4230 Exam #3

Which of the following enables organizations to conduct international trade without having to resort to barter?

A.
Foreign exchange market

B.
Caribbean Single Market and Economy

C.
Auction market

D.
Countertrade

E.
Balance-of-trade equilibrium

A

The currency of the country of Venadia falls sharply in value against the currency of Lutetia, a neighboring country. Which of the following is a consequence of this exchange rate movement?

A.
Lutetia’s products will achieve a competitive pricing in Venadia.

B.
Venadia’s exports to Lutetia will increase, because Venadian goods will become cheaper in Lutetia.

C.
Venadia’s products will cost more in Lutetia.

D.
There will be no difference in the volume or direction of trade.

E.
Lutetia’s exports to Venadia will increase, because Lutetian goods will become cheaper in Venadia.

B

Which of the following is a function of the foreign exchange market?

A.
To provide some insurance against foreign exchange risk

B.
To protect short-term cash flow from adverse changes in exchange rates

C.
To eliminate volatile changes in exchange rates

D.
To reduce the economic exposure of a firm

E.
To enable companies to engage in capital flight when countertrade is not possible

A

Steven converted $1,000 to ×105,000 for a trip to Japan. However, he spent only ×50,000. During this period, the value of the dollar weakened against the yen. Considering a current exchange rate of $1 = ×100, how many dollars did Steven spend on the trip?

A.
$550

B.
$523

C.
$450

D.
$600

E.
$500

C. For an exchange rate of $1 = ×100, the remaining 55,000 yen would yield 550 dollars. Hence, the amount spent by Steven during the trip is $450 ($1,000 – $550).

A French company wants to invest 20 million euros for three months. The company found that investing in a Thai money market account would give it a higher interest rate than domestic investments. Which of the following is true about this investment?

A.
The investment is risk-free because money market investments are considered to be equivalent to bank deposits.

B.
The investment is not risk-free because foreign currency movements in the intervening period can affect the profitability of the firm.

C.
The investment is risk-free because such investments also lock foreign exchange rates for the duration of the investment.

D.
The investment is not risk-free because money market instruments are considered to be the most speculative of all investments.

E.
The investment is risk-free because the Thai money market is considered to be more stable and secure than other markets.

B

Which of the following refers to currency speculation?

A.
The short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates

B.
The exchange rate at which a foreign exchange dealer will convert one currency into another that particular day

C.
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates

D.
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy

E.
The growth in a country’s money supply exceeding the growth in its output, leading to price inflation

A

Robben Inc. converts $1,000,000 into euros when the exchange rate is $1 = €0.75. After three months, the company converts this back into dollars when the exchange rate is $1 = €0.80. Which of the following is the outcome of this transaction?

A.
A loss of $62,500

B.
A loss of $66,667

C.
A gain of $50,000

D.
A gain of $62,500

E.
A loss of $50,000

A. Currency speculation typically involves the short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates. In the first transaction, the company receives €750,000. These euros when converted back into dollars yield only $937,500 (€750,000 ÷ 0.80). Net loss = $1,000,000 – $937,500.

Which of the following refers to carry trade?

A.
Providing insurance or hedging against the risks that arise from volatile changes in exchange rates

B.
A transaction between two parties that involves exchanging currency and executing a deal at some specific date in the future

C.
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates

D.
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy

E.
Borrowing in one currency where interest rates are low and then using the proceeds to invest in another currency where interest rates are high

E.

The interest rate on borrowings in Rhodia is 2 percent and the interest rate on bank deposits in Maritia is 7.5 percent. In this scenario, a carry trade would be to:

A.
borrow money in Maritian currency, convert it into Rhodian currency, and deposit it in a Rhodian bank.

B.
borrow money in Rhodian currency and invest in stocks with good growth potential in Rhodia.

C.
borrow money in Rhodian currency, convert it into Maritian currency, and deposit it in a Maritian bank.

D.
invest in bank deposits of Maritia and reinvest the earnings in Rhodia.

E.
invest in bank deposits of Rhodia and reinvest the earnings in Maritia.

C.

The speculative element of the carry trade is that its success is based upon a belief that:

A.
there will be no adverse movement in exchange rates or interest rates.

B.
liquidity is the key factor in determining interest rates.

C.
increasing money supply will not drive inflation.

D.
spot exchange rates are more favorable than forward exchange rates.

E.
hedging insures a company against foreign exchange risks.

A.

Which of the following caused a decline in the dollar/yen carry trade during 2008-2009?

A.
Increase in risk appetite making the carry trade less attractive

B.
Decrease in interest rate differentials as the U.S. rates came down

C.
Increase in interest rate differentials as Japanese interest rates came down

D.
Decrease in interest rate differentials as the U.S. interest rates went up

E.
Decrease in interest rate differentials as the Japanese rates went up

B.

What is a firm engaging in when it insures itself against foreign exchange risk?

A.
Currency speculation

B.
Carry trade

C.
Hedging

D.
Currency swap

E.
Arbitrage

C.

How are spot exchange rates determined?

A.
By using historical average prices of different currencies

B.
By the interaction between demand and supply of a currency relative to other currencies

C.
By taking the average of a basket of currencies

D.
By government decree

E.
By predicting future currency movements

B.

An American company imports laptop computers from Japan. The company knows that after a shipment arrives, it must pay in yen to the Japanese supplier within 30 days. In a particular exchange, the American company must pay the Japanese supplier ×150,000 for each computer at the current dollar/yen spot exchange rate of $1 = ×110. The company intends to resell the computers the day they arrive for $1,600 each but it does not have the funds to pay the Japanese supplier until the computers have been sold. Which of the following will happen if the exchange rate after 30 days is $1 = ×90?

A.
The importer will earn a profit of approximately $236 per computer.

B.
The importer will earn a profit of approximately $67 per computer.

C.
The importer will incur a loss of approximately $236 per computer.

D.
The importer will incur a loss of approximately $67 per computer.

E.
The importer will incur a loss of approximately $90 per computer.

D. Changes in spot exchange rates can be problematic for an international business. Initially, the American importer had estimated a profit of $236 per computer ($1,600 – $1,364). However, at an exchange rate of $1 = ×90, the importer will have to pay $1,667 per computer (×150,000/90). The outcome will be a loss of $67 ($1,600 – $1,667).

A U.S. company that imports laptop computers from Japan knows that in 30 days it must pay in yen to a Japanese supplier when a shipment arrives. The company will pay the Japanese supplier ×150,000 for each computer, and the current dollar/yen spot exchange rate is $1 = ×110. The importer can sell the computers the day they arrive for $1,600 each. However, the importer will not have the funds to pay the Japanese supplier until the computers have been sold. The importer enters into a 30-day forward exchange transaction with a foreign exchange dealer at $1 = ×105. Which of the following will happen if the exchange rate after 30 days is $1 = ×90?

