand for its imports equals:

a. 0.2

b. 0.5

c. 1.0

d. 2.0

37. According to the Marshall-Lerner condition, currency depreciation would have a negative effect on a country's trade balance if the elasticity of demand for its exports plus the elasticity of demand for its imports equals:

a. 0.5

b. 1.0

c. 1.5

d. 2.0

38. The absorption approach suggests that one of the following causes a trade deficit to decrease following currency depreciation:

a. A decline in domestic interest rates

b. A rise in domestic imports

c. A rise in government spending

d. A decline in domestic absorption

39. The absorption approach to currency depreciation is represented by one of the following equations:

a. B = Y - A

b. Y = C + I + G + (X-M)

c. I + X = S + M

d. S - I = X - M

40. The time period that it takes for companies to form new business connections and place new orders in response to currency depreciation is known as the:

a. Recognition lag

b. Replacement lag

c. Decision lag

d. Production lag

41. The time period that it takes for companies to increase output of commodities for which demand has increased due to currency depreciation is known as the:

a. Recognition lag

b. Decision lag

c. Replacement lag

d. Production lag

42. According to the J-curve effect, currency appreciation:

a. Decreases a trade surplus

b. Increases a trade surplus

c. Decreases a trade surplus before increasing a trade surplus

d. Increases a trade surplus before decreasing a trade surplus

43. According to the J-curve effect, currency depreciation:

a. Decreases a trade deficit

b. Increases a trade deficit

c. Decreases a trade deficit before increasing a trade deficit

d. Increases a trade deficit before decreasing a trade deficit

44. �� The analysis of the effects of currency depreciation include all of the following except the:

a. Absorption approach

b. Elasticity approach

c. Fiscal approach

d. Monetary approach

45. According to the absorption approach (B = Y - A), currency devaluation improves a nation's trade balance if:

a. Y increases and A increases

b. Y decreases and A decreases

c. Y increases and/or A decreases

d. Y decreases and/or A increases

46. The effect of currency depreciation on the purchasing power of money balances and the resulting impact on domestic expenditures is emphasized by the:

a. Absorption approach

b. Monetary approach

c. Fiscal approach

d. Elasticity approach

47. The Marshall-Lerner condition suggests that depreciation of the franc leads to a worsening of France's trade account if the:

a. Elasticity of demand for French exports is 0.4 while the French elasticity of demand for imports is 0.2

b. Elasticity of demand for French exports is 0.6 while the French elasticity of demand for imports is 0.4

c. Elasticity of demand for French exports is 0.5 while the French elasticity of demand for imports is 0.7

d. Elasticity of demand for French exports is 0.6 while the French elasticity of demand for imports is 0.7

Table 14.1. Hypothetical Costs of Producing an Automobile for Toyota Inc. of Japan

Cost Component Yen Cost Dollar-Equivalent Cost

Labor 1,200,000

Materials

Steel 800,000

Other materials 1,600,000

Total material costs 2,400,000

Other costs 400,000

Total costs 4,000,000

48. Refer to Table 14.1. Assuming that Toyota obtains all inputs from Japanese suppliers and that the yen/dollar exchange rate is 200 yen per dollar. The dollar-equivalent cost of a Toyota automobile equals:

a. $5000

b. $10,000

c. $15,000

d. $20,000

49. Refer to Table 14.1. Assume that Toyota Inc. obtains all of its automobile inputs from Japanese suppliers. If the yen's exchange value appreciates from 200 yen = $1 to 100 yen = $1, the yen cost of a Toyota automobile equals:

a. 4,000,000 yen

b. 6,000,000 yen

c. 8,000,000 yen

d. 10,000,000 yen

50. Refer to Table 14.1. Assume that Toyota Inc. obtains all of its automobile inputs from Japanese suppliers. If the yen's exchange value appreciates from 200 yen = $1 to 100 yen = $1, the dollar-equivalent cost of a Toyota automobile equals:

a. $10,000

b. $20,000

c. $30,000

d. $40,000

51. Refer to Table 14.1. Assume that Toyota Inc. imports steel from U.S. suppliers, whose costs are denominated in dollars, while all other inputs are obtained from Japanese suppliers whose costs are denominated in yen. If the yen's exchange value appreciates from 200 yen = $1 to 100 yen = $1, the yen cost of a Toyota automobile equals:

a. 2,400,000 yen

b. 3,000,000 yen

c. 3,600,000 yen

d. 4,200,000 yen

52. Refer to Table 14.1. Assume that Toyota Inc. imports steel from U.S. suppliers, whose costs are denominated in dollars, while all other inputs are obtained from Japanese suppliers whose costs are denominated in yen. If the yen's exchange value appreciates from 200 yen = $1 to 100 yen = $1, the dollar-equivalent cost of a Toyota automobile equals:

a. $24,000

b. $30,000

c. $36,000

d. $42,000

53. The lag that occurs between changes in relative prices and the quantities of goods traded is the

a. Recognition lag

b. Recovery lag

c. Implementation lag

d. Legislative lag

54. The Marshall-Lerner condition illustrates

a. The price effects of a nation's currency depreciation on its trade deficit

b. The price effects of a nation's currency appreciation on its trade deficit

c. The effect of fixed exchange rate systems on the trade balance

d. None of the above

55. The absorption approach to currency depreciation focuses on the

a. Purchasing power of money

b. Relative price effects

c. Income effects

d. Price elasticity of demand

56. Reversing balance of payments disequilibria may came at the expense of

a. Economic relations with our trading partners

b. Domestic recession

c. Price inflation

d. All of the above

TRUE/FALSE

1. Currency devaluation is initiated by governmental policy rather than the free-market forces of supply and demand.

2. If a currency's exchange rate is overvalued, a government would likely initiate actions to revalue the currency.

3. If a currency's exchange rate is undervalued, a government would likely initiate actions to devalue the currency.

4. The purpose of currency devaluation is to cause a depreciation in a currency's exchange value.

5. The purpose of currency revaluation is to cause an appreciation in a currency's exchange value.

6. Assume that General Motors employs labor and materials, whose costs are denominated in dollars, in the production of automobiles. If the dollar's exchange value depreciates by 10 percent against the yen, the yen-denominated cost of a GM vehicle rises by 10 percent.

