(Test Bank) Multinational Financial Management

Shapiro, 11

Business

Test Bank

11th Edition

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Chapter 1, Introduction CHAPTER 1 Introduction EASY (definitional) 1.1 Historically, the primary motive for U.S. multinationals to produce abroad has been to a) lower costs b) expand markets c) avoid trade barriers d) gain tax benefits Ans: b Section: evolution of multinational Level: Easy 1.2 The primary objective of the multinational corporation is to a.) maximize shareholder wealth b) maximize world production c) minimize debt d) minimize the cost of doing business globally Ans: a Section: Multinational Financial Management: Theory and Practice Level: Easy 1.3 ____________ is defined as the purchase of assets or commodities on one market for immediate resale on another in order to profit form a price discrepancy. a) internationalization b) arbitrage c) financing d) total risk Ans: b Section: evolution of multinational Level: Easy 1.4 The value of good financial management is ___________ in the global markets because of the much greater probability of market imperfections and multiple tax rates. a) minimized b) neutralized c) enhanced d) arbitraged away Ans: c Section: role of the financial executive Chapter 1, Introduction Level: Easy 1.5 When a firm operates globally it offers advantages such as a) greater political power at home b) bless taxes on its profits c) greater negotiating power with foreign minority groups d) greater negotiating power with labor unions Ans: d Section: The rise of the MNC Level: Easy 1.6 The prime transmitter of global competitive forces is the a) public utility firm b) financial management experience of the U.S. markets c) the multinational corporation d) the Federal Reserve System of the U.S. Ans: c Section: rise of the multinational Level: Easy 1.7 ___________ were the earliest multinationals. a) raw-material seekers b) market seekers c) cost minimizers d) oil companies Ans: a Section: raw material seekers Level: Easy 1.8 The ___________ are the archetype of the modern multinational firm that goes overseas to produce and sell in foreign markets. a) cost minimizers b) market seekers c) raw-material seekers d) whaling companies Ans: b Section: market seekers Level: Easy 1.9 ___________ are a recent category of multinationals that seek out and invest in lower cost production sites overseas. a) Cost minimizers Chapter 1, Introduction b) Market seekers c) Raw-material seekers d) High tech firms Ans: a Section: cost minimizers Level: Easy 1.10 Which one of the following is a consequence of increased global competition? a) the creation of new steel plants in the old industrial countries b) the end of free-trade agreements between governments of the world c) increased comfort level of trade unions with the consequences d) increased anxiety among workers in the old industrial countries Ans: d Section: Consequences of Global Competition Level: Easy 1.11 International ________ can reduce the volatility of an investment portfolio because national financial markets tend to move independently of each other. a) arbitrage b) centralization of the MNC’s cash c) diversification d) investment Ans: c Section: The Importance of Total Risk Level: Easy 1.12 Which one of the following has been a major driver of globalization? a) massive deregulation b) the collapse of the communist bloc c) revolution in information technologies d) all of the above Ans: d Section: The rise of the multinational corporation Level: Easy 1.13 Companies gradually increase their commitment to international business with strategies that are progressively more sophisticated. Which one of the following steps is NOT one of the steps? a) exporting Chapter 1, Introduction b) setting up a sales subsidiary c) setting up a distribution system d) creating a legal entity in the new target country Ans: D Section: The Process of Overseas Expansion by Multinationals Level: Easy 1.14 Which one of the following is an alternate and/or a precursor to setting up a production facility abroad? a) exporting b) setting up a sales subsidiary c) setting up a distribution system d) licensing Ans: D Section: The Process of Overseas Expansion by Multinationals Level: Easy 1.15 In which category of multinational is McDonald’s most likely to fall? a) raw materials seeker b) market seeker c) cost minimizer d) hedge fund Ans: b Section: market seeker Level: Medium 1.16 Which of the following did NOT accelerate the growth of the global economy in the past twenty years? a) the U.S.