A.
The importer will earn a profit of approximately $236 per computer.

B.
The importer will earn a profit of approximately $171 per computer.

C.
The importer will earn a profit of approximately $65 per computer.

D.
The importer will incur a loss of approximately $67 per computer.

E.
The importer will incur a loss of approximately $105 per computer.

B. To insure or hedge against a foreign exchange risk, the U.S. importer might want to engage in a forward exchange. A forward exchange occurs when two parties agree to exchange currency and execute the deal at some specific date in the future. Initially, the importer had estimated a profit of $236 per computer ($1,600 – $1,364). With the forward contract in place, the importer will have to pay no more than $1,429 per computer (×150,000/105). The outcome will be a guaranteed profit of $171 ($1,600 – $1,429).

Which of the following occurs when two parties agree to exchange currency and execute the deal at some specific date in the future?

A.
Forward exchange

B.
Spot exchange

C.
Carry trade

D.
Currency swap

E.
Arbitrage

A.

Which of the following indicates that the dollar is selling at a discount on the 30-day forward market?

A.
The spot exchange rate is $1 = ×120 currently and $1 = ×130 after 30 days.

B.
The spot exchange rate is $1 = ×120 currently and $1 = ×100 after 30 days.

C.
The current spot exchange rate is $1 = ×120 and the 30-day forward rate is $1 = ×110 after 30 days.

D.
The current spot exchange rate is $1 = ×120 and the 30-day forward rate is $1 = ×130 after 30 days.

E.
The current spot exchange rate is $1 = ×120 and the 30-day forward rate is $1 = ×120 after 30 days.

C.

Which of the following instances indicates that the dollar is selling at a premium on the 30-day forward market?

A.
The spot exchange rate is currently $1 = ×120 and changes to $1 = ×130 after 30 days.

B.
The spot exchange rate is currently $1 = ×120 and changes to $1 = ×110 after 30 days.

C.
The current spot exchange rate is $1 = ×120 and the 30-day forward rate is $1 = ×110 after 30 days.

D.
The current spot exchange rate is $1 = ×120 and the 30-day forward rate is $1 = ×130 after 30 days.

E.
The current spot exchange rate is $1 = ×120 and the 30-day forward rate is $1 = ×120.

D.

Assume that the dollar is selling at a premium on the 30-day dollar/euro forward market. Which of the following is true of the foreign exchange dealers’ market’s expectations about the dollar over the next 30 days?

A.
The dollar will depreciate against the euro.

B.
The market is undecided about the direction of currency movement.

C.
The dollar will appreciate against the euro.

D.
The dollar/euro exchange rate will be steady.

E.
The dollar will buy more euros with a spot exchange than with a 30-day forward exchange.

C.

Which of the following transactions is used to move out of one currency and into another for a limited period without incurring foreign exchange risk?

A.
Currency swap

B.
Currency speculation

C.
Carry trade

D.
Spot exchange

E.
Arbitrage

A.

Which of the following foreign exchange trading centers has the highest percentage of activity?

A.
Frankfurt

B.
London

C.
Paris

D.
Hong Kong

E.
Sydney

B.

Which of the following is a reason for London’s dominance in the foreign exchange market?

A.
Great Britain’s decision to retain the British pound instead of using the euro

B.
The preeminence of Financial Times Stock Exchange (FTSE) index as an economic health indicator

C.
London’s location making it the link between the East Asian and New York markets

D.
London being the preferred headquarters destination for major multinational corporations

E.
London’s trading centers opening soon after Tokyo’s and New York’s trading centers closing for the night

C.

Which of the following is a key feature of the foreign exchange market?

A.
The foreign exchange market never sleeps.

B.
The foreign exchange market is located in London.

C.
The foreign exchange market is characterized by high transaction costs.

D.
The foreign exchange market is shut for two hours every day.

E.
The foreign exchange market is poorly interconnected giving rise to ample arbitrage opportunities.

A.

What is meant by arbitrage?

A.
To provide insurance or hedge against the risks that arise from volatile changes in exchange rates

B.
A transaction between two parties that involves exchanging currency and executing a deal at some specific date in the future

C.
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates

D.
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy

E.
To borrow in one currency where interest rates are low and use the proceeds to invest in another currency where interest rates are high

D.

Assume that the yen/dollar exchange rate quoted in London at 3 p.m. is ×120 = $1, and the New York yen/dollar exchange rate at the same time (10 a.m. New York time) is ×123 = $1. Which of the following transactions would yield immediate profit?

A.
Forward exchange

B.
Carry trade

C.
Currency swap

D.
Arbitrage

E.
Currency speculation

D.

The yen/dollar exchange rate is ×120 = $1 in London and ×123 = $1 in New York at the same time. What is the net profit if a dealer takes $1,000,000 to purchase ×123,000,000 in New York and engages in arbitrage by selling it in London?

A.
$34,000

B.
$20,390

C.
$25,000

D.
$46,666

E.
$39,454

C. The purchase of securities in one market for immediate resale in another to profit from a price discrepancy is known as arbitrage. ×123 million could be sold for dollars in London to get $1,025,000 (×123 million ÷ 120). Net profit = $1,025,000 – $1,000,000 = $25,000.

Which of the following is true of the determination of exchange rates?

A.
Differences in relative demand and supply do not explain the determination of exchange rates.

B.
Differences in relative demand and supply explain the factors underlying the phenomenon behind the demand for and supply of a currency.

C.
The differences in relative demand and supply alone provide a high-level understanding of what’s behind the determination of exchange rates.

D.
While the differences in relative demand and supply provide an accurate explanation for appreciation of currencies, they fail to explain depreciation.

E.
The differences in relative demand and supply cannot explain or predict the conditions under which a particular currency will be in demand or not.

E.

Which of the following is true of the differences in relative demand and supply of currencies?

A.
They cannot be used to explain the determination of exchange rates.

B.
While they provide an understanding of the major factors underlying exchange rates, they exclude minor factors.

C.
They provide a high-level understanding of exchange rates.

D.
While they provide an accurate explanation for appreciation of currencies, they fail to explain depreciation.

E.
They cannot explain or predict when the demand of a particular currency would exceed its supply and vice versa.

E.

The law of one price states that:

A.
by comparing the prices of identical products in different currencies, it would be possible to determine the "real" or PPP exchange rate that would exist if markets were efficient.