7. Assume that General Motors employs labor and materials, whose costs are denominated in dollars, in the production of automobiles. If the dollar's exchange value appreciates by 10 percent against the yen, the yen-denominated cost of a GM vehicle falls by 10 percent.

8. Appreciation of the dollar's exchange value worsens the international competitiveness of Boeing Inc., whereas a dollar depreciation improves its international competitiveness.

9. When manufacturing automobiles, suppose that General Motors uses labor and materials whose costs are denominated in dollars and pounds respectively. If the dollar's exchange value appreciates by 15 percent against the pound, the pound-denominated cost of a GM vehicle rises by 15 percent.

10. According to the absorption approach, currency devaluation best improves a country's trade balance when its economy is at maximum capacity.

11. When manufacturing computer software, suppose that Microsoft Inc. uses labor and materials whose costs are denominated in dollars and francs respectively. If the dollar's exchange value depreciates 10 percent against the franc, the franc-denominated cost of the firm's software falls by 10 percent.

12. When producing jetliners, suppose that Boeing employs labor and materials whose costs are denominated in dollars and marks respectively. If the dollar's exchange value depreciates 20 percent against the mark, the mark-denominated cost of a Boeing jetliner falls by an amount less than 20 percent.

13. As yen-denominated costs become a larger portion of Ford's total costs, a dollar appreciation results in a smaller increase in the yen-denominated cost of a Ford auto than occurs when all input costs are dollar denominated.

14. A depreciation of the dollar results in Whirlpool dishwashers becoming less competitive in Europe.

15. By decreasing the relative production costs of U.S. companies, a dollar appreciation tends to lower U.S. export prices in foreign-currency terms, which induces an increase in the amount of U.S. goods exported abroad.

16. By increasing relative U.S. production costs, a dollar depreciation tends to increase U.S. export prices in foreign-currency terms, which results in an increase in the quantity of U.S. goods exported abroad.

17. Suppose the exchange value of the franc rises against the currencies of Switzerland's major trading partners. To protect themselves from decreases in foreign sales caused by the mark's appreciation, Swiss companies could shift production to countries whose currencies had depreciated against the mark.

18. In the early 1990s, the yen sharply appreciated against the dollar. To protect themselves from export reductions caused by the yen's appreciation, Japanese auto companies transferred increasing amounts of auto production from the United States to Japan.

19. The elasticity approach to currency depreciation emphasizes the income effects of depreciation.

20. The elasticity approach to currency depreciation emphasizes the relative price effects of depreciation and suggests that depreciation best improves a country's trade balance when the elasticities of demand for the country's imports and exports are high.

21. The absorption approach to currency devaluation deals with the income effects of devaluation while the elasticity approach to devaluation deals with the price effects of devaluation.

22. According to the absorption approach, an increase in domestic expenditures must occur for currency devaluation to promote balance of trade equilibrium.

23. The monetary approach emphasizes the effects of currency depreciation on the purchasing power of money, and the resulting impact on domestic expenditure levels.

24. According to the Marshall-Lerner condition, currency depreciation will worsen a country's balance of trade if the country's elasticity of demand for imports plus the foreign demand elasticity for the country's exports exceeds 1.0.

25. The Marshall-Lerner condition asserts that if the sum of a country's elasticity of demand for imports and the foreign elasticity of demand for the country's exports equals 1.0, a depreciation of the country's currency will not affect its balance of trade.

26. Suppose the U.S. price elasticity of demand for imports equals 0.4 and the foreign demand elasticity for the U.S. exports equals 0.2. According to the Marshall-Lerner condition, a depreciation of the dollar's exchange value will improve the U.S. balance of trade.

27. The Marshall-Lerner condition suggests that if the sum of a country's elasticity of demand for imports and the foreign elasticity of demand for the country's exports exceeds 1.0, an appreciation of the country's exchange rate will worsen its balance of trade.

28. Suppose the U.S. price elasticity of demand for imports equals 1.2 and the foreign elasticity of demand for U.S. exports equals 1.5. According to the Marshall-Lerner condition, an appreciation of the dollar's exchange value would worsen the U.S. balance of trade.

29. Empirical research suggests that most countries' price elasticities of demand for imports and exports are very inelastic, suggesting that currency depreciation would result in a worsening of a country's balance of trade.

30. The J-curve effect implies that in the short run a currency depreciation will result in a balance of trade surplus for the home country. As time passes, however, the home country's balance of trade will move toward deficit.

31. Suppose the dollar appreciates 10 percent against the Swiss franc. According to the J-curve effect, the U.S. balance of trade will initially worsen, but then improve as time passes.

32. The J-curve effect implies that the price elasticity of demand for imports and exports is more elastic in the short run than in the long run.

33. The extent to which changing currency values result in changing prices of imports and exports is known as the J-curve effect.

34. Complete currency pass through suggests that if the dollar's exchange value depreciates by 10 percent, imports will become 10 percent more expensive to Americans while U.S. exports will become 10 percent cheaper to foreigners.

35. Partial currency pass-through implies that if the dollar's exchange value appreciates by 10 percent, imports would become, say, 6 percent more expensive to Americans while U.S. exports would become, say, 8 percent cheaper to foreigners.

36. Suppose the U.S. economy is operating at full capacity and the dollar's exchange value depreciates. According to the absorption approach, the United States would have to accept reductions in domestic spending if the U.S. trade balance is to improve as a result of the depreciation.

