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invests directly in facilities to produce a product in a foreign country.
Which of the following is an example of a greenfieldinvestment?
A Chinese sugar maker setting up a sugar crushing facility in Cuba.
The stock of FDI is:
the total accumulated value of foreign-owned assets at a given time.
The _____ of FDI refers to the amount of FDI undertaken over ayear.
Which of the following is the prime reason why Africa hasattracted FDI in recent years?
Raw material availability
Which of the following summarizes the total amount of resourcesinvested in factories, stores, office buildings, and the like?
Gross fixed capital formation
Which of the following primarily explains why developing nationsare characterized by lower percentage of cross-border mergers and acquisitionscompared to developed nations?
Fewer target firms to acquire in developing nations
When contemplating FDI, why do firms apparently prefer to acquireexisting assets rather than undertake greenfield investments?
Mergers and acquisitions are quicker to execute than greenfield investments.
A French wind power company gives an Indonesian company the rightto produce and sell wind turbines in return for a royalty fee on every unitsold. Which business practice is this an example of?
Which of the following specifically reduces the viability of anexporting strategy specifically for products with low value-to-weightratios?
Which of the following is a way in which governments increase theattractiveness of FDI and licensing relative to exporting?
By implementing import quotas
Identify the theory that seeks to explain why firms often preferforeign direct investment over licensing as a strategy for entering foreignmarkets.
In which of the following situations does the internalizationtheory recommend FDI as opposed to licensing?
When the firm needs tight control over a foreign entity
Which of the following best describes an industry composed of alimited number of large firms?
Which of the following is a direct consequence of theinterdependence between firms in an oligopoly?
Which of the following observations concerning Knickerbocker'stheory is true?
It does not explain why the first firm in an oligopoly decides to undertake FDI rather than to export or license.
_____ arises when two or more enterprises encounter each other indifferent regional markets, national markets, or industries.
According to Knickerbocker's theory:
when a firm that is part of an oligopolistic industry expands into a foreign market, other firms in the industry will be compelled to make similar investments.
Which of the following observations was made by RaymondVernon?
Firms undertake FDI at particular stages in the life cycle of a product they have pioneered.
Which of the following is a major drawback of using the productlife-cycle theory in explaining FDI?
It fails to identify when it is profitable to invest abroad.
The _____ suggests that a firm will establish productionfacilities where foreign assets or resource endowments that are important tothe firm are located.
Advantages that arise from using resource endowments or assetsthat are tied to a particular place and that a firm finds valuable to combinewith its own unique assets are known as:
According to the _____ view of FDI, MNEs extract profits from thehost country and take them to their home country, giving nothing of value tothe host country in exchange.
Which view of FDI traces its roots to classical economics and theinternational trade theories of Adam Smith and David Ricardo?
Which political view allows FDI so long as the benefits outweighthe costs?
The pragmatic nationalist view
A country rejects FDI proposals in certain industries. It does sobecause the tangible advantages of such investments are lesser than potentialcosts like loss of employment and reduction of overall well-being. However, itaggressively pursues inviting foreign investments in sectors likeinfrastructure, education, and healthcare because of the benefits that accruewith them. Which political view of FDI is discussed in this example?
The pragmatic nationalist view
Why is it said that not all the new jobs created by FDI representnet additions in employment?
Because jobs created by an investment may be offset by the jobs lost in domestic companies
When a company brings capital and/or technology to a host country,the host country benefits from the:
resource-transfer effect of FDI.
A country's _____ keeps track of its payments to and its receiptsfrom other countries.
Which of the following arises when a country is importing moregoods and services than it is exporting?
Which of the following arises when a country is exporting moregoods and services than it is importing?
Current account surplus
In which of the following situations would FDI improve the currentaccount of the host country's balance of payments?
If the FDI is a substitute for imports of goods or services
In which way can the source country's balance of payments benefitfrom an FDI made in a foreign country?
From the inward flow of foreign earnings
How is the adverse effect of the balance of payments for the homecountry due to an FDI usually offset?
By the subsequent inflow of foreign earnings
FDI undertaken to serve the home market is known as:
How can FDI undertaken to serve the home market stimulate economicgrowth in the home country?
By freeing home-country resources to concentrate on activities where the home country has a comparative advantage
What is double taxation in the context of FDI?
Taxation of income in both home and host country
Which of the following is a home-country policy aimed at limitingoutward FDI flow?
Taxing domestic companies' foreign earnings at a higher rate than their domestic earnings
Licensing would be a good option for firms in which of thefollowing industries?
In fragmented, low-technology industries in which globally dispersed manufacturing is not an option.
_____ is essentially the service-industry version of licensing,although it normally involves much longer term commitments.
From least integrated to most integrated, the levels of economicintegration are:
a free trade area, a customs union, a common market, an economic union, and a political union.