B.
a country’s "nominal" interest rate (i) is the sum of the required "real" rate of interest (r) and the expected rate of inflation over the period for which the funds are to be lent (I).

C.
a country in which price inflation is running wild should expect to see its currency depreciate against that of countries in which inflation rates are lower.

D.
when the growth in a country’s money supply is faster than the growth in its output, price inflation is fueled.

E.
in competitive markets free of transportation costs and trade barriers, identical products sold in different countries must sell for the same price when their price is expressed in terms of the same currency.

E.

The euro/dollar exchange rate is €1 = $1.20. According to the law of one price, how much would a camera that retails for $300 in New York sell for in Germany?

A.
€320

B.
€300

C.
€250

D.
€360

E.
€150

C. Since one euro is equal to 1.2 dollars, the price of the camera should be €250 ($300/1.2).

Which of the following has no impediments to the free flow of goods and services, such as trade barriers?

A.
Economic Union

B.
Currency Board

C.
Efficient market

D.
Carry trade

E.
European Monetary System

C.

To express the PPP theory in symbols, let P$ be the U.S. dollar price of a basket of particular goods and P× be the price of the same basket of goods in Japanese yen. What does the purchasing power parity (PPP) theory predict to be the equivalent of the dollar/yen exchange rate, E$/×?

A.
E$/× = (1 + P×)/P$

B.
E$/× = (1 + P$)/P×

C.
E$/× = P×/P$

D.
E$/× = P$/P×

E.
E$/× = (1 + P$)/(1 + P×)

D

If a basket of goods costs $100 in the United States and €120 in Europe, what would the purchasing power parity theory’s prediction of the dollar/euro exchange rate be?

A.
$1 = €1.20

B.
$1 = €1

C.
$1 = €0.80

D.
$1 = €0.90

E.
$1 = €1.10

A. In this case, dollar/euro exchange rate should be $100/€120 or $0.833 per euro. In other words, $1 = €1.20.

Which of the following is true of the purchasing power parity (PPP) theory?

A.
A country’s "nominal" interest rate (i) is the sum of the required "real" rate of interest (r) and the expected rate of inflation over the period for which the funds are to be lent (I).

B.
The exchange rate will not change if relative prices change.

C.
The price of a "basket of goods" should be roughly equivalent in each country in relatively efficient markets.

D.
In competitive markets free of transportation costs and trade barriers, identical products sold in different countries must sell for the same price.

E.
If the law of one price were true for all goods and services, the PPP exchange rate could not be found from any individual set of prices.

C.

Which of the following is illustrated by the Big Mac Index published by The Economist?

A.
The law of one price

B.
The purchasing power parity theorem

C.
The Fisher effect

D.
Flow of FDI

E.
The bandwagon effect

B.

Which of the following is true of inflation?

A.
It occurs when the demand for a particular currency is more than the supply.

B.
It occurs when securities are purchased in one market for immediate resale in another.

C.
It occurs when two parties agree to exchange currency and execute a deal at a specific date in the future.

D.
It occurs when the quantity of money in circulation rises faster than the stock of goods and services.

E.
It occurs when output increases faster than the money supply.

D.

Which of the following occurs when a government increases the money supply?

A.
It results in an overall decrease in credit.

B.
It makes it difficult for individuals and companies to borrow from banks.

C.
It makes it easier for banks to borrow from the government.

D.
It causes a decrease in demand for goods and services.

E.
It causes price deflation as the money supply exceeds goods and services output.

c.

The purchasing power parity (PPP) theory tells us that a country with a high inflation rate will see:

A.
appreciation in its currency exchange rate.

B.
a decrease in interest rates.

C.
the collapse of the gold standard.

D.
depreciation in its currency exchange rate.

E.
a decrease in its money supply.

D.

During inflation, an increase in the amount of currency available leads to:

A.
overheating of the economy thereby reducing the production levels in the economy.

B.
changes in the relative demand-and-supply conditions in the foreign exchange market.

C.
a reduction in the rate of inflation thus leading to an appreciation of the currency.

D.
decreased lending by banks thereby resulting in more savings.

E.
a decrease in the demand for goods and services, which drives currency value higher.

B.

Which of the following is true when a government is strongly committed to controlling the rate of growth in money?

A.
The country’s future inflation rate may be low.

B.
The country’s currency will steadily depreciate significantly and instantly in the foreign exchange market.

C.
The country’s economy will be marked by an abundance of liquidity.

D.
The country will see a good number of populist measures not funded by taxation.

E.
The country will struggle to match money supply with adequate supply of goods and services.

A.

If a country’s government does not control the rate of growth in money supply:

A.
its future inflation rate will be low.

B.
its taxes will decrease in the future.

C.
it will see reduced spending on public infrastructure projects.

D.
its currency could depreciate in the future.

E.
its output of goods and services will exceed money supply, thereby fueling deflation.

D.

Which of the following is a drawback of the purchasing power parity theory?

A.
It does not appear to be a strong predictor of short-run movements in exchange rates covering time spans of five years.

B.
It does not explain change in exchange rates in terms of change in relative prices.

C.
It cannot explain when the demand of a particular currency would exceed its supply and vice versa.

D.
It does not address inflation in situations where governments control the rate of growth in money supply.

E.
It cannot predict exchange rate changes for countries with high rates of inflation and underdeveloped capital markets.

A.

The purchasing power parity (PPP) theory best predicts exchange rate changes for countries with:

A.
appreciating currencies.

B.
stable currencies.

C.
underdeveloped capital markets.

D.
small differentials in inflation rates.

E.
industrialized economies.

C.

The failure to find a strong link between relative inflation rates and exchange rate movements has been referred to as the:

A.
currency crisis.

B.
banking crisis.

C.
purchasing power parity puzzle.

D.
bandwagon effect.

E.
foreign exchange risk.

C.

Which of the following is a reason for the failure of the purchasing power parity (PPP) theory to predict exchange rates accurately?

A.
It assumes away transportation costs and trade barriers.

B.
It does not take into account the law of one price.

C.
It does not take into account the practice of arbitrage.

D.
It assumes that the markets are not efficient.

E.
It does not consider government influence on a nation’s money supply.

A.

Which of the following weakens the link between relative price changes and changes in exchange rates predicted by purchasing power parity (PPP) theory by violating the assumption of efficient markets?

A.
Government intervention in cross-border trade

B.
The relationship between money supply and price inflation

C.
The impact of increase in currency on relative demand and supply conditions of currencies

D.
Excessive growth in money supply

E.
The insignificant impact of transportation costs on international trade

A.