SHORT ANSWER

1. How do demand elasticities influence a country's trade position when exchange rates change?

2. How is the absorption approach used for analyzing the effects of currency devaluation?

ESSAY

1. What is a pass-through relationship?

2. How do movements in exchange rates affect domestic costs, in the presence of foreign sourcing?

CHAPTER 15—EXCHANGE-RATE SYSTEMS AND CURRENCY CRISES

MULTIPLE CHOICE

1. The exchange-rate system that best characterizes the present international monetary arrangement used by industrialized countries is:

a. Freely fluctuating exchange rates

b. Adjustable pegged exchange rates

c. Managed floating exchange rates

d. Pegged or fixed exchange rates

2. Which exchange-rate mechanism is intended to insulate the balance of payments from short-term capital movements while providing exchange rate stability for commercial transactions?

a. Dual exchange rates

b. Managed floating exchange rates

c. Adjustable pegged exchange rates

d. Crawling pegged exchange rates

3. Which exchange-rate mechanism calls for frequent redefining of the par value by small amounts to remove a payments disequilibrium?

a. Dual exchange rates

b. Adjustable pegged exchange rates

c. Managed floating exchange rates

d. Crawling pegged exchange rates

4. Under managed floating exchange rates, if the rate of inflation in the United States is less than the rate of inflation of its trading partners, the dollar will likely:

a. Appreciate against foreign currencies

b. Depreciate against foreign currencies

c. Be officially revalued by the government

d. Be officially devalued by the government

5. Under adjustable pegged exchange rates, if the rate of inflation in the United States exceeds the rate of inflation of its trading partners:

a. U.S. exports tend to rise and imports tend to fall

b. U.S. imports tend to rise and exports tend to fall

c. U.S. foreign exchange reserves tend to rise

d. U.S. foreign exchange reserves remain constant

6. Under a pegged exchange-rate system, which does not explain why a country would have a balance-of-payments deficit?

a. Very high rates of inflation occur domestically

b. Foreigners discriminate against domestic products

c. Technological advance is superior abroad

d. The domestic currency is undervalued relative to other currencies

7. Which exchange-rate system does not require monetary reserves for official exchange-rate intervention?

a. Floating exchange rates

b. Pegged exchange rates

c. Managed floating exchange rates

d. Dual exchange rates

8. A primary objective of dual exchange rates is to allow a country the ability to insulate its balance of payments from net:

a. Current account transactions

b. Unilateral transfers

c. Merchandise trade transactions

d. Capital account transactions

9. During the 1970s, the European Union, in its quest for monetary union, adopted what came to be referred to as the "Community Snake." This device was a:

a. Adjustable pegged exchange rate system

b. Dual exchange rate system

c. Jointly floating exchange rate system

d. Freely floating exchange rate system

10. Under the historic adjustable pegged exchange-rate system, member countries were permitted to correct persistent and sizable payment deficits (i.e., fundamental disequilibrium) by:

a. Officially revaluing their currencies

b. Officially devaluing their currencies

c. Allowing their currencies to depreciate in the free market

d. Allowing their currencies to appreciate in the free market

11. Which exchange-rate system involves a "leaning against the wind" strategy in which short-term fluctuations in exchange rates are reduced without adhering to any particular exchange rate over the long run?

a. Pegged or fixed exchange rates

b. Adjustable pegged exchange rates

c. Managed floating exchange rates

d. Freely floating exchange rates

12. In 1973, the reform of the international monetary system resulted in the change from:

a. Adjustable pegged rates to managed floating rates

b. Managed floating rates to adjustable pegged rates

c. Crawling pegged rates to freely floating rates

d. Freely floating rates to crawling pegged rates

13. The Bretton Woods Agreement of 1944 established a monetary system based on:

a. Gold and managed floating exchange rates

b. Gold and adjustable pegged exchange rates

c. Special Drawing Rights and managed floating exchange rates

d. Special Drawing Rights and adjustable pegged exchange rates

14. Rather than constructing their own currency baskets, many nations peg the value of their currencies to a currency basket defined by the International Monetary Fund. Which of the following illustrates this basket?

a. IMF tranche

b. Special Drawing Rights

c. Primary reserve asset

d. Swap facility

15. Small nations (e.g., the Ivory Coast) whose trade and financial relationships are mainly with a single partner tend to utilize:

a. Pegged exchange rates

b. Freely floating exchange rates

c. Managed floating exchange rates

d. Crawling pegged exchange rates

16. Small nations (e.g., Tanzania) with more than one major trading partner tend to peg the value of their currencies to:

a. Gold

b. Silver

c. A single currency

d. A basket of currencies

17. Under a floating exchange-rate system, if American exports increase and American imports fall, the value of the dollar will:

a. Appreciate

b. Depreciate

c. Be officially revalued

d. Be officially devalued

18. Under a floating exchange-rate system, if American exports decrease and American imports rise, the value of the dollar will:

a. Appreciate

b. Depreciate

c. Be officially revalued

d. Be officially devalued

19. Under a floating exchange rate system, an increase in U.S. imports of Japanese goods will cause the demand schedule for Japanese yen to:

a. Increase, inducing a depreciation in the yen

b. Decrease, inducing a depreciation in the yen

c. Increase, inducing an appreciation in the yen

d. Decrease, inducing an appreciation in the yen

20. Given an initial equilibrium in the money market and foreign exchange market, suppose the Federal Reserve increases the money supply of the United States. Under a floating exchange-rate system, the dollar would:

a. Appreciate in value relative to other currencies

b. Depreciate in value relative to other currencies

c. Be officially devalued by the government

d. Be officially revalued by the government

21. Given an initial equilibrium in the money market and foreign exchange market, suppose the Federal Reserve decreases the money supply of the United States. Under a floating exchange rate system, the dollar would:

a. Appreciate in value relative to other currencies

b. Depreciate in value relative to other currencies

c. Be officially devalued by the government

d. Be officially revalued by the government

22. Under a floating exchange-rate system, if the U.S. dollar depreciates against the Swiss franc:

a. American exports to Switzerland will be cheaper in francs

b. American exports to Switzerland will be more expensive in francs

c. American imports from Switzerland will be cheaper in dollars

d. None of the above

23. If the Japanese yen depreciates against other currencies in the exchange markets, this will:

a. Have no effect on the Japanese balance of trade

b. Tend to worsen the Japanese balance of trade

c. Tend to improve the Japanese balance of trade

d. None of the above

24. If the Japanese yen appreciates against other currencies in the exchange markets, this will:

a. Have no effect on the Japanese balance of trade

b. Tend to improve the Japanese balance of trade

c. Tend to worsen the Japanese balance of trade

d. None of the above

25. Suppose Sweden's inflation rate is less than that of its trading partner. Under a floating exchange rate system, Sweden would experience a:

a. Appreciation in its currency

b. Depreciation in its currency

c. Fall in the level of its exports

d. Rise in the level of its imports

26. Assume that interest rates in London rise relative to those in Switzerland. Under a floating exchange-rate system, one would expect the pound (relative to the franc) to:

a. Depreciate due to the increased demand for pounds

b. Depreciate due to the increased demand for francs

c. Appreciate due to the increased demand for francs

d. Appreciate due to the increased demand for pounds

27. Under a floating exchange-rate system, which of the following best leads to a depreciation in the value of the Canadian dollar?