Country X and Country Y reach an agreement to boost bilateraltrade. They agree to remove all barriers to the trade of goods and services.They, however, are free to determine their own trade policies with regard tononmembers. Which level of economic integration is this an example of?
A Free trade area
Which feature of a customs union differentiates it from a freetrade area?
A common external trade policy toward nonmembers
A _____ has no barriers to trade between member countries,includes a common external trade policy, and allows factors of production tomove freely between members.
Three countries agree to remove barriers to trade between membercountries and adopt a common external trade policy toward nonmembers. They alsoagree to allow people and other factors of production to move freely acrosstheir borders. Which level of economic integration is this an example of?
Which feature of a common market differentiates it from a customsunion?
Ability of factors of production to move freely between members
A(n) _____ involves the free flow of products and factors ofproduction between member countries, the adoption of a common external tradepolicy, a common currency, harmonization of members' tax rates, and a commonmonetary and fiscal policy.
Which feature of an economic union differentiates it from a commonmarket?
A common monetary and fiscal policy
Which of the following is a reason why the European Union isconsidered an imperfect economic union?
Not all members of the union have adopted the euro.
The move toward economic union raises the issue of how to make acoordinating bureaucracy accountable to the citizens of member nations. Whichof the following offers a solution to this problem?
A political union
A political benefit of economic integration is that:
it creates incentives for political cooperation and reduces the potential for violent conflict.
Which of the following explains why economic integration has neverbeen easy to achieve or sustain, despite the strong economic and politicalarguments in support?
While a nation as a whole may benefit significantly, certain groups may lose.
_____ occurs when high-cost domestic producers are replaced bylow-cost producers within the free trade area.
Which of the following occurs when lower-cost external suppliersare replaced by higher-cost suppliers within the free trade area?
Country A and Country B entered into a free trade agreementrecently. After this, Country A starts importing heavy machinery from CountryB. Country A used to previously import such machinery at lower rates fromanother country. Which of the following has occurred in this scenario?
To ensure that a free trade agreement does not result in trade diversion,which of the following has to come within the scope of WTO?
The European Community was established by:
the Treaty of Rome signed in 1957.
The _____ is responsible for proposing EU legislation,implementing it, and monitoring compliance with EU laws by member states.
Why is the European Council said to be the ultimate controllingauthority within the EU?
Since draft legislation from the commission can become EU law only if the council agrees
Which of the following is directly elected by the populations ofthe member states and is primarily a consultative rather than legislativebody?
The European Parliament
Which of the following was the outcome of the Treaty of Lisbonsigned in 2007?
It increased the power of the European Parliament.
Which of the following observations pertaining to the EU's Courtof Justice is incorrect?
Its judges are required to act as representatives of national interests.
Which of the following observations is not true of the euro?
It is used by all member states of the European Union.
Which treaty, signed in December 1991, committed EC members toadopting a common currency by January 1, 1999?
The Maastricht Treaty
Which of the following is seen as a benefit of the euro?
Lower foreign exchange and hedging costs
Which of the following is seen as a disadvantage of theeuro?
National authorities losing control over monetary policy
In a(n) _____, similarities in the underlying structure ofeconomic activity make it feasible to adopt a single currency and use a singleexchange rate as an instrument of macroeconomic policy.
optimal currency area
Which of the following was required for new applicants to qualifyfor EU membership?
Deregulation of markets
Which of the following is seen to be a consequence of the size ofthe EU from 15 nations to 27 nations?
Delays in the decision-making processes
Which of the following is a reason why Turkey is not yet a memberof the EU?
Because of concerns over human rights issues in the country.
How does the NAFTA seem to increase the internationalcompetitiveness of U.S. and Canadian firms?
It allows them to take advantage of lower labor costs in Mexico.
What was the main objection raised by those in the United Statesand Canada who opposed the ratification of the NAFTA?
Bolivia, Peru, Ecuador, Columbia, and Venezuela are all membersof:
the Andean Pact.
Mercosur originated as a(n) _____ between Brazil and Argentina in1988.
free trade pact
According to Alexander Yeats:
the trade diversion effects of Mercosur outweigh its trade creation effects.
In early 2006, six CARICOM members and the United Statesestablished the _____, which was modeled on the EU's single market.
Caribbean Single Market and Economy
Which of the following is true of ASEAN?
It is slowly progressing toward establishing a free trade zone.
Which of the following accounts for about 55 percent of theworld's GNP and 49 percent of world trade?
Which of the following is the most frequently aired objection tofree trade in Africa?
They need to be "protected" by tariff barriers from unfair foreign competition.
The lowering of barriers to trade and investment between countriesis likely to lead to _____ throughout the EU.
increased price competition
Which term refers to the rate at which one currency is convertedinto another?
What are the two main functions of the foreign exchangemarket?