When dominant enterprises in an industry exercise a degree of pricing power, setting different prices in different markets to reflect varying demand conditions, it is referred to as:

A.
price discrimination.

B.
premium pricing.

C.
psychological pricing.

D.
price skimming.

E.
price leadership.

A.

Which of the following is a way in which an enterprise with some market power might limit arbitrage so that their price discrimination policy works?

A.
Pricing its products identically despite huge differences in demand across different markets

B.
Differentiating otherwise identical products among nations along some line, such as design or packaging

C.
Adopting a pricing strategy that matches what competitors charge in each of the different national markets

D.
Limiting sales of its products to only a few nations

E.
Selling its products at higher prices than normal to break even by selling fewer units

B.

In countries where inflation is expected to be high, interest rates also will be high, because investors want compensation for the decline in the value of their money. This relationship is referred to as the:

A.
PPP theory puzzle.

B.
lead strategy.

C.
Fisher effect.

D.
bandwagon effect.

E.
international Fisher effect.

C.

The Fisher effect states that:

A.
a country’s "nominal" interest rate (i) is the sum of the required "real" rate of interest (r) and the expected rate of inflation over the period for which the funds are to be lent (I).

B.
by comparing the prices of identical products in different currencies, it is possible to determine the "real" or purchasing power parity exchange rate that would exist if markets were efficient.

C.
a country in which price inflation is running wild should expect to see its currency depreciate against that of countries in which inflation rates are lower.

D.
when the growth in a country’s money supply is faster than the growth in its output, price inflation is fueled.

E.
in competitive markets free of transportation costs and trade barriers, identical products sold in different countries must sell for the same price.

A.

According to the Fisher effect, if the "real" rate of interest in a country is 4 percent and the expected annual inflation is 9 percent, what would the "nominal" interest rate be?

A.
5 percent

B.
13 percent

C.
9 percent

D.
36 percent

E.
2.25 percent

B. i = r + I, i.e., 4% + 9% = 13%

Which of the following states that for any two countries, the spot exchange rate should change in an equal amount but in the opposite direction to the difference in nominal interest rates between the two countries?

A.
Bandwagon effect

B.
Law of one price

C.
International Fisher effect

D.
Helms-Burton Act

E.
Purchasing power parity (PPP) theory

C.

The nominal interest rate is 9 percent in Brazil and 6 percent in Japan. Applying the international Fisher effect, the Brazilian real should:

A.
appreciate by 3 percent against the Japanese yen.

B.
depreciate by 3 percent against the Japanese yen.

C.
appreciate by 1.5 percent against the Japanese yen.

D.
depreciate by 1.5 percent against the Japanese yen.

E.
appreciate by 15 percent against the Japanese yen.

B.

Which of the following refers to the bandwagon effect?

A.
Securities are purchased in one market for immediate resale in another.

B.
Dominant enterprises exercise a degree of pricing power, setting different prices in different markets to reflect varying demand conditions.

C.
Traders move like a herd, all in the same direction and at the same time, in response to each other’s perceived actions.

D.
Governments routinely intervene in international trade, creating tariff and nontariff barriers to cross-border trade.

E.
The output of goods and services grows at a lesser rate than that of the money supply.

C.

Which of the following is the reason for the failure of purchasing power parity theory and international Fisher effect in predicting short-term movements in exchange rates?

A.
The impact of investor psychology on short-run exchange rate movements

B.
The strong relationship between inflation rates and interest rates

C.
The impact of interest rates and short-term exchange rate movements

D.
The strong relationship between interest rate differentials and subsequent changes in spot exchange rates

E.
Government intervention in cross-border trade that violates the assumption of efficient markets

A.

Which of the following positions is adopted by the inefficient market school of thought toward exchange rate forecasting?

A.
Forward exchange rates are the best possible predictors of future spot exchange rates.

B.
Forward exchange rates represent market participants’ collective predictions of likely spot exchange rates.

C.
Companies cannot beat the markets because forward rates reflect all available information about likely future changes in exchange rates.

D.
Investing in forecasting services can improve the foreign exchange market’s estimate of future exchange rates.

E.
The foreign exchange market is efficient at setting forward rates, which are unbiased predictors of future spot rates.

D.

Which of the following is true of the efficient market school of thought toward exchange rate forecasting?

A.
Forward rates are not unbiased predictors of future spot rates.

B.
Accurate predictions of future spot rates can be calculated from publicly available information.

C.
Prices do not reflect all available information about the market.

D.
Inaccuracies in predictions will not be consistently above or below future spot rates; they will be random.

E.
Forecasts might provide better predictions of future spot rates than forward exchange rates do.

D.

In terms of the approaches to exchange rate forecasting, which of the following draw(s) on economic theory to construct sophisticated econometric models for predicting exchange rate movements?

A.
Technical analysis

B.
Fractional integration models

C.
Markov switching models

D.
Fundamental analysis

E.
Chart analysis

D.

Which of the following is a variable used in exchange rate forecasting models based on fundamental analysis?

A.
Relative strength indicator

B.
Moving average

C.
Inflation rate

D.
Business cycles

E.
Regression

C.

Which of the following is true of a country that is running a deficit on a balance-of-payments current account?

A.
It is importing fewer goods and services than it is exporting.

B.
It may result in depreciation of the country’s currency on the foreign exchange market.

C.
It will lead to very low interest rates in the country.

D.
It will lead to a shortage of the country’s currency in the foreign exchange market.

E.
It is engaging in neo-mercantilism.

B.

Which of the following approaches to forecasting exchange rate movements uses price and volume data to determine past trends?

A.
Technical analysis

B.
Behavioral equilibrium model

C.
Interest rate parity equation model

D.
Fundamental analysis

E.
Portfolio balance model

A.

Which of the following premises is technical analysis, an approach to exchange rate forecasting, based on?

A.
Price and volume data cannot be used to determine past trends.

B.
Econometric models drawn from economic theory are best suited to predict exchange rate movements.

C.
The foreign exchange market is efficient and forward exchange rates are the best predictors of future spot exchange rates.

D.
Previous market trends and waves can be used to predict future market trends and waves.

E.
Since forward exchange rates are the best predictors of future spot rates, it makes no sense to invest in forecasting.

D.

Which of the following observations is true of technical analysis, an approach to exchange rate forecasting?

A.
It draws on economic theory to construct models for predicting exchange rate movements.

B.
The variables contained in this model typically include relative money supply growth rates, inflation rates, and interest rates.

C.
There is a sound theoretical rationale for the assumption of predictability underlying this approach.

D.
Owing to its drawbacks, this approach has declined in importance over the last few years, giving way to fundamental analysis.