-Canada-Mexico free-trade pact b) the creation of the European Union c) China’s entrance into the WTO d) Trade sanctions against Iran Ans: d Section: Consequences of Global Competition Level: Medium 1.17 The multinational financial system does NOT enable companies to a) avoid currency controls b) reduce taxes c) access lower cost financing sources d) avoid exchange rate risk Chapter 1, Introduction Ans: d Section: rise of the multinational Level: Medium 1.18 Given the added risks associated with doing business abroad, companies should a) limit their foreign sales to less than 40% of total sales b) limit their foreign assets to less than 30% of total assets c) avoid foreign markets altogether unless they can earn a return in excess of the return they earn in their domestic market d) not limit their foreign sales at all Ans: d Section: the internationalization of business Level: Medium 1.19 Which of the following is an example of reverse foreign investment? a) Honda builds a factory in Ohio b) Apple builds a plant in Ireland that exports to the United States c) British Telecom issues new stock in the United States d) American investors buy shares in Sony Ans: a Section: market seeker Level: Medium 1.20 Which of the following is NOT a failing of the theory of comparative advantage? a) it ignores the role of uncertainty and economies of scale b) it assumes that factors of production are immobile c) it assumes that there are no differentiated products d) it assumes a scarcity of resources Ans: d Section: rise of the multinational Level: Medium 1.21 Although a firm may be interested in expanding overseas, it may not have the option to acquire a local operation. This type of challenge is most common in a) the European Union b) the United States c) Japan d) developing countries Ans: d Section: The Process of Overseas Expansion by Multinationals Level: Medium Chapter 1, Introduction 1.22 What would be the preferred mode of market penetration for the firm seeking to expand globally when the company wants to market its patent? a) Licensing b) Exporting c) Setting up local facilities d) Setting up a foreign sales office Ans: b Section: The Process of Overseas Expansion by Multinationals Level: Medium 1.23 Which of the following is generally a licensing rather that an exporting opportunity for a multinational looking to expand globally? a) The firm has a product that can be shipped without adaptation. b) The firm is seeking to market a specific product or process technology that can be written down and transmitted objectively. c) The firm has a product such as a new device that is technologically advanced. d) A firm that has a specialized cost-saving equipment. Ans: B Section: The Process of Overseas Expansion by Multinationals Level: Medium 1.24 Which of the following theories identifies specialization as the main reason for international business activity? a) product life cycle theory of international trade b) theory of diversification c) doctrine of comparative advantage d) theory of globalization Ans: c Section: rise of the multinational Level: Difficult 1.25 Critics of the multinational corporation would not fault its tendency to a) shift production from one location to another in search of lower costs b) avoid taxes c) cause balance of payments difficulties d) engage in environmental protection measures Ans: d Section: criticisms of the MNC Level: Difficult 1.26 Multinational firms Chapter 1, Introduction a) are riskier than purely domestic firms because of the exposures of operating abroad b) are less risky than purely domestic firms because of international diversification c) may be less risky than domestic firms if the added risks of operating overseas are more than offset by the ability to operate in nations whose economic cycles are not perfectly in phase d) invest in developed countries only and avoid developing economies Ans: c Section: the importance of total risk Level: Difficult 1.27 According to the capital asset pricing model a) only the systematic component of risk affects the required return b) foreign investments whose returns are uncorrelated with the market's return should have a higher required return than comparable domestic investments c) total risk of the investment is most relevant for small to medium-sized firms d) diversification is secondary to risk levels of the investment Ans: a Section: capital asset pricing Level: Difficult 1.28 The internationalization process tends to a) proceed in a preprogrammed series of steps b) begin by licensing foreign producers c) inevitably involve foreign production d) often begin by accident Ans: d Section: capital asset pricing Level: Difficult 1.29 According to the efficient market hypothesis, which one of the following is NOT correct? a) markets place a premium on the future b) today’s stock price is the best predictor of tomorrow’s stock