a. A decrease in the Canadian money supply

b. A fall in the Canadian interest rate

c. An increase in national income overseas

d. Rising inflation overseas

28. A market-determined increase in the dollar price of the pound is associated with:

a. Revaluation of the dollar

b. Devaluation of the dollar

c. Appreciation of the dollar

d. Depreciation of the dollar

29. A market-determined decrease in the dollar price of the pound is associated with:

a. Revaluation of the dollar

b. Devaluation of the dollar

c. Appreciation of the dollar

d. Depreciation of the dollar

30. Which of the following is not a potential disadvantage of freely floating exchange rates?

a. They require larger amounts of international reserves than other exchange systems

b. Demand schedules for imports and exports may be price speculation

c. There may occur large amounts of destabilizing speculation

d. Capital movements among nations may be hindered via exchange rate fluctuations

31. Proponents of freely floating exchange rates maintain that:

a. Central banks can easily modify fluctuations in exchange rates

b. The system allows policy makers freedom in pursuing domestic economic goals

c. Inelastic demand schedules prevent large fluctuations in exchange rates

d. Inelastic supply schedules prevent large fluctuations in exchange rates

32. A potential disadvantage of freely floating exchange rates is that there would:

a. Exist excessive amounts of hedging in the foreign exchange markets

b. Be a lack of incentive to initiate exchange arbitrage

c. Be excessive amounts of destabilizing speculation

d. Exist a devaluation bias in the exchange markets

33. Under a floating exchange rate system, if there occurs a fall in the dollar price of the franc:

a. American exports to France will be cheaper in francs

b. American exports to France will be more expensive in francs

c. American imports from France will be more expensive in dollars

d. None of the above

34. Under a system of floating exchange rates, a U.S. trade deficit with Japan will cause:

a. A flow of gold from the United States to Japan

b. The U.S. government to ration yen to U.S. importers

c. An increase in the dollar price of yen

d. A decrease in the dollar price of yen

35. A potential limitation of freely floating exchange rates is that:

a. Countries require a larger amount of international reserves than otherwise

b. Countries are unable to initiate economic policies to combat unemployment

c. Exchange rates may experience wide and frequent fluctuations

d. Demand tends to be highly sensitive to price movements

36. To temporarily offset an appreciation in the dollar's exchange value, the Federal Reserve could ____ the U.S. money supply which would promote a (an) ____ in U.S. interest rates and a ____ in investment flows to the United States.

a. Increase, decrease, decrease

b. Increase, increase, decrease

c. Decrease, decrease, decrease

d. Decrease, increase, decrease

37. To temporarily offset a depreciation in the dollar's exchange value, the Federal Reserve could ____ the U.S. money supply which would promote a (an) ____ in U.S. interest rates and a (an) ____ in investment flows to the United States.

a. Increase, decrease, decrease

b. Increase, increase, increase

c. Decrease, decrease, increase

d. Decrease, increase, increase

38. In a managed floating exchange-rate system, temporary stabilization of the dollar's exchange value requires the Federal Reserve to adopt a (an) ____ monetary policy when the dollar is appreciating and a (an) ____ policy when the dollar is depreciating.

a. Expansionary, expansionary

b. Expansionary, contractionary

c. Contractionary, expansionary

d. Contractionary, contractionary

39. The central bank of the United Kingdom could prevent the pound from appreciating by:

a. Selling pounds on the foreign exchange market

b. Buying pounds on the foreign exchange market

c. Reducing its inflation rate relative to its trading partners

d. Promoting domestic investment and technological development

40. A surplus nation can reduce its payments imbalance by:

a. Applying tariffs and trade restrictions on imports

b. Revaluing its national currency

c. Increasing its labor productivity

d. Setting higher interest rates than its trading partners

41. A main purpose of exchange stabilization funds is to:

a. Permit a country to overvalue its currency in the exchange markets

b. Permit a country to undervalue its currency in the exchange markets

c. Increase the supply of foreign currency when imports exceed exports

d. Decrease the supply of foreign currency when imports exceed exports

42. As a policy instrument, currency devaluation may be controversial since it:

a. Imposes hardships on the exporters of foreign countries

b. Imposes hardships on exporters of the devaluing country

c. Is generally followed by unemployment in the devaluing country

d. Is generally followed by price deflation in the devaluing country

43. Given a two-country world, assume Canada and Sweden devalue their currencies by 20 percent. This would result in:

a. An appreciation in the Canadian currency

b. An appreciation in the Swedish currency

c. An appreciation in both currencies

d. An appreciation in neither currency

44. Suppose that Japan maintains a pegged exchange rate that overvalues the yen. This would likely result in:

a. Japanese exports becoming cheaper in world markets

b. Imports becoming expensive in the Japanese market

c. Unemployment for Japanese workers

d. Full employment for Japanese workers

45. To defend a pegged exchange rate that overvalues its currency, a country could:

a. Discourage commodity exports

b. Encourage commodity imports

c. Purchase its own currency in international markets

d. Sell its own currency in international markets

46. Given a two-country world, suppose Japan devalues the yen by 20 percent and South Korea devalues the won by 15 percent. This results in:

a. An appreciation in the value of both currencies

b. A depreciation in the value of both currencies

c. An appreciation in the value of the yen against the won

d. A depreciation in the value of the yen against the won

47. Given a two-country world, suppose Japan revalues the yen by 15 percent and South Korea revalues the won by 12 percent. This results in:

a. An appreciation in the value of both currencies

b. A depreciation in the value of both currencies

c. An appreciation in the value of the yen against the won

d. A depreciation in the value of the yen against the won

Figure 15.1 shows the market for the Swiss franc. In the figure, the initial demand for marks and supply of marks are depicted by D0 and S0 respectively.