E.
It does not rely on a consideration of economic fundamentals.

E.

How is a country’s currency referred to when its government allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with it?

A.
Externally convertible

B.
Nonconvertible

C.
Leading

D.
Freely convertible

E.
Lagging

D.

How is a currency classified if only nonresidents may convert it into a foreign currency without any limitations?

A.
Externally convertible

B.
Nonconvertible

C.
Leading

D.
Freely convertible

E.
Lagging

A.

The government of Beryllia tightly controls the ability of its residents to convert its currency into other currencies. However, all foreign businesses with deposits in banks of Beryllia may, at any time, convert all their currency into foreign currency and take them out of the country. Beryllia’s currency is said to be:

A.
leading.

B.
nonconvertible.

C.
externally convertible.

D.
freely convertible.

E.
lagging.

C.

Which of the following is a reason why governments limit convertibility of their currency?

A.
To encourage foreign investments

B.
To control currency appreciation

C.
To encourage capital flight

D.
To preserve their foreign exchange reserves

E.
To promote neo-mercantilism

D.

Which of the following occurs when residents and nonresidents of a country rush to convert their holdings of domestic currency into a foreign currency?

A.
Deflation

B.
Arbitrage

C.
Liquidity rush

D.
Capital flight

E.
Currency swap

D.

The phenomenon of capital flight is most likely to occur when:

A.
the recovery phase post an economic depression nears its end.

B.
the value of the domestic currency depreciates rapidly because of hyperinflation.

C.
a country’s economic prospects are stable and indicate growth.

D.
interest rates are low for a prolonged period of time.

E.
governments lift convertibility restrictions on their currency.

B.

Companies can deal with the problem of nonconvertibility of currency by engaging in:

A.
price discrimination.

B.
countertrade.

C.
arbitrage.

D.
price skimming.

E.
currency speculation.

B.

Which of the following refers to countertrade?

A.
A short-term movement of funds from one currency to another in the hopes of profiting from shifts in exchange rates

B.
The exchange rate at which a foreign exchange dealer will convert one currency into another that particular day

C.
Simultaneous purchase and sale of a given amount of foreign exchange for two different value dates

D.
The purchase of securities in one market for immediate resale in another to profit from a price discrepancy

E.
A range of barter-like agreements by which goods and services can be exchanged for other goods and services

E.

Which of the following refers to the extent to which the income from individual transactions is affected by fluctuations in foreign exchange values?

A.
Translation exposure

B.
Economic exposure

C.
Purchasing power parity

D.
Transaction exposure

E.
Forward exchange rate

D.

Which of the following is an example of transaction exposure?

A.
Obligations for the purchase of goods at previously agreed prices

B.
Borrowing of funds in domestic currency

C.
Impact of currency exchange rate changes on the reported financial statements of a company

D.
Long-term effect of changes in exchange rates

E.
The effect of changing exchange rates on future prices, sales, and costs

A.

What is meant by translation exposure?

A.
The long-run effect of changes in exchange rates on future prices, sales, and costs

B.
The impact of currency exchange rate changes on the reported financial statements of a company

C.
The extent to which a firm’s future international earning power is affected by changes in exchange rates

D.
The extent to which the income from individual transactions is affected by fluctuations in foreign exchange values

E.
The obligations for the purchase or sale of goods and services at previously agreed prices

B.

Which of the following is concerned with the present measurement of past events?

A.
Economic exposure

B.
Transaction exposure

C.
Arbitrage

D.
Translation exposure

E.
Currency speculation

D.

Which of the following refers to the extent to which the reported consolidated results and balance sheets of a corporation are affected by fluctuations in foreign exchange values?

A.
Economic exposure

B.
Transaction exposure

C.
Translation exposure

D.
Countertrade

E.
Carry trade

C.

What is meant by economic exposure?

A.
The extent to which a firm’s future international earning power is affected by changes in exchange rates

B.
The impact of currency exchange rate changes on the reported financial statements of a company

C.
The extent to which the income from individual transactions is affected by fluctuations in foreign exchange values

D.
The extent to which the quantity of money in circulation rises faster than the stock of goods and services

E.
The extent of disparity in prices, when expressed in the same currency, of similar products in different countries

A.

Which of the following is concerned with the effect of exchange rate changes on individual transactions, most of which are short-term affairs that will be executed within a few weeks or months?

A.
Purchasing power parity

B.
Transaction exposure

C.
Economic exposure

D.
Translation exposure

E.
Currency speculation

B.

A lead strategy involves:

A.
delaying foreign currency payables when a currency is expected to appreciate.

B.
delaying foreign currency payables when a currency is expected to depreciate.

C.
attempting to collect foreign currency receivables early when a foreign currency is expected to appreciate.

D.
attempting to collect foreign currency receivables early when a foreign currency is expected to depreciate.

E.
delaying the collection of foreign currency receivables when a foreign currency is expected to appreciate.

D.

A lag strategy involves:

A.
delaying the collection of foreign currency receivables when a foreign currency is expected to appreciate.

B.
delaying the collection of foreign currency receivables when a foreign currency is expected to depreciate.

C.
attempting to collect foreign currency receivables early when a foreign currency is expected to appreciate.

D.
paying foreign currency payables (to suppliers) before they are due when a currency is expected to appreciate.

E.
paying foreign currency payables (to suppliers) before they are due when a currency is expected to depreciate.

A.

In terms of foreign exchange, which of the following is true of leading and lagging strategies?

A.
They primarily protect long-term cash flows from adverse changes in exchange rates.

B.
They are used to minimize economic exposure of companies.

C.
They can help firms minimize their transaction and translation exposure.

D.
They involve accelerating payments from strong-currency to weak-currency countries.

E.
They are limited by governments because they create pressure on strong currencies.

C.

In terms of foreign exchange, which of the following observations is true of leading and lagging strategies?

A.
They are easy to implement.

B.
They primarily protect long-term cash flows from adverse changes in exchange rates.

C.
Firms need minimal bargaining power to implement them.

D.
They can put pressure on a weak currency.

E.
They accelerate payments from strong-currency to weak-currency countries.

D.

Which of the following is a step taken to manage foreign exchange risk?

A.
Firms should focus solely on managing transaction and translation exposures.

B.
Forecasting future exchange rate movements should be avoided as it is speculative.

C.
Firms need to develop strategies for dealing with economic exposure.

D.
Firms should avoid central control of exposure.

E.
Firms should not distinguish between transaction and translation exposure and economic exposure.

C.

Which of the following refers to the institutional arrangements that govern exchange rates?

A.
Generally accepted accounting principles

B.
General agreement on tariffs and trade

C.
International monetary system

D.
General agreement on trade in services

E.
Financial management information system

C.