price c) stock prices reflect all available information d) today’s stock price incorporates the past history of prices Ans: a Section: market efficiency Level: Difficult 1.30 Which one of the following provides strong evidence that internationalization continues to grow in the world economy? Chapter 1, Introduction a. import restrictions by the Bush Administration on foreign steel b. efforts suggested by politicians to restrict the sourcing of foreign products by locally headquartered multinationals c. the growing volume of foreign direct investment by U.S. as well as other multinational companies d. pressure on governments to embargo unfriendly nations Ans: c Section: Evolution of the Multinational Corporation Level: Difficult 1.31 For the multinational corporation, which one of the following complements to the integration of worldwide operations is MOST critical? a) flexibility b) adaptability c) speed d) economies of scale of distribution Ans: c Section: A Behavioral Definition of the Multinational Corporation Level: Difficult 1.32 Referring to the text, if you were the CEO of a multinational corporation, which of the following would be MOST important to you in hiring a manager? One that a) Avoids risk at any price b) Manages effectively the political environment of the subsidiary country c) Anticipates every future disturbance related to the supply chain d) Makes decisions that anticipates problems and provides solutions that enhances the firm’s prospects for growth Ans: d Section: The Global Manager Level: Difficult 1.33 Reverse foreign investment into the United States primarily started with _________ multinationals? a) West European b) East European c) Japanese d) Chinese Ans: d Section: The rise of the multinational corporation Level: Difficult Chapter 1, Introduction 1.34 Privatization refers to _____________ a) A corporation deciding to delist its shares on a stock exchange. b) A government that decides to purchase privately owned enterprises c) A government that decides to allow private enterprises to exist d) A government that decides to sell state owned enterprises to private investors. Ans. d Section The rise of the multinational corporation Level: Difficult 1.35 Total risk can be attributed to how many sources? a) 0 b) 1 c) 2 d) 3 Ans. c Section Capital Asset Pricing Level: Difficult 1.36 Which of the following factors has NOT recently contributed to radically changing the global competitive environment? a) Increased nationalizations of private enterprises b) Massive deregulation c) The collapse of the Soviet Union d) Advances in information technology Ans. a Section The Rise of the Multinational Corporation Level: Difficult 1.37 The world’s dominant currency is the ______ a) Euro b) U.S. dollar c) British pound d) Swiss Franc Ans. b Section: Introduction Level: Easy. 1.38 The BRICS refer to which group of countries: Chapter 1, Introduction a) Belgium, the Republic of Ireland, Croatia and Serbia b) Botswana, Rwanda, Ivory Coast, and Sudan c) Brazil, Russia, India, China, and South Africa d) Big and Rich Industrial Countries of Southern Europe. Ans. c Section: Evolution of the Multinational Corporation Level: Easy 1.39 The theory of comparative advantage implies that: a) one country's gain comes at the expense of another country. b) international trade will enhance the standard of living of both countries. c) if a country doesn’t have an absolute advantage in at least one good there is no benefit to trade d) that the country with cheaper labor will reap all the benefits from trade. Ans. b Section: The rise of the multinational corporation Level: Easy 1.40 The theory of comparative advantage ignores which of the following: a) Uncertainty b) Economies of scale c) Transportation costs d) All of the above Ans. d Section: The rise of the multinational corporation Level: Difficult Chapter 2, The Determination of Exchange Rates CHAPTER 2 The Determination of Exchange Rates 2.1 The most likely explanation for the rise of the U.S. dollar during the early 1980s is that the U.S. a. budget deficit lowered U.S. interest rates b. trade deficit accelerated U.S. inflation c. economy slowed dramatically d. budget deficit raised U.S. interest rates Ans: d Section: Expectations and the asset market model of exchange rates Level: Easy 2.2 The U.S. dollar weakened during the 1970s for the following reasons EXCEPT a. U.S. inflation accelerated b. the U.S. economy weakened c. foreigners didn't want to hold as many dollars as before d. foreigners wanted to hold more dollars than before Ans: d Section: Expectations and the asset market model of exchange rates Level: Easy 2.3 Of the following, exchange rates depend the most upon relative a. monetary