Figure 15.1. The Market for the Swiss Franc

48. Refer to Figure 15.1. With a system of floating exchange rates, the equilibrium exchange rate is:

a. $0.40 per franc

b. $0.50 per franc

c. $0.60 per franc

d. $0.70 per franc

49. Refer to Figure 15.1. Suppose that the United States increases its imports from Switzerland, resulting in a rise in the demand for francs from D0 to D1. Under a floating exchange rate system, the new equilibrium exchange rate would be:

a. $0.40 per franc

b. $0.50 per franc

c. $0.60 per franc

d. $0.70 per franc

50. Refer to Figure 15.1. Suppose the United States decreases investment spending in Switzerland, thus reducing the demand for francs from D0 to D2. Under a floating exchange rate system, the new equilibrium exchange rate would be:

a. $0.40 per franc

b. $0.50 per franc

c. $0.60 per franc

d. $0.70 per franc

51. Refer to Figure 15.1. Suppose the demand for francs increases from D0 to D1. Under a fixed exchange rate system, the U.S. exchange stabilization fund could maintain a fixed exchange rate of $0.50 per franc by:

a. Selling francs for dollars on the foreign exchange market

b. Selling dollars for francs on the foreign exchange market

c. Decreasing U.S. exports, thus decreasing the supply of francs

d. Stimulating U.S. imports, thus increasing the demand for francs

Table 15.1. The Market for Francs

Quantity of Dollar price Quantity of

francs demanded of francs francs supplied

600 $0.05 0

500 0.10 100

400 0.15 200

300 0.20 300

200 0.25 400

100 0.30 500

0 0.35 600

52. Refer to Table 15.1. Under a system of floating exchange rates, the equilibrium exchange rate equals:

a. $0.15 per franc

b. $0.20 per franc

c. $0.25 per franc

d. $0.30 per franc

53. Refer to Table 15.1. If monetary authorities fix the exchange rate at $0.10 per franc, there would be a:

a. Shortage of 200 francs

b. Shortage of 400 francs

c. Surplus of 200 francs

d. Surplus of 400 francs

54. Refer to Table 15.1. If monetary authorities fix the exchange rate at $0.30 per franc, there will be a:

a. Shortage of 200 francs

b. Shortage of 400 francs

c. Surplus of 200 francs

d. Surplus of 400 francs

55. Under managed floating exchange rates, the Federal Reserve could offset an appreciation of the dollar against the yen by:

a. Increasing the money supply which promotes falling interest rates and net investment outflows

b. Increasing the money supply which promotes rising interest rates and net investment inflows

c. Decreasing the money supply which promotes falling interest rates and net investment outflows

d. Decreasing the money supply which promotes rising interest rates and net investment inflows

56. Under managed floating exchange rates, a central bank would initiate:

a. Contractionary monetary policy to offset a depreciation of its currency

b. Contractionary monetary policy to offset an appreciation of its currency

c. Expansionary monetary policy to offset a depreciation of its currency

d. None of the above

57. To offset an appreciation of the dollar against the yen, the Federal Reserve would:

a. Sell dollars on the foreign exchange market and lower domestic interest rates

b. Sell dollars on the foreign exchange market and raise domestic interest rates

c. Buy dollars on the foreign exchange market and lower domestic interest rates

d. Buy dollars on the foreign exchange market and raise domestic interest rates

58. To help insulate their economies from inflation, currency depreciation, and capital flight, developing countries have implemented:

a. Regional trading blocs

b. Currency boards

c. Central banks

d. Regional fiscal policies

59. If Mexico dollarizes its economy, it essentially

a. Allows the Federal Reserve to be its lender of last resort

b. Accepts the monetary policy of the Federal Reserve

c. Ensures that its business cycle was identical to that of the U.S.

d. Abandons its ability to run governmental balanced budgets

60. If Mexico fully dollarizes its economy, it agrees to

a. Print pesos only to finance deficits of its national government

b. Use the U.S. dollar alongside its peso to finance transactions

c. Have the U.S. Treasury be in charge of its tax collections

d. Replace pesos with U.S. dollars in its economy

61. An objective of the dollarization of the Mexican economy would be to:

a. Shield its economy from hyperinflation, currency depreciation, and capital flight

b. Allow the Federal Reserve to be its lender of last resort

c. Ensure that its monetary policy is independent of the Federal Reserve

d. Permit it to benefit from tariffs and subsidies imposed by the U.S. government

62. In order to stabilize a currency, the central bank will need to adopt

a. An expansionary monetary policy to offset currency depreciation

b. An expansionary monetary policy to offset currency appreciation

c. A contractionary policy to offset currency appreciation

d. Both b and c

63. The crawling peg is a

a. Fixed exchange rate system

b. Floating exchange rate system

c. Compromise between fixed and floating exchange rates

d. Exchange rate system used by nations experiencing no inflation

64. Exchange rate controls

a. Achieved prominence during the economic crises of the late 1930's

b. Were popular immediately after World War II

c. Are widely used by the developing nations

d. All of the above

65. The flexibility of floating rates may generate the problem of

a. Inflationary bias

b. Deflationary bias

c. Continuous depreciation

d. Both a and c

TRUE/FALSE

1. By the early 1970s, gold had been phased out of the international monetary system.

2. Since 1974, the major industrial countries have operated under a system of fixed exchange rates based on the gold standard.

3. Today, fixed exchange rates are used primarily by small, developing countries that tie their currencies to a key currency such as the U.S. dollar.

4. Smaller nations with relatively undiversified economies and large trade sectors tend to peg their currencies to one of the world's key currencies.

5. Large industrial nations with diversified economies and small trade sectors have generally pegged their currencies to one of the world's key currencies.

6. Small nations, such as Angola and Barbados, peg their currencies to the U.S. dollar since the prices of many of their traded goods are determined in markets in which the dollar is the key currency.

7. Many developing nations with low inflation rates have pegged their currencies to the U.S. dollar as a way of allowing modest increases in domestic inflation rates.

8. Pegging to a single currency is generally done by developing nations whose trade and financial relationships are mainly with a single industrial-country partner.

9. Developing countries with more than one major trading partner often peg their currencies to a group or basket of those trading partner currencies.

10. Most developing countries have chosen to allow their currencies to float independently in the foreign exchange market.

11. Today, special drawing rights (SDRs) represent the most important currency basket against which developing countries maintain pegged exchange rates.