Which of the following refers to a system under which the exchange rate for converting one currency into another is continuously adjusted depending on the laws of supply and demand?

A.
Fixed exchange rate

B.
Floating exchange rate

C.
Forward exchange rate

D.
Pegged exchange rate

E.
Nominal exchange rate

B.

In which kind of exchange rate is the value of the currency fixed relative to a reference currency, and then the exchange rate between that currency and other currencies is determined by the reference currency exchange rate?

A.
Flexible

B.
Pegged

C.
Real

D.
Dirty-float

E.
Floating

B.

Many of the world’s developing nations peg their currencies, primarily to the:

A.
U.S. dollar.

B.
Saudi riyal.

C.
Japanese yen.

D.
Chinese yuan.

E.
German deutsche mark.

A.

In a floating exchange rate, the relative value of a currency:

A.
is more predictable and less volatile.

B.
is determined by market forces.

C.
changes infrequently only under a specific set of circumstances.

D.
is set against other currencies at some mutually agreed on exchange rate.

E.
does not depend on the free play of market forces.

B.

Which of the following refers to a system under which a country’s currency is nominally allowed to float freely against other currencies, but in which the government will intervene, buying and selling currency, if it believes that the currency has deviated too far from its fair value?

A.
Fixed float

B.
Clean float

C.
Pegged float

D.
Dirty float

E.
Capital float

D.

Which of the following statements is true about the various exchange rate systems?

A.
In a fixed exchange rate system, the value of a currency is adjusted according to the day to day market forces.

B.
In a clean float, the central bank of a country will intervene in the foreign exchange market to try to maintain the value of its currency.

C.
After the collapse of the Bretton Woods system of floating exchange rates in 1973, the world has operated with a fixed exchange rate system.

D.
Under the Bretton Woods system, currency devaluations over 10 percent were allowed only with the approval of the IMF.

E.
In dirty float, the exchange rate between a currency and other currencies is relatively fixed against a reference currency exchange rate.

D.

In which kind of exchange rate system are the values of a set of currencies set against each other at some mutually agreed on exchange rate?

A.
Clean float

B.
Floating

C.
Fixed

D.
Dirty-float

E.
Pegged

C.

The 1944 Bretton Woods conference created two major international institutions that play a role in the international monetary system—the International Monetary Fund (IMF) and the:

A.
United Nations.

B.
European Union.

C.
World Trade Organization.

D.
World Bank.

E.
G20.

D.

Which of the following refers to the gold standard?

A.
Pegging currencies to gold and guaranteeing convertibility

B.
Conducting international trade by physically exchanging gold

C.
The most valuable currency in the world at any given point in time

D.
The common global standard of gold quality to be maintained

E.
The quality of merchandise to be maintained for it to be exportable

A.

Which of the following is a reason for the emergence of the gold standard?

A.
Expansion in the volume of international trade due to the Industrial Revolution

B.
Inability of governments to convert gold into paper currency on demand at a fixed rate

C.
Widening gap between the developed and the developing nations

D.
Failure of the Bretton Woods fixed exchange rate system

E.
Failure of the U.S. dollar to act as a reference currency

A.

In terms of the gold standard, the amount of currency needed to purchase one ounce of gold was referred to as the:

A.
gold to bond ratio.

B.
gold reserve ratio.

C.
gold mix ratio.

D.
gold par value.

E.
gold net value.

D.

Which of the following describes a country when the income its residents earn from exports is equal to the money its residents pay to other countries for imports?

A.
A currency crisis

B.
Balance-of-trade equilibrium

C.
Balance-of-payments deficit

D.
Balance-of-trade surplus

E.
Fiscal deficit

B.

Which of the following is a great strength of the gold standard?

A.
It helped establish the dollar as a predominant vehicle currency.

B.
It helped governments raise foreign exchange reserves thereby increasing economic stability.

C.
It contained a powerful mechanism for achieving balance-of-trade equilibrium by all countries.

D.
It helped reduce inflation to near-zero levels in all countries engaged in international trade.

E.
It helped to establish a common currency across the globe to fund international trade.

C.

Which of the following statements is true about the gold standard?

A.
Given a common gold standard, the value of any currency in units of any other currency was easy to determine.

B.
Establishing a gold standard seemed impractical as the volume of international trade expanded in the wake of the Industrial Revolution.

C.
A drawback of the gold standard was that it failed to provide a mechanism for achieving balance-of-trade equilibrium by all countries.

D.
Under the gold standard, when a country has a trade deficit, there will be a net flow of gold from the other countries to that country.

E.
The gold standard refers to the use of gold coins as a medium of exchange between countries involved in international trade.

A.

In the 1930s, countries were devaluing their currencies at will in order to boost exports, thus shattering confidence in the:

A.
floating exchange rate system.

B.
gold standard system.

C.
fixed exchange system.

D.
Bretton Woods system.

E.
managed-float system.

B.

Certovia and Norkland are two neighboring countries that actively trade goods and services with each other. Under the gold standard, there will be a net flow of gold from Norkland to Certovia when:

A.
Certovia is in trade deficit with Norkland.

B.
Norkland is in balance-of-trade equilibrium with Certovia.

C.
Certovia is in trade surplus with Norkland.

D.
Certovia imports more than it exports to Norkland.

E.
Norkland’s balance of payment to Certovia is favorable.

C.

Argonia Republic is in trade surplus with Kamboly. Under the gold standard, which of the following statements is true until a balance-of-trade equilibrium is achieved?

A.
There will be a net flow of gold from Argonia Republic to Kamboly.

B.
The money supply in Kamboly will be reduced due to the flow of gold to Argonia Republic.

C.
The prices of the traded goods in Kamboly will increase.

D.
The demand for traded goods in Argonia Republic will increase.

E.
Kamboly will start to buy more goods from Argonia Republic.

B.

Which of the following was a reason that led to the collapse of the gold standard in 1939?

A.
Difficulty and complexity in using the gold standard to determine the exchange rate

B.
Agreement by governments to convert paper currency into gold on demand at a fixed rate

C.
A cycle of competitive currency devaluations by various countries

D.
Expansion in the volume of international trade in the wake of the Industrial Revolution

E.
The inability of the gold standard to act as a mechanism for achieving balance-of-trade equilibrium by all countries

C.

All countries were to fix the value of their currency in terms of gold but were not required to exchange their currencies for gold, according to the 1944:

A.
Bretton Woods agreement.

B.
Washington Consensus.

C.
World Bank treaty.

D.
Group of Five treaty.

E.
United Nations agreement.

A.