systems b. political systems c. trade deficits d. inflation rates between nations Ans: d Section: The nature of money and currency values Level: Easy 2.4 ______ is another name for the complete replacement of the local currency with the U.S. dollar. a. Seignorage b. Dollarization c. Depreciation d. Appreciation Ans: b Section: Currency Substitution/Dollarization Level: Easy Chapter 2, The Determination of Exchange Rates 2.5 A cheap yuan relative to other currencies would give China’s __________ an unfair advantage in the global economy. a. imports b. subsidies c. bankers d. exporters Ans: d Section: How Real Exchange Rates Affect Relative Competitiveness Level: Easy 2.6 The asset market view of exchange rate determination does NOT state that the spot rate a. should follow a random walk b. is affected primarily by a nation's long-run economic prospects c. is influenced by a nation’s annual economic growth d. should be strongly affected by a nation's balance of trade Ans: d Section: Expectations and the asset market model of exchange rates Level: Easy 2.7 When monetary authorities have not insulated their domestic money supplies from the foreign exchange transactions, it is known as ________ intervention. a. unsterilized b. sterilized c. foreign market d. subsidized Ans: a Section: Sterilized versus unsterilized intervention Level: Easy 2.8 When the U.S. Federal Reserve sells or purchases Treasury securities in order to sterilize the impact of their foreign exchange market interventions, it is referred to as a(n). ________ operation. a. floating currency b. spot rate c. revaluation d. open market Ans: d Section: Sterilized versus unsterilized intervention Level: Easy Chapter 2, The Determination of Exchange Rates 2.9 During the 1994 peso problem, Mexico made a fundamental error by not allowing the ________ of pesos to fall. a) demand b) supply c) devaluation d) real exchange rate Ans: b Section: Sterilized versus unsterilized intervention Level: Easy 2.10 When the U.S. dollar becomes weaker, U.S. exports become more ____ in foreign markets. a. competitive b. costly c. credit worthy d. productive Ans: a Section: How Real Exchange Rates Affect Relative Competitiveness Level: Easy 2.11 Although the mechanics of central bank interventions in the global currency markets may vary from country to country, the goal is always the same, to ____ the demand for one currency by ______ the supply of another. a. increase, increasing b. decrease, decreasing c. increase, decreasing d. decrease, increasing Ans: a Section: Foreign Exchange Market Intervention Level: Easy 2.12 On Friday, September 13, 1992, the lira was worth DM 0.0013. Over the weekend the lira devalued against the DM to DM 0.0012. By how much had the lira devalued against the DM? a. 7.69% b. 8.33% c. 5.21% d. 9.27% Ans: a Section: Setting the equilibrium spot exchange rate Level: Medium Chapter 2, The Determination of Exchange Rates 2.13 Suppose that the Brazilian real devalues by 40% against the U.S. dollar. By how much will the dollar appreciate against the real? a. 67% b. 40% c. 32% d. 28% Ans: a Section: Setting the equilibrium spot exchange rate Level: Medium 2.14 The French euro devalued by 17% against the U.S. dollar. This is equivalent to a revaluation of the dollar against the euro by a) 17% b) 16.31% c) 20.48% d) 17.54% Ans: c Section: Setting the equilibrium spot exchange rate Level: Medium 2.15 If the Australian dollar devalues against the Japanese yen by 10%, the yen will appreciate by a. 33.32% b. 25.55% c. 10.11% d. 11.11% Ans: d Section: Setting the equilibrium spot exchange rate Level: Medium 2.16 If the euro depreciates against the U.S. dollar by 50%, the dollar appreciates against the euro by a. 55% b. 100% c. 200% d. 1,000% Ans: b Section: Setting the equilibrium spot exchange rate Level: Medium 2.17 If the U.S. dollar appreciates against the Nigerian naira by 150%, the naira depreciates against the dollar by Chapter 2, The Determination of Exchange Rates a. 60% b. 75% c. 125% d. 300% Ans: a Section: Setting the equilibrium spot exchange rate Level: Medium 2.18 If the dinar devalues against the U.S. dollar by 45%, the U.S. dollar will appreciate against the dinar by a. 45% b. 82% c. 55% d. 32% Ans: b Section: Setting the equilibrium spot exchange rate Level: Medium 2.19 If the peso depreciates against the U.S dollar by 80%, the US dollar will appreciate against the peso by a. 300% b. 200% c. 250% d. 400% Ans: d Section: Setting the equilibrium spot exchange rate Level: Medium 2.20 If the U.S. dollar appreciates against the euro by 25%, the euro will depreciate against the U.S. dollar a. 25% b. 20% c. 30% d. 10% Ans: b Section: Setting the equilibrium spot exchange rate