12. The special drawing right is a currency basket of five major industrial country currencies.

13. The Australian dollar is currently regarded is the key currency of the international monetary system.

14. A "key currency" is one that is widely traded on world money markets, has demonstrated relative stable values over time, and has widely been accepted as a means of international settlement.

15. The U.S. dollar is generally regarded as the major "key currency" of the international monetary system.

16. Most nations currently allow their currencies' exchange values to be determined solely by the forces of supply and demand in a free market.

17. Under the gold standard, the official exchange rate would be $2.80 per pound as long as the United States bought and sold gold at a fixed price of $35 per ounce and Britain bought and sold gold at 12.5 pounds per ounce.

18. The par values of most developing-country currencies are currently defined in terms of gold.

19. The purpose of an exchange stabilization fund is to ensure that the market exchange rate does not deviate beyond unacceptable levels from the official exchange rate.

20. To keep the pound's exchange value from depreciating against the franc, the British exchange stabilization fund would sell pounds for francs on the foreign exchange market.

21. To keep the yen's exchange value from appreciating against the dollar, Japan's exchange stabilization fund would buy yen for dollars on the foreign exchange market.

22. The purpose of currency devaluation is to cause the home country's exchange value to appreciate, thus reducing a balance of trade surplus.

23. If Uganda devalues its shilling by 10 percent and Burundi devalues its franc by 5 percent, the shilling's exchange value appreciates 10 percent against the franc.

24. If Uganda sets its par value at 400 shillings per SDR and Burundi sets its par value at 200 francs per SDR, the official exchange rate is 1 franc = o.5 shillings.

25. If Uganda revalues its shilling by 20 percent and Burundi devalues its franc by 5 percent, the shillings exchange value will appreciate by 25 percent against the franc.

26. Unlike floating exchange rates, fixed exchange rates are not characterized by par values and central bank intervention in the foreign exchange market.

27. Because there is no exchange stabilization fund under floating exchange rates, any holdings of international reserves serve as working balances rather than to maintain a given exchange rate for any currency.

28. Under an adjustable-pegged system, market exchange rates are intended to be maintained within a narrow band around a currency's official exchange rate. In the case of fundamental disequilibrium, the currency can be devalued or revalued to promote current-account equilibrium.

29. In 1973 the major industrial countries terminated managed-floating exchange rates and adopted an adjustable-pegged exchange rates.

30. A "dirty float" occurs when a nation used central bank intervention in the foreign exchange market to promote a depreciation of its currency's exchange value, thus gaining a competitive advantage compared to its trading partners.

31. Under managed-floating exchange rates, market forces are allowed to determine exchange rates in the short run while central bank intervention is used to stabilize exchange rates in the long run.

32. Under managed floating exchange rates, central bank intervention is used to offset temporary fluctuations in exchange rates that contribute to uncertainty in carrying out transactions in international trade and finance.

33. To offset an appreciation in the dollar's exchange value, the Federal Reserve can nudge interest rates down in the United States which results in net investment outflows.

34. When pursued over the long run, a policy of increasing the domestic money supply to offset an appreciation of the home country's currency results in inflation and a decrease in home-country competitiveness in key industries.

35. At the Maastricht Treaty of 1991, members of the European Community established a blueprint for an Economic and Monetary Union with a single currency and a European central bank overseeing a single monetary policy.

36. It is universally recognized that Europe fulfills the conditions of an optimum currency area.

SHORT ANSWER

1. Which nations use multiple exchange rates the most and why?

2. What is an SDR?

ESSAY

1. What is the difference between the crawling peg and adjustable pegged exchange rates?

2. How can currency boards and dollarization prevent currency crises?

#ECO 305 Week 10 Quiz – Strayer

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ECO 302 Week 10 Quiz - Strayer

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Quiz Chapter 16

TRUE/FALSE

1. A model with sticky prices and nominal wages is a disequilibrium model.

2. Menu costs are the posted prices of a firm.

3. In the short run in a model with sticky prices, a monetary surprise affects labor demand and real output.

4. In the long run in a model with sticky prices, a monetary surprise affects labor demand and real output.

5. A new Keynesian model produces a countercyclical pattern of the average product of labor while in the data the average product of labor is weakly procyclical.

6. In the new Keynesian model, an increase in household consumption will increase output by more than the original increase in consumption.

7. In the new Keynesian model, a monetary expansion will decrease output in the short run.

8. In a model with imperfect competition, a firm will set its price equal to its nominal marginal cost.

9. In the Keynesian model with sticky nominal wages, the nominal wage rate is fixed above its market-clearing value.

10. In the Keynesian model with sticky nominal wages, a monetary expansion does not affect the real wage rate.

11. The Federal Funds rate is determined in the market for bonds issued by the U.S. Treasury.

MULTIPLE CHOICE

1. Menu costs are:

a. the posted prices of a firm. c. are set by the government.

b. the costs of changing prices. d. are the long run costs of the firm.

2. Sticky prices are:

a. real prices that do not rapidly respond to changed circumstances. c. nominal prices that do not rapidly respond to changed circumstances.

b. prices set by government. d. prices that can never be changed.

3. In the model of price setting, the demand for the firms product is:

a. positively related to real income in the economy. c. negatively related to the real wage the firm pays.

b. positively related to the firms price relative to the price level. d. all of the above.

4. In the model of price setting, the demand for the firms product is:

a. negatively related to real income in the economy. c. negatively related to the real wage the firm pays.

b. negatively to the firms price relative to the price level. d. all of the above.

5. A firm’s markup ratio is:

a. its price relative to the price level. c. it price relative to its marginal costs.

b. the price level relative to its marginal costs. d. its marginal cost relative to the price level.

6. In the model of price setting, the demand for the firm’s price is:

a. positively related to the markup ratio. c. negatively related to the firm’s marginal product of labor.

b. positively related to the nominal wage the firm pays. d. all of the above.

7. In the model of price setting, the demand for the firm’s price is:

a. positively related to the markup ratio. c. positively related to the firm’s marginal product of labor.

b. negatively related to the nominal wage the firm pays. d. all of the above.