The objective of establishing the World Bank was to:

A.
revive the gold standard.

B.
promote general economic development.

C.
control and manage the International Monetary Fund.

D.
promote a floating exchange rate system.

E.
approve large currency devaluations.

B.

Which of the following observations is true of the Bretton Woods agreement?

A.
The participating countries were required to exchange their currencies for gold.

B.
Devaluation was accepted as a tool of competitive trade policy.

C.
The agreement called for a system of floating exchange rates.

D.
For weak currencies, devaluation of up to 10 percent was allowed without any formal approval by the International Monetary Fund.

E.
A fixed exchange rate system was deemed impractical.

D.

An aspect of the Bretton Woods agreement was a commitment not to use:

A.
the system of fixed exchange rates.

B.
devaluation as a weapon of competitive trade policy.

C.
gold as a measure to fix the value of currencies.

D.
funds from the International Monetary Fund and the World Bank.

E.
the U.S. dollar as a reference currency.

B.

Under a fixed exchange rate regime, what would be the result if a country rapidly increased its money supply by printing currency?

A.
It would lead to an increase in the worth of the currency.

B.
The prices of imports would become more attractive in the country.

C.
The country’s goods would be highly competitive in world markets.

D.
Trade surplus in the country would increase.

E.
It would lead to price deflation in the country.

B.

The architects of the Bretton Woods agreement built limited flexibility into the fixed exchange rate system in order to:

A.
avoid high unemployment.

B.
facilitate competitive currency devaluations.

C.
widen balance-of-payments gap between countries.

D.
increase money supply and thereby price inflation.

E.
avoid balance-of-trade equilibrium between countries.

A.

How does the International Monetary Fund (IMF) provide loans to deficit-laden countries?

A.
It prints the required currencies, thereby increasing money supply in those countries.

B.
It acts as a market, buying goods from these countries and selling them to developed countries.

C.
A pool of gold and currencies contributed by its members provides the resources for lending operations.

D.
The World Bank lends the required amount to the IMF at a low interest rate.

E.
It collects money from those countries that wish to devaluate their currencies.

C.

Which term was not defined in the International Monetary Fund’s Articles of Agreement but was intended to apply to countries that had suffered permanent adverse shifts in the demand for their products?

A.
Competitive disadvantage

B.
Capital flight

C.
Fundamental disequilibrium

D.
Break-even point

E.
Diseconomies of scale

C.

Without currency devaluation, a country in "fundamental disequilibrium" would experience:

A.
a persistent trade surplus.

B.
a balance-of-payments equilibrium.

C.
an increase in exports.

D.
high unemployment.

E.
deflation.

D.

Which of the following was the initial mission of the World Bank?

A.
Maintaining order in the international monetary system

B.
Financing the building of Europe’s economy by providing low-interest loans

C.
Taking over as the successor to the International Monetary Fund

D.
Reviving the gold standard system

E.
Enforcement of the floating exchange rate system

B.

Which of the following was responsible for the World Bank shifting its focus from Europe to third-world nations?

A.
The Great Depression

B.
The Jamaica agreement

C.
World War II

D.
The Marshall Plan

E.
The Bretton Woods agreement

D.

What was the effect of the Marshall Plan?

A.
The United States lent money directly to European nations to help them rebuild their economies.

B.
Member countries of the International Monetary Fund were free to engage in competitive currency devaluations.

C.
The World Bank lent funds to reconstruct the war-torn economies of Europe.

D.
The United States lent money to third-world nations to support their public-sector projects.

E.
The World Bank lent money to the International Monetary Fund so that it could finance deficit-laden countries.

A.

Which of the following is true of the International Bank for Reconstruction and Development (IBRD) scheme of the World Bank?

A.
Resources to fund IBRD loans are raised through subscriptions from wealthy members.

B.
The interest rate charged by the World Bank is higher than the commercial banks’ market rate.

C.
Borrowers have to pay the bank’s cost of funds plus a margin for expenses.

D.
The bank avoids offering low-interest loans to risky customers whose credit rating is often poor.

E.
It was established to approve currency devaluations that are beyond 10 percent.

C.

Which of the following observations about the International Development Association (IDA) scheme of the World Bank is true?

A.
Money is raised through bond sales in the international capital market.

B.
Borrowers have up to 50 years to repay at an interest rate of less than 1 percent a year.

C.
IDA loans go only to European countries.

D.
Grants and interest-free loans are denied to governments of underdeveloped nations.

E.
The bank offers loans only to customers with a satisfactory credit rating.

B.

The collapse of the fixed exchange rate system has been traced to the:

A.
U.S. macroeconomic policy package of 1965-1968.

B.
inflexibility of the fixed exchange rate system that led to high unemployment.

C.
Marshall Plan, under which the United States lent money heavily to European nations.

D.
failure of the International Monetary Fund to impose monetary discipline.

E.
increased taxes in the United States to finance its welfare programs.

A.

Under the U.S. macroeconomic policy package of 1965-1968, President Lyndon Johnson backed an increase in U.S. government spending that was financed by:

A.
the sale of gold reserves.

B.
borrowing from the International Monetary Fund.

C.
an increase in the money supply.

D.
an increase in taxes.

E.
selling bonds in the international capital market.

C.

Under the U.S. macroeconomic policy package of 1965-1968, President Lyndon Johnson backed an increase in U.S. government spending that was financed by an increase in the money supply, resulting in:

A.
increased exports.

B.
a rise in price inflation.

C.
increased taxes.

D.
a positive trade balance.

E.
an increase in the worth of currency.

B.

Which of the following was an announcement made by U.S. President Nixon to enable the devaluation of the dollar during the increase in inflation in 1971 in the United States?

A.
The IMF member countries would adopt the gold standard to fix exchange rates.

B.
The United States would no longer support the World Bank.

C.
A new 15 percent tax would be charged on U.S. exports.

D.
The dollar would no longer be convertible into gold.

E.
German deutsche marks would be the new reference currency.

D.

Which of the following was the weakness of the Bretton Woods system?

A.
It could be wrecked by heavy borrowings from the World Bank and the International Monetary Fund.

B.
It could not work if the U.S. dollar was under speculative attack.

C.
The inflexibility of the system resulted in high unemployment.

D.
It forced fiscal and monetary discipline on participating nations.

E.
It allowed the countries to engage in competitive currency devaluations.

B.

In January 1976, which one of the followed revised the International Monetary Fund’s Articles of Agreement to reflect the new reality of floating exchange rates?

A.
Jamaica agreement

B.
Bretton Woods agreement

C.
Marshall Plan

D.
General agreement on Tariffs and Trade

E.
Plaza Accord

A.

