Final Exam (Part 4)

Question 1

When a country’s currency is weak, the price of its ________.

Answer 1

B. exports on world markets declines and the price of its imports increases

Question 2

Which of the following is the intentional lowering of a currency’s value by its government?

Answer 2

C. devaluation

Question 3

Devaluation of a nation’s currency ________.

Answer 3

D. increases the price of a country’s imports

Question 4

The intentional raising of the value of a currency by a nation’s government is called ________.

Answer 4

A. revaluation

Question 5

Which of the following stipulates that an identical product must have an identical price in all countries when the price is expressed in a common currency?

Answer 5

D. the law of one price

Question 6

Which of the following talks about the relative ability of two countries’ currencies to buy the same “basket” of goods in those two countries?

Answer 6

A. purchasing power parity

Question 7

Which of the following is true of inflation?

Answer 7

A. It is the result of supply and demand for a currency.

Question 8

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

Answer 8

B. monetary policy

Question 9

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

Answer 9

C. fiscal policy

Question 10

The principle that nominal interest rate is the sum of the real interest rate and the expected rate of inflation over a specific period of time is called ________.

Answer 10

C. the Fisher effect

Question 11

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

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

Answer 11

B. exchange rate

Question 12

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

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

Answer 12

B. law of one price

Question 13

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

Sam has been studying the price of wheat across markets. If a kilogram of wheat costs €1.5 in France and $1 in the United States, the law of one price would tell us ________.

Answer 13

A. the expected exchange rate between the euro and the dollar is €1.5/$

Question 14

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

Suppose Sam then noticed that the actual euro/dollar exchange rate on currency markets is €1.2/$, and that a kilogram of wheat still costs $1 in the U.S. and €1.5 in France. Sam then knows that ________.

Answer 14

C. wheat is priced higher in France

Question 15

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

It the actual euro/dollar exchange rate on currency markets is €1.2/$, and a kilogram of wheat still costs $1 in the U.S. and €1.5 in France, Sam also knows that the price of a kilogram of wheat in France is ________.

Answer 15

B. $1.25

Question 16

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

Sam’s mentor is excited about the wheat prices in France and the U.S. because he sees an opportunity to buy wheat in the U.S. and sell it in France, which is known as a(n) ________.

Answer 16

C. arbitrage opportunity

Question 17

The process whereby countries in a geographic area cooperate with one another to reduce or eliminate barriers to the international flow of products, people, or capital is called ________.

Answer 17

D. regional economic integration

Question 18

Which of the following is an important goal of regional economic integration?

Answer 18

C. to raise the living standards of people

Question 19

The main difference between a free trade area and a customs union is that the members of a customs union ________.

Answer 19

C. agree to treat trade with all nonmember nations in a similar manner

Question 20

Higher levels of trade between nations result in ________.

Answer 20

C. greater purchasing power

Question 21

Which of the following is a potential drawback of regional economic integration?

Answer 21

C. trade diversion

Question 22

Which of the following countries is a member of the North American Free Trade Agreement (NAFTA)?

Answer 22

A. Canada

Question 23

Which of the following statements is true of NAFTA?

Answer 23

A. It eliminated all tariffs and nontariff trade barriers on goods originating from within North America.

Question 24

Scenario: Moonland Union
Twenty-six nations of Moonland region, have decided to cooperate with one another to eliminate trade barriers among them and create the Moonland Union. They are not sure, however, to what extent they want to cooperate.

The process undertaken by these twenty-six countries is an example of ________.

Answer 24

B. regional economic integration

Question 25

Scenario: Moonland Union
Twenty-six nations of Moonland region, have decided to cooperate with one another to eliminate trade barriers among them and create the Moonland Union. They are not sure, however, to what extent they want to cooperate.

As a first stage of cooperation, the countries agree to remove all barriers to trade among themselves. Each country also maintains policies it sees fit against nonmembers. At this stage, Moonland Union can be described as a ________.

Answer 25

A. free trade area

Question 26

Scenario: Moonland Union
Twenty-six nations of Moonland region, have decided to cooperate with one another to eliminate trade barriers among them and create the Moonland Union. They are not sure, however, to what extent they want to cooperate.

If these twenty-six nations continue to eliminate all barriers to trade among themselves and set a common trade policy against nonmembers, they would create a ________.

Answer 26

B. customs union

Question 27

Scenario: Moonland Union
Twenty-six nations of Moonland region, have decided to cooperate with one another to eliminate trade barriers among them and create the Moonland Union. They are not sure, however, to what extent they want to cooperate.

Some countries in Moonland Union are interested not just in free trade among themselves and a common trade policy against nonmembers, but also in removing all barriers to the movement of labor and capital among themselves. This type of integration is best described as a ________.

Answer 27

D. common market

Question 28

Scenario: Moonland Union
Twenty-six nations of Moonland region, have decided to cooperate with one another to eliminate trade barriers among them and create the Moonland Union. They are not sure, however, to what extent they want to cooperate.

Country M wants member nations to harmonize their tax, monetary, and fiscal policies and wants to create a common currency. Country M is requesting for the creation of a(n) ________ in the Moonland nations.

Answer 28

A. economic union

Question 29

Scenario: Moonland Union
Twenty-six nations of Moonland region, have decided to cooperate with one another to eliminate trade barriers among them and create the Moonland Union. They are not sure, however, to what extent they want to cooperate.

Country X advocates the greatest level of integration possible for the member nations of the Moonland Union. Which of the following is Country X most likely to support?

Answer 29

B. political union