8. In the model of price setting, the demand for the firm’s price is:

a. negatively related to the markup ratio. c. positively related to the firm’s marginal product of labor.

b. positively related to the nominal wage the firm pays. d. all of the above.

9. In the model of price setting, the demand for the firm’s price is:

a. negatively related to the markup ratio. c. negatively related to the firm’s marginal product of labor.

b. negatively related to the nominal wage the firm pays. d. all of the above.

10. In the model with sticky prices, in the short run a positive monetary shock leads to:

a. an increase in household real money balances. c. no change in household’s desired real money balances.

b. an increase in household’s demand for goods. d. all of the above.

11. In the model with sticky prices, in the short run a positive monetary shock leads to:

a. an increase in household real money balances. c. an increase in house hold’s desired real money balances.

b. a decrease in household’s demand for goods. d. all of the above.

12. In the model with sticky prices, in the short run a positive monetary shock leads to:

a. a decrease in household real money balances. c. a decrease in household’s desired real money balances.

b. an increase in household’s demand for goods. d. all of the above.

13. In the model with sticky prices, in the short run a positive monetary shock leads to:

a. a decrease in household real money balances. c. no change in household’s desired real money balances.

b. a decrease in household’s demand for goods. d. all of the above.

14. In a model with sticky prices, a positive monetary shock would cause households:

a. to spend more to try to get rid of the excess money. c. to change optimal real money balances.

b. to want to hold more money. d. all of the above.

15. In the model with sticky prices, in the short run a positive monetary shock leads to:

a. an increased supply of labor. c. a higher marginal product of labor.

b. an increased demand for labor. d. all of the above.

16. In the short run with a model with sticky prices a positive monetary surprise:

a. increases labor demand. c. increases the real wage.

b. increases real output. d. all of the above.

17. In the short run with a model with sticky prices a positive monetary surprise:

a. increases labor demand. c. leaves the real wage unchanged.

b. decreases real output. d. all of the above.

18. In the short run with a model with sticky prices a positive monetary surprise:

a. decreases labor demand. c. leaves the real wage unchanged.

b. increases real output. d. all of the above.

19. In the short run with a model with sticky prices a positive monetary surprise:

a. decreases labor demand. c. increases the real wage.

b. decreases real output. d. all of the above.

20. In the short run with a model with sticky prices a negative monetary surprise:

a. decreases labor demand. c. decreases the real wage.

b. decreases real output. d. all of the above.

21. In the short run with a model with sticky prices a negative monetary surprise:

a. decreases labor demand. c. increases the real wage.

b. increases real output. d. all of the above.

22. In the short run with a model with sticky prices a negative monetary surprise:

a. increases labor demand. c. increases the real wage.

b. decreases real output. d. all of the above.

23. In the short run with a model with sticky prices a negative monetary surprise:

a. increases labor demand. c. decreases the real wage.

b. increases real output. d. all of the above.

24. In the short run in a model with sticky prices:

a. the labor input is procyclical. c. the real wage rate in procyclical.

b. the average product of labor is countercyclical. d. all of the above.

25. In the short run in a model with sticky prices:

a. the labor input is procyclical. c. the real wage rate in countercyclical.

b. the average product of labor is procyclical. d. all of the above.

26. In the short run in a model with sticky prices:

a. the labor input is countercyclical. c. the real wage rate in countercyclical.

b. the average product of labor is countercyclical. d. all of the above.

27. In the short run in a model with sticky prices:

a. the labor input is countercyclical. c. the real wage rate in procyclical.

b. the average product of labor is procyclical. d. all of the above.

28. In the long run in a model with sticky prices:

a. prices will adjust. c. increase in prices reverse the short run effects.

b. money is neutral. d. all of the above.

29. In the long run in a model with sticky prices:

a. prices will adjust. c. the short run effects persist.

b. money still affects output. d. all of the above.

30. In the long run in a model with sticky prices:

a. prices remain sticky. c. the short run effects persist.

b. money is neutral. d. all of the above.

31. In the long run in a model with sticky prices:

a. prices remain sticky. c. increase in prices reverse the short run effects.

b. money affects production. d. all of the above.

32. In a new Keynesian model:

a. money is procyclical and money is weakly procyclical in the data. c. the average product of labor is countercyclical while the average product of labor is weakly procyclical in the data.

b. the price level is countercyclical and the price level is countercyclical in the data. d. all of the above.

33. In a new Keynesian model:

a. money is procyclical and money is weakly procyclical in the data. c. the average product of labor is procyclical while the average product of labor is countercyclical in the data.

b. the price level is procyclical and the price level is procyclical in the data. d. all of the above.

34. In a new Keynesian model:

a. money is countercyclical and money is weakly countercyclical in the data. c. the average product of labor is procyclical while the average product of labor is countercyclical in the data.

b. the price level is countercyclical and the price level is countercyclical in the data. d. all of the above.

35. In new Keynesian model:

a. money is countercyclical and money is weakly countercyclical in the data. c. the average product of labor is countercyclical while the average product of labor is weakly procyclical in the data.

b. the price level is procyclical and the price level is procyclical in the data. d. all of the above.

36. In a new Keynesian model an increase in aggregate demand causes:

a. an increase in real production greater than the increase in aggregate demand. c. an increase in real production less than the increase in aggregate demand.

b. an increase in real production equal to increase in aggregate demand. d. a decrease in real production.

37. In a new Keynesian model a temporary increase in output could be cause by:

a. a positive monetary surprise. c. a positive shock to government purchases.

b. households becoming exogenously more thrifty. d. all of the above.

38. In a new Keynesian model a temporary increase in output could be cause by:

a. a positive monetary surprise. c. a negative shock to government purchases.

b. households becoming exogenously less thrifty. d. all of the above.

39. In a new Keynesian model a temporary increase in output could be cause by:

a. a negative monetary surprise. c. a negative shock to government purchases.

b. households becoming exogenously more thrifty. d. all of the above.

40. In a new Keynesian model a temporary increase in output could be cause by:

a. a negative monetary surprise. c. a positive shock to government purchases.

b. households becoming exogenously less thrifty. d. all of the above.

41. In the short run in a new Keynesian model an increase in money means:

a. the price level must rise. c. the interest rate must rise.

b. real GDP must rise. d. all of the above.

