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concept of the “Impossible Trinity”

  1. The authors discuss the concept of the “Impossible Trinity” or the inability to achieve simultaneously the goals of exchange rate stability, full financial integration, and monetary independence. If a country chooses to have a pure float exchange rate regime, which two of the three goals is a country most able to achieve?
full financial integration and monetary independence
exchange rate stability and full financial integration
monetary independence and exchange rate stability
A country cannot attain any of the exchange rate goals with a pure float exchange rate regime.
  • MNEs must modify finance theories like cost of capital and capital budgeting because of foreign complexities. 



  • A small economy country whose GDP is heavily dependent on trade with the United States could use a(n) ________ exchange rate regime to minimize the risk to their economy that could arise due to unfavorable changes in the exchange rate.
managed float
pegged exchange rate with the Euro
independent floating
pegged exchange rate with the United States
      Relative to MNEs, purely domestic firms tend to have GREATER political risk. True False A firm in the International Trade Phase of Globalization: makes all foreign payments in foreign currency units and all foreign receipts in domestic currency units. bears direct foreign exchange risk. receives all foreign receipts in foreign currency units and makes all foreign payments in domestic currency units. none of the above     Imports have the potential to lower a country’s inflation rate because of each of the following EXCEPT: the higher prices of foreign goods spurs domestic competitors to cut prices. the import of lower priced goods limits what domestic competitors can charge for goods. the import of lower priced services limits what domestic competitors can charge for services. all of the above     Which of the following is NOT an argument against dollarization? Dollarization causes a loss of sovereignty over domestic monetary policy. The central bank of the dollarized country loses the role of lender of last resort. Dollarization causes the country to lose the power of seignorage. Dollarization removes currency volatility against the dollar.
  • In January 2002, the Argentine Peso changed in value from Peso1.00/$ to Peso1.40/$, thus, the Argentine Peso ________ against the U.S. dollar.
remained neutral
all of the above
  • Under a fixed exchange rate system, the government bears the responsibility to ensure that the BOP is near zero. If the sum of the current and capital accounts do not approximate zero, the government is expected to intervene in the foreign exchange market by buying or selling official foreign exchange reserves. If the sum of the first two accounts is GREATER THAN ZERO, a ________ demand for the domestic currency exists in the world. To preserve the fixed exchange rate, the government must then intervene in the foreign exchange market and ________ domestic currency for foreign currencies or gold so as to bring the BOP back near zero.
surplus; buy
deficit; sell
deficit; buy
surplus; sell
  Which of the following domestic financial instruments have NOT been modified for use in international financial management?  interest rate and currency swaps currency options and futures letters of credit All of the above are domestic financial instruments that have also been modified for use in international financial markets.    
  1. The twin agency problems limiting financial globalization are caused by these two groups acting in their own self-interests rather than the interests of the firm.
corporate insiders and attorneys
attorneys and unsavory customs officials
corporate insiders and rulers of sovereign states
rulers of sovereign states and unsavory customs officials
  1. Based on the premise that, other things equal, countries would prefer a fixed exchange rate, which of the following statements is NOT true?
Fixed exchange rate regimes necessitate that central banks maintain large quantities of international reserves for use in the occasional defense of the fixed rate.
Stable prices aid in the growth of international trade and lessen exchange rate risks for businesses.
Fixed rates are inherently inflationary in that they require the country to follow loose monetary and fiscal policies.
Fixed rates provide stability in international prices for the conduct of trade.
  1. Beginning in 1991 Argentina conducted its monetary policy through a currency board. In January 2002, Argentina abandoned the currency board and allowed its currency to float against other currencies. The country took this step because:
the United States required the action as a prerequisite to finalizing a free trade zone with all of North, South, and Central America.
the Argentine Peso had grown too strong against major trading powers thus the currency board policies were hurting the domestic economy.
the Argentine government lost the ability to maintain the pegged relationship as in fact investors and traders perceived a lack of equality between the Argentine Peso and the U.S. dollar.
all of the above
  1. In finance, a liquid asset:
sells at or near its market value.
sells quickly.
both A and B
none of the above
  1. Which of the following statements about the balance of payments is NOT true?
The BOP is a flow statement, summarizing all international transactions that occur across the geographic borders over a period of time, typically a year.
Although the BOP must always balance in theory, in practice there are substantial imbalances as a result of statistical errors and misreporting of current account and financial account flows.
The BOP is the summary statement of all international transactions between one country and all other countries.
All of the above are true.
  1. The International Monetary Fund (IMF): 
was created as a result of the Bretton Woods Agreement.
aids countries with balance of payment and exchange rate problems.
in recent years has provided large loans to Russia, South Korea, and Brazil.
is all of the above.
  1. In the Anglo-American model of corporate governance, the primary goal of management is to:
maximize shareholder wealth.
maximize the wealth of all stakeholders.
minimize risk.
minimize costs.          
  1. Which of the following is NOT a possible and appropriate response by shareholders dissatisfied with existing firm management of a publicly traded firm?
Shareholders, perhaps with the help of others, could attempt to initiate a takeover.
Shareholders could remain quietly disgruntled.
Shareholders could sell their shares of stock.
All of these responses may be possible and appropriate.
  1. If share price rises from $12 to $15 per share, and pays a dividend of $1 per share, what was the rate of return to shareholders?
  • Use the following terms for this question: 
    C = consumption
    I = capital investment spending
    G = government spending
    X = exports of goods and services
    M = imports of goods and services
    BOP = balance of payments
    GDP = gross domestic product
    NPV = net present value
    INF = inflation
    R = real rate of return