Level: Medium 2.21 If a foreigner purchases a U.S. government security the a. supply of dollars rises b. federal government deficit declines c. demand for dollars rises Chapter 2, The Determination of Exchange Rates d. U.S. money supply rises Ans: c Section: Setting the equilibrium spot exchange rate Level: Medium 2.22 The foreign currency price of foreign goods in terms of the local currency price of domestic goods is called a. the real exchange rate b. the balance of trade c. the trade-weighted exchange rate d. purchasing parity Ans: a Section: The fundamentals of central bank intervention Level: Medium 2.23 An increase in the real exchange rate will a. raise national income b. lower national income c. make a country less competitive in international trade d. lower the cost of foreign goods e. c and d Ans: e Section: The fundamentals of central bank intervention Level: Medium 2.24 A slowdown in U.S. economic growth will a. boost the value of the dollar because inflation fears will be calmed b. boost the value of the dollar because the Federal Reserve will expand the money supply c. lower the value of the dollar because the U.S. will be a less attractive place to investors d. lower the value of the dollar because interest rates will rise Ans: c Section: The fundamentals of central bank intervention Level: Medium 2.25 The willingness of people to hold money a. increases with the interest rate b. rises with price stability c. rises with national income d. b and c only Chapter 2, The Determination of Exchange Rates Ans: d Section: The fundamentals of central bank intervention Level: Medium 2.26 Sound economic policies will a. raise the value of a nation's currency by boosting the economy b. lower the value of a nation's currency by increasing the precautionary demand for money c. lower the value of a nation's currency by leading to lower interest rates d. both b and c Ans: a Section: The fundamentals of central bank intervention Level: Medium 2.27 Large government budget deficits will a. raise the value of a nation's currency by raising domestic interest rates b. raise the value of a nation's currency by stimulating the domestic economy c. lower the value of a nation's currency by leading to higher inflation d. be irrelevant since historical experience shows no correlation between government budget deficits and the value of the nation's currency Ans: d Section: The nature of money and currency values Level: Medium 2.28 If you were a monetary authority and wanted to neutralize the effects of central bank currency interventions such as interest rate changes, which of the following would be most effective? a. the sale or purchase of Treasury securities b. the creation of a currency board c. pegging the exchange rate to another currency d. convincing investors that the currencies involved in the intervention are perfect complements to each other Ans: a Section: Sterilized versus Unsterilized Intervention Level: Medium 2.29 Which type of money is most likely to see its value fluctuate in the foreign exchange market? a. fiat money b. commodity money c. price-indexed money d. pegged-exchange rate Chapter 2, The Determination of Exchange Rates Ans: a Section: Central bank reputations and currency values Level: Difficult 2.30 An increase in the supply of U.S. dollars by the Federal Reserve will a. raise the value of the dollar because it will stimulate U.S. economic growth b. raise the value of the dollar because it will lead to higher U.S. interest rates c. reduce the value of the dollar because of inflation fears in the United States d. decrease the value of the dollar because it will force other countries to raise their interest rates Ans: c Section: The fundamentals of central bank intervention Level: Difficult 2.31 On July 19, 1985, the Italian lira devalued by 17% against the U.S. dollar. This is equivalent to a revaluation of the dollar against the lira of a. 17% b. 16.31% c. 20.48% d. 17.54% Ans: c Section: Setting the equilibrium spot exchange rate Level: Difficult 2.32 Which of the following is an example of foreign exchange market intervention? a. the U.S. government pays Social Security checks to pensioners living in Poland b. IBM sells euros it received in international trade c. the Canadian government pays interest to Saudi Arabian investors d. the French government sells dollars in the foreign exchange market to prop up the value of the euro Ans: d Section: The fundamentals of central bank intervention Level: Difficult 2.33 During 1995, the yen went from $0.0125 to $0.0095238. By how much did the dollar appreciate against the yen? a. 23.81% b. 31.25% c. 15.67% d. 40.78% Ans: b Section: Setting the equilibrium spot exchange rate Level: Difficult Chapter 2, The Determination of Exchange Rates 2.34 The _______ for/of foreign currency in the U.S. is derived from the demand for ___________ by American consumers. a. Demand, foreign products b. Demand, tax loopholes c. Supply, lower tariffs d. Supply, local products Ans: a: Section: Setting the equilibrium spot exchange rate Level: Difficult 2.35 Which one of the following is NOT associated with dollarization of a nation’s currency? a. In Panama 30-year mortgages were no longer available b. central banks may lose the profit on the currency they hold c. it has been known to provide price stability d. some capital may return and the economy begin to grow again Ans: a Section: Central Bank Reputations and Currency Values – Dollarization Level: Difficult 2.36 Which one of the following is NOT a disadvantage of a strong dollar? a. Ford Corporation’s competitiveness diminishes in foreign markets b. American-made Dell computers lose sales to their Chinese counterparts c. U.S. unemployment levels rise in some sectors d. Americans will be less prone to buy foreign wines Ans: d Section: The Fundamentals of Central Bank Interventions – How Real Exchange Rates Affect Relative Competitiveness Level: Difficult 2.37 The value of the euro was $0.84 on October 27, 2000. On March 23, 2008 the same euro was worth $1.58. By how much did the value of the dollar depreciate vis-à-vis the euro? a) 88.10% b) -88.10% c) -67.13% d) -46.84% Ans: d Section: Setting the equilibrium spot exchange rate Level: Difficult Chapter 2, The Determination of Exchange Rates 2.38. In the two years after Brexit the pound depreciated sharply by 17.81%. If the British pound two years after was worth $1.20, what was it worth before Brexit? a) $1.17 b) $1.46 c) $1.81 d) $1.92 Ans: b Section: Setting the equilibrium spot exchange rate Level: Difficult 2.39. On September 11, 2019, President Trump tweeted that the Federal Reserve should cut interest rates to zero or less. If financial markets view the Federal Reserve as being completely independent from the executive branch. Then what would be the likely market reaction on the value of the dollar relative to the euro. a) There should be no reaction based on that tweet b) The value of the dollar would drop c) The value of the euro would drop d) The value of the dollar would increase Ans: a Section: Central bank reputations and currency values Level: Medium 2.40 In response to a falling Turkish lira the President of Turkey Recep Tayyip Erdogan on May 11, 2018 called for lower interest rates and described interest rates as the “mother and father of all evil.” If markets believe the President of Turkey has influence on the central bank then what is the likely market reaction on that day? a) The Turkish lira will appreciate relative to the euro b) The Turkish lira will depreciate relative to the euro c) The dollar will appreciate relative to the euro and the Turkish lira d) There should be no market reaction based on this statement Ans: b Section: Central bank reputations and currency values Level: Medium Chapter 3, The International Monetary System CHAPTER 3 The International Monetary System 3.1 The ________ is an exchange rate system that is free from central bank and other government-type interventions. a) managed float b) clean float c) dirty float d) target-zone arrangement Ans: b Section: Free float Level: Easy 3.2 What is the name for the exchange rate system where market participants will adjust their current and expected future currency needs as price levels change, interest differentials appear, and economic growth occurs? a) free float b) clean float c) managed float d) dirty float Ans: a Section: Alternative Exchange Rate Systems Level: Easy 3.3 When governments attempt to reduce the uncertainty caused by short and medium term exchange rate changes, it is referred to as _________. a) smoothing out daily fluctuations b) leaning against the wind c) unofficial pegging d) a dirty float Ans: b Section: Managed float Level: Easy 3.4 Under a _________, countries adjust their national economic policies to maintain their exchange rates within a specific margin around agreed-upon, fixed central exchange rates. a) managed float b) ‘beggar-thy-neighbor” devaluation c) dirty float d) target-zone arrangement Chapter 3, The International Monetary System Ans: d Section: Target-zone arrangement Level: Easy 3.5 What is the name of the policy aimed to lessen the need to monetize a government’s budget deficit by reducing expenditures often with the unintended outcome of increased unemployment? a) fixed-rate system b) managed float c) target-zone arrangement d) austerity Ans: d Section: Target-zone arrangement Level: Easy 3.6 ________ is nonconvertible paper money backed only by faith in the monetary authorities. a) Specie b) Fiat money c) Seignorage d) Par value Ans: b Section: The classical gold standard Level: Easy 3.7 Under the classic gold standard, if prices began rising in the U.S. a) the dollar value of the pound would rise b) the dollar value of the pound would fall c) the U.S. would begin running a balance of trade surplus d) gold would flow out of the U.S. and the U.S. money supply would drop Ans: d Section: The classical gold standard Level: Easy 3.8 The Bretton Woods system a) ended in 1971 b) ended in 1939 when World War II began c) is currently the basis for the international monetary system d) is currently in use only by the major industrial nations Ans: a Section: Introduction Level: Easy Chapter 3, The International Monetary System 3.9 The current exchange rate system can best be characterized as a ___ system. a) free float b) managed float c) fixed-rate d) hybrid Ans: d Section: The current system of exchange rate determination Level: Easy 3.10 Managed floats do NOT fall into which of the following categories of central bank intervention? a) smoothing out daily fluctuations b) leaning against the wind c) unofficial pegging d) letting market forces set exchange rates Ans: d Section: Managed float Level: Easy 3.11 The European Monetary System is best described as a a) clean float b) target-zone arrangement c) dirty float d) managed float Ans: b Section: The european monetary system Level: Easy 3.12 Which of the following produced a valuable lesson about exchange-rate stability and target-zone arrangements? a) European Monetary System b) European Community c) European Common Market d) European Union Ans: a Section: The European Monetary System and Monetary Union Level: Easy 3.13 What is the name given to profits earned by a central bank from money creation? a) seigniorage b) interest arbitrage Chapter 3, The International Monetary System c) moral hazard d) fiat money Ans: a Section: The European Monetary System and Monetary Union Level: Easy 3.14 A weak peso is most likely to cause a) added employment and inflation in Mexico b) less unemployment but more inflation in Mexico c) more unemployment but less inflation in Mexico d) less unemployment and less inflation in Mexico Ans: b Section: Emerging market currency crises Level: Easy 3.15 The Bretton Woods system fell apart because a) of the oil crisis b) U.S. monetary policy was too expansionary c) Japan ran a large trade surplus d) the United States no longer supported a pegged gold standard Ans: b Section: The bretton woods system Level: Easy 3.16 The gold standard was dissolved in 1973 because a) the U.S. printed too many dollars to maintain gold at $35/oz b) exchange markets preferred a floating rate system c) high interest rates raised the cost of holding gold d) some countries preferred to hold gold instead of dollars Ans: d Section: The post-bretton woods system Level: Easy 3.17 The rising dollar in the early 1980s can be attributed to a) high real interest rates in the United States b) improved investment prospects in the United States c) the growing U.S. budget deficit d) a and b only Ans: d: Section: The post-bretton woods system Level: Easy Chapter 3, The International Monetary System 3.18 The fall of the dollar beginning in 1985 can be attributed to a) the growing U.S. budget deficit b) the large U.S. trade deficit c) rapid U.S. economic growth d) the slowdown in U.S. economic growth relative to growth overseas Ans: d Section: The post-bretton woods system Level: Easy 3.19 The characteristic of gold that is most important to the success of a gold standard is that it is a) portable b) storable c) easily standardized d) expensive to produce as well as universally acceptable Ans: d Section: The classical gold standard Level: Medium 3.20 A gold standard ensures a long-run tendency toward price stability because a) gold is desirable b) gold is durable and storable c) the cost of producing an ounce of gold stays relatively constant overtime d) gold supply is directly related to consumer satisfaction Ans: c Section: The classical gold standard Level: Medium 3.21 Calls for a new gold standard reflect a) fundamental distrust of government's willingness to maintain the integrity of fiat money b) a general willingness to accept fiat money c) a short memory of what actually transpired under the gold standard d) the durability and desirability of gold Ans: a Section: The classical gold standard Level: Medium 3.22 Assume you are a critic of the World Bank. Which one of the following would NOT be one of your criticisms? a) World Bank projects do not come under the scrutiny of the global financial markets.