Currency conversion and providing some insurance against foreign exchange risk
A pair of shoes costs £40 in Britain. An identical pair costs $50in the United States when the exchange rate is £1 = $1.50. Which of thefollowing is correct?
The U.S. offers a better deal.
An exchange rate of €1 = $1.30 indicates that:
one euro buys 1.30 dollars.
The _____ helps us to compare the relative prices of goods andservices in different countries.
Assume that an American company today invests some of its sparecash in a Hungarian money market account that will earn 8 percent for a periodof two months. Which of the following, if it happens during the next twomonths, would imply that the company will earn less than 8 percent on itsinvestment?
The dollar appreciates against the Hungarian forint.
International businesses use foreign exchange markets for all ofthe following reasons except:
to cover themselves from all risks involved in currency speculation.
The short-term movement of funds from one currency to another inthe hopes of profiting from shifts in exchange rates is known as:
Which of the following involves borrowing in one currency whereinterest rates are low, and then using the proceeds to invest in anothercurrency where interest rates are high?
Assume that the interest rate on borrowings in Japan is 1 percent,while the interest rate on deposits in Australian banks is 5 percent. A traderborrows in yen and then converts the money into Australian dollars and depositsit in an Australian bank to make a 4 percent margin. Which type of trade isthis an example of?
When two parties agree to exchange currency and execute the dealimmediately, the transaction is a:
The _____ is the rate at which a foreign exchange dealer convertsone currency into another currency on a particular day.
spot exchange rate
Assume that the current exchange rate is €1 = $1.50. If youexchange 1,000 euros for dollars, you will receive _____.
_____ are exchange rates governing some specific future dateforeign exchange transactions.
Forward exchange rates
Assuming the 30-day forward exchange rate were $1 = ¥130 and thespot exchange rate were $1 = ¥120, the dollar is selling at a _____ on the30-day forward market.
Which of the following refers to the simultaneous purchase andsale of a given amount of foreign exchange for two different value dates?
Which of the following is the most important foreign exchangetrading center?
Assume that the yen/dollar exchange rate quoted in Tokyo at 3:00p.m. is ¥120 = $1, and the yen/dollar exchange rate quoted in New York at thesame time is ¥123 = $1. A dealer in New York uses dollars to purchase yen andthen immediately sells the yen to buy dollars in Tokyo, thereby making aprofit. The dealer has engaged in a(n):
If the demand for dollars outstrips its supply and if the supplyof Japanese yen is greater than the demand for it, what will happen?
The dollar will appreciate against the yen
The _____ states that in competitive markets free oftransportation costs and barriers to trade, identical products sold indifferent countries must sell for the same price when their price is expressedin terms of the same currency.
law of one price
According to the law of one price, if the exchange rate betweenthe British pound and the dollar is £1 = $1.50, a shirt that retails for $120in New York should sell for _____ in London.
Assume that the law of one price holds. A shirt that retails for$120 in New York sells for £60 in London. The exchange rate between the Britishpound and the dollar is £1 = $1.50. Assuming away transportation costs andtrade barriers, this creates a profit-making opportunity called _____.
The _____ suggests that given relatively efficient markets, theprice of a "basket of goods" should be roughly equivalent in eachcountry.
purchasing power parity theory
Suppose the price of a Big Mac in New York is $3.00 and the priceof a Big Mac in Paris is equivalent to $3.75 at the prevailing euro/dollarexchange rate. Using the concept of purchasing power parity, the euro is:
overvalued by 25 percent against the dollar.
Identify the incorrect statement about the PPP theory.
It yields accurate predictions of short-run movements in exchange rates.
Which of the following occurs when the quantity of money incirculation in a country rises faster than the country's stock of goods andservices?
Which of the following is referred to as the purchasing powerparity puzzle?
The failure to find a strong link between relative inflation rates and exchange rate movements.
The _____ states that a country's "nominal" interestrate is the sum of the required "real" rate of interest and theexpected rate of inflation over the period for which the funds are to belent.
It follows from the Fisher Effect that if the real interest rateis the same worldwide; any difference in interest rates between countriesreflects differing expectations about ______.
The _____ states that for any two countries, the spot exchangerate should change in an equal amount but in the opposite direction to thedifference in nominal interest rates between the two countries.
International Fisher Effect
Which of the following occurs when traders start moving as a herdin the same direction at the same time?
The _____ school of thought argues that forward exchange rates dothe best possible job of forecasting future spot rates and therefore investingin forecasting services would be a waste of money.
Which of the following would a follower of the inefficient marketschool of thought agree with?
Companies would be better off investing in foreign exchange forecasting services.
_____ uses price and volume data to determine past trends, whichare expected to continue into the future.
A currency is said to be freely convertible when:
both residents and nonresidents are allowed to purchase unlimited amounts of a foreign currency with it.