    The static equation for the nations GDP is:
GDP = C + I + G + (X + M ) × INF
GDP = C + I + X – M + R
GDP = C + I + G + X + M
GDP = C + I + G + X – M
  • The financial account consists COMPLETELY of which four components?
mutual fund investment, portfolio investment, derivative investment, and stock investment
direct investment, stock investment, net financial derivatives, and bond investment
stock investment, bond investment, derivative investment, and mutual fund investment
direct investment, portfolio investment, net financial derivatives, and other asset investment   Balance of payment (BOP) data may be important for any of the following reasons: Changes in a country’s BOP may signal a change in controls over payment of dividends and interest. BOP data helps to forecast a country’s market potential, especially in the short run. The BOP is an important indicator of a country’s foreign exchange rate. all of the choices provided above    
  • The balance of payments as applied to a course in international finance may be defined as:
the amount of a country’s merchandise trade deficit or surplus.
the amount still owed by governments to the International Monetary Fund.
the amount still owed by an exporting firm after making an initial down payment.
the measurement of all international economic transactions between the residents of a country and foreign residents.
  • Domestic firms tend to make GREATER use of financial derivatives than MNEs because they can bear the greater risk presented by these financial instruments.


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  • In determining why a firm becomes multinational there are many reasons. One reason is that the firm is a market seeker. Which of the following is NOT a reason why market-seeking firms produce in foreign countries?
satisfaction of local demand in the domestic markets
satisfaction of local demand in the foreign country
political safety and small likelihood of government expropriation of assets
All of the above are market-seeking activities.
  • When the EU moved to a single currency with the adoption of the euro, its member states agreed to each of the following EXCEPT:
control of their own money supply.
free movement of capital in and out of their economies.
a single currency.
In fact, the member states agreed to ALL of the above.
    When categorizing investments for the financial account component of the balance of payments the ________ is an investment where the investor has no control whereas the ________ is an investment where the investor has control over the asset. direct investment; indirect investment direct investment; portfolio investment portfolio investment; direct investment portfolio investment; indirect investment
  • Which of the following is NOT an important concept when distinguishing between international and domestic financial management?
corporate governance
political risk
culture, history, and institutions
All of the above are important distinguishing concepts.
  • Which of the following would NOT be considered a typical BOP transaction?
The U.S. subsidiary of European financial giant, Credit Suisse, pays dividends to its parent in Zurich.
Toyota U.S.A. is a U.S. distributor of automobiles manufactured in Japan by its parent company.
A U.S. tourist purchases gifts at a museum in London.
All are example of BOP transactions.
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