42. In the short run in a new Keynesian model an increase in money means:

a. the price level must rise. c. the interest rate must fall.

b. real GDP must fall. d. all of the above.

43. Unlike the price misperception model the new Keynesian models finds that:

a. the price level is countercyclical as the data show. c. the price level is procyclical as the data show.

b. the price level is countercyclical while the data show it is procyclical. d. the price level is procyclical as the data show it is countercyclical.

44. In a model with sticky nominal wages an increase in the money supply will:

a. lower the real wage. c. increase the labor input.

b. increase real output. d. all of the above.

45. In a model with sticky nominal wages an increase in the money supply will:

a. lower the real wage. c. decrease the labor input.

b. decrease real output. d. all of the above.

46. In a model with sticky nominal wages an increase in the money supply will:

a. raise the real wage. c. decrease the labor input.

b. increase real output. d. all of the above.

47. In a model with sticky nominal wages an increase in the money supply will:

a. raise the real wage. c. increase the labor input.

b. decrease real output. d. all of the above.

48. A result of a model with sticky nominal wages is:

a. voluntary unemployment in the short run. c. money being countercyclical while in the data money is weakly procyclical.

b. a countercyclical real wage while in the data the real wage is procyclical. d. all of the above.

49. A result of a model with sticky nominal wages is:

a. involuntary unemployment in the short run. c. money being countercyclical while in the data money is weakly procyclical.

b. a procyclical real wage as in the data. d. all of the above.

50. A reason that nominal wages might be sticky is:

a. the government sets all wages. c. people having incomplete information about wages at other jobs.

b. contracts between workers and employers. d. all of the above.

51. The sticky-price model differs from the equilibrium business-cycle model in assuming that

a. nominal goods prices do not react to market changes quickly. c. real goods prices do not react to market changes quickly.

b. nominal goods prices react to market changes quickly. d. real goods prices react to market changes quickly.

52. The sticky-price model differs from the equilibrium business-cycle model in assuming that

a. the typical producer takes as given the price of his or her output. c. most goods are standardized and easily traded in organized markets.

b. the typical producer actively sets the price of his or her output. d. most goods are traded in perfectly-competitive markets.

53. The sticky-price model differs from the equilibrium business-cycle model in assuming that each producer

a. takes into account restaurant costs. c. takes into account menu costs.

b. assumes costs of price changes equal zero. d. assumes restaurant costs are greater than one.

54. A firm’s nominal marginal cost of production is

a. the ratio of the marginal product of labor to nominal wages. c. nominal wages minus the marginal product of labor.

b. nominal wages plus the marginal product of labor. d. the ratio of nominal wages to the marginal product of labor.

55. A firm’s nominal marginal cost of production is

a. the nominal cost of producing an additional unit of the good. c. equal to the marginal product of labor.

b. the real cost of producing an additional unit of the good. d. the same thing as a firm’s markup ratio.

56. Under imperfect competiton, each firm

a. has a nominal marginal cost equal to its output price. c. will set its price below its nominal marginal cost.

b. can set its price above its nominal marginal cost. d. none of the above.

57. If we observe in the market for automobiles that the auto price is above a firm’s nominal marginal cost, then

a. the firm is not maximizing profits. c. the market has imperfect competiton.

b. the firm is not accounting for restaurant costs. d. the firm takes as given its output price.

58. In the short-run in a sticky-price model, an increase in money shifts the

a. supply curve for labor rightward. c. demand curve for labor leftward.

b. supply curve for labor leftward. d. demand curve for labor rightward.

59. In the short-run in a sticky-price model, a decrease in money shifts the

a. demand curve for labor leftward. c. supply curve for labor rightward.

b. supply curve for labor leftward. d. demand curve for labor rightward.

60. In the short-run in a sticky-price model, where the product’s price is fixed by assumption, an increase in demand for a firm’s product will lead to

a. a decrease in production. c. no change in production.

b. an increase in production. d. a decrease in firm profits.

61. Labor hoarding means that

a. workers are motivated to remain out of the labor market during a recession. c. employers are motivated to retain workers even during a recession.

b. workers are motivated to work additional hours during an expansion. d. workers are motivated to work fewer hours during an expansion.

62. Labor hoarding may occur because

a. firms face costs in hiring and firing workers. c. firms want to have labor available for the next economic upturn.

b. workers face costs in the decision to enter the labor force. d. both (a) and (c).

63. The new Keynesian model may exhibit a multiplier effect, which implies that

a. the rise in output may be greater than the initial expansion in aggregate demand. c. the rise in labor supply may be greater than the initial expansion in aggreagate demand.

b. the rise in output will be lower than the initial expansion in aggregate demand. d. the rise in labor supply will be lower than the initial expansion in aggreagate demand.

64. In the new Keynesian model, an increase in household consumption will

a. increase saving. c. increase output by less than the increase in consumption.

b. increase output by more than the increase in consumption. d. not affect output.

65. The Federal Funds rate is

a. the 10-year nominal interest rate in the Federal Funds market. c. the overnight nominal interest rate in the Federal Funds market.

b. the 10-year real interest rate in the Federal Funds market. d. the overnight nominal interest rate in the Eurodollar market.

66. The Federal Funds rate applies

a. mostly to 30-year home mortgages. c. to the Eurodollar market.

b. mostly to the IMF (International Monetary Fund). d. to the inter-bank market.

67. A shortcoming of a constant-growth-rate rule for money is that

a. the Fed must have advance knowledge about future quantities of real money demanded. c. households may not understand how the Fed funds rate affects them.

b. the Fed must have an accurate measure of currency. d. it does not allow the nominal interest rate to respond to variations in the real quantity of money demanded.

SHORT ANSWER

1. What are sticky prices and when might prices be sticky?

2. In a model of price setting what determines firm j’s price?

3. What are the effects of a positive monetary surprise in the short run a model with sticky prices?

4. What are the long run effects of a monetary surprise in a model with sticky prices?

5. What are the effects of a monetary surprise in a model with sticky nominal wages?

6. When would a constant-growth rate rule for money work well, and when would it be difficult to use?

7. In the Keynesian model with sticky nominal wages, what is the short-run impact from a monetary expansion?

#ECO 302 Week 10 Quiz - Strayer

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