_____ is most likely to occur when the value of the domesticcurrency is depreciating rapidly because of hyperinflation or when a country'seconomic prospects are shaky in other respects.
_____ refers to a range of barter-like agreements by which goodsand services can be traded for other goods and services.
The extent to which the income from individual transactions isaffected by fluctuations in foreign exchange values is known as:
_____ is the impact of short-run currency exchange rates changeson the reported financial statements of a company.
A(n) _____ involves attempting to collect foreign currencyreceivables early when a foreign currency is expected to depreciate and payingforeign currency payables before they are due when a currency is expected toappreciate.
The international monetary system refers to the institutionalarrangements that govern _____.
When the foreign exchange market determines the relative value ofa currency, we say that the country is adhering to a _____ regime.
floating exchange rate
A pegged exchange rate means that the value of a currency is_____.
fixed relative to a reference currency
A dirty float refers to a situation in which _____.
a country tries to hold its currency against an important reference currency without a formal pegged rate
After World War II, world's major industrial nations arrangedtheir currencies against each other at a mutually agreed on exchange rate. Thisis an example of a _____ system.
fixed exchange rate
Which of the following statements is true of the Goldstandard?
Currencies were pegged to gold under the gold standard.
Gold par value refers to the _____.
amount of a currency needed to purchase one ounce of gold
A country is said to be in balance-of-trade equilibrium when_____.
the income its residents earn from exports is equal to the money its residents pay for imports
A country's trade balance is in surplus when _____
its exports are more than its imports
Which of the following is an advantage of using the goldstandard?
It contains a powerful mechanism for achieving balance-of-trade equilibrium by all countries.
The agreement reached at Bretton Woods established _____.
International Monetary Fund
Which of the following observations is true of the Bretton Woodsagreement?
All countries agreed to fix the value of their currency in terms of gold under the agreement.
The World Bank was established at the at Bretton Woods conferenceto _____.
promote general economic development
Identify the currency that was convertible to gold under theBretton Woods system.
What will happen if a country increases its money supply rapidlyunder fixed exchange rate regime?
Trade deficit would widen in that country.
Which of the following is a disadvantage of using a rigid policyof fixed exchange rates?
It is likely to create high unemployment in some cases.
Which of the following is a function of World Bank?
Lending money to governments for development
Which of the following is a factor that initiated the collapse ofthe fixed exchange rate system?
Worsening of U.S. foreign trade position
Which of the following changes were made to IMF's Articles ofAgreement in the Jamaica agreement?
IMF members were permitted to sell their gold reserves at the market price.
_____ exchange rates were declared as acceptable in the Jamaicaagreement of IMF.
United States had large and growing trade deficit between 1980 and1985. Despite this, the value of U.S. dollar rose during this period. Which ofthe following is a factor that caused this occurrence?
United States attracted heavy inflows of capital from foreign investors during this period.
Which of the following is the reason why the currentforeign-exchange system is sometimes thought of as a managed-floatsystem?
Governments intervene frequently in the foreign exchange market.
Which of the following arguments is in favor of floating exchangerates?
A country's ability to expand or contract its money supply should be limited by the need to maintain exchange rate parity.
The monetary autonomy argument holds that _____.
each country should be allowed to choose its own inflation rate
Which of the following arguments is against the use of fixedexchange rates?
Each country has the freedom to choose its own inflation rate.
Which of the following arguments strengthen the idea of floatingexchange rates?
External agencies should not interfere in the monetary policies of a country.
Those in favor of floating exchange rate claim that _____.
trade imbalances can be adjusted by using floating exchange rates
Which of the following is an exchange rate policy where theexchange rate is determined completely by market forces?
Which of the following is the exchange rate policy where thegovernment intervenes in the exchange rate system only in a limited way?
Under a _____ exchange rate regime, a country will attach thevalue of its currency to that of a major currency.
Which of the following statements is true of pegged exchangerates?
Pegged exchange rates are popular among many of the world's smaller nations.
A country that introduces a currency board commits itself to convertingits domestic currency on demand into _____.
another currency at a fixed exchange rate
Under a currency board system, _____.
government lacks the ability to set interest rates
A currency crisis occurs due to _____.
a speculative attack on the exchange value
Moral hazard arises when people behave recklessly because_____.
they know they will be saved if things go wrong
Which of the following is a common criticism against IMF?
Which of the following observations is true of the current systemof foreign exchange market?
The current system is a combination of government intervention and speculative activity.
Which of the following will help a company hedge against currencyfluctuations?
Dispersing production to different geographic locations
Contracting out manufacturing allows companies to reduce economicexposure because _____.
it allows companies to shift suppliers from country to country
Increasingly the _____ has been acting as macroeconomic police ofthe world economy, insisting that countries seeking significant borrowingsadopt certain macroeconomic policies.
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