Which of the following was abandoned as per the Jamaica agreement of 1976?

A.
Floating exchange rate system

B.
U.S. dollar as the reference currency

C.
Gold as a reserve asset

D.
Membership to the International Monetary Fund

E.
Granting International Monetary Fund loans to less developed countries

C.

Which of the following statements is true about the changes in the world monetary system since March 1973?

A.
The value of the U.S. dollar has never seen a fall ever since.

B.
Exchange rates have become much more volatile.

C.
Exchange rates have become more predictable.

D.
The fixed rate system was adopted to calculate exchange rates.

E.
The European Monetary System as an institution has gained more prominence.

B.

Which of the following is one of the reasons for the rapid rise in the value of the dollar between 1980 and 1985 despite a large trade deficit?

A.
Political stability in all other parts of the world

B.
Heavy capital outflows from the United States

C.
Low real interest rates in the United States

D.
Slow economic growth in the developed countries of Europe

E.
Increasing exports against decreasing imports in the United States

D.

The fall in the value of the U.S. dollar between 1985 and 1988 was caused by:

A.
economic growth in the developed countries of Europe.

B.
a fall in prices of exported U.S. goods.

C.
a trade surplus in the United States during the previous years.

D.
a combination of government intervention and market forces.

E.
the protectionism measures adopted by European countries.

D.

Under the Plaza Accord of 1985, the Group of Five major industrial countries concluded that it would be desirable if:

A.
the countries returned to a system of fixed exchange rates.

B.
the participating members reverted to the gold standard.

C.
the United States adopted protectionism to improve its trade balance.

D.
most major currencies appreciated vis-à-vis the U.S. dollar.

E.
governments did not regulate the buying and selling of currency.

D.

Which of the following explains the rise of the dollar against most major currencies in the late 1990s, even though the United States was still running a significant balance-of-payments deficit?

A.
Reduced government intervention in the foreign exchange market

B.
Increased foreign investments in U.S. financial assets

C.
Low real interest rates in the United States compared to the rest of the world

D.
Increased exports as opposed to imports

E.
Increased communism in the United States

B.

From mid-2008 through early 2009, the value of the dollar moderately increased against major currencies, despite the fact that the American economy was suffering from a serious financial crisis. Which of the following was a reason for this phenomenon?

A.
High real interest rates in the United States compared to any other developed region in the world sparked an inflow of funds into the country.

B.
U.S. assets were characterized by a high-risk, high-return payoff which prompted foreign investors to park their funds.

C.
Foreign investors were excited at the possibility of high returns following the government bail-out of financial institutions.

D.
Foreign investors put their money in low-risk U.S. assets such as low-yielding U.S. government bonds.

E.
Foreign investors saw opportunities in the United States as the level of indebtedness had begun to reduce.

D.

Which of the following is a characteristic of the floating exchange rate regime?

A.
It allows for automatic trade balance adjustments.

B.
The use of monetary policy by the government is restricted.

C.
It allows for greater monetary discipline.

D.
It limits the destabilizing effects of exchange rate speculation.

E.
It eliminates volatility and uncertainty associated with exchange rates.

A.

Which of the following is an argument for a fixed exchange rate system?

A.
Governments can contract their money supply without worrying about the need to maintain parity.

B.
Trade balance adjustments do not require the intervention of the International Monetary Fund.

C.
It ensures that governments do not expand the monetary supply too rapidly, thus causing high price inflation.

D.
Speculations in exchange rates boost exports and reduce imports.

E.
Each country should be allowed to choose its own inflation rate.

C.

Which of the following is true of monetary contraction in a fixed exchange rate system?

A.
It requires low interest rates.

B.
It increases the demand for money.

C.
It puts downward pressure on a fixed exchange rate.

D.
It leads to an inflow of money from abroad.

E.
It can lead to high price inflation.

D.

Under the Bretton Woods system, if a country developed a permanent deficit in its balance of trade that could not be corrected by domestic policy, this would require the:

A.
country to import more than it exports.

B.
country to make its exports more expensive.

C.
International Monetary Fund to agree to a currency devaluation.

D.
government to expand monetary supply in the economy.

E.
government to undertake activities that led to exchange rate appreciation.

C.

Which of the following is an argument for a floating exchange rate system?

A.
Each country should be allowed to choose its own inflation rate.

B.
Speculation in exchange rates dampens the growth of international trade and investment.

C.
Unpredictability of exchange rate movements makes business planning difficult.

D.
Removal of the obligation to maintain exchange rate parity destroys a government’s monetary control.

E.
Trade deficits can be determined by the balance between savings and investment in a country, not by the external value of its currency.

A.

In comparison to a floating exchange rate regime, a fixed exchange rate system is characterized by:

A.
smoother trade balance adjustments.

B.
increased destabilizing effects of exchange rate speculation.

C.
greater autonomy in terms of monetary policy.

D.
higher monetary discipline.

E.
greater exchange rate uncertainty and volatility.

D.

Critics of floating exchange rates claim that trade deficits are determined by the:

A.
balance between savings and investment in a country.

B.
external value of the currency of a country.

C.
exchange rates of other currencies.

D.
valuations made by International Monetary Fund and the World Bank.

E.
mechanism of competitive currency devaluation.

A.

Which one of the following refers to an exchange rate system under which a country’s exchange rate is allowed to fluctuate against other currencies within a target zone?

A.
Free float

B.
Fixed peg

C.
Adjustable peg

D.
Pure float

E.
Capital float

C.

Which of the following holds true for a pegged exchange rate system?

A.
Adopting a pegged exchange rate regime increases inflationary pressures in a country.

B.
It is necessary for a country whose currency is chosen for the peg to pursue a sound monetary policy.

C.
Pegged exchange rates are popular among many of the world’s largest and developed nations.

D.
The value of a pegged currency falls when the reference currency rises in value.

E.
It is similar to a floating exchange rate system rather than a fixed system.

B.

Adopting which kind of an exchange rate regime moderates inflationary pressures in a country?

A.
Nominal

B.
Pegged

C.
Pure "free float"

D.
Clean float

E.
Real

B.

What can a country introduce if it wants to commit itself to converting its domestic currency on demand into another currency at a fixed exchange rate?

A.
A free-float exchange rate system

B.
A clean-float exchange rate system

C.
A pure-float exchange rate system

D.
A currency board

E.
A gold standard

D.

How does a country that introduces a currency board make its commitment to converting its domestic currency on demand into another currency at a fixed exchange rate credible?

A.
By borrowing funds from the International Monetary Fund and the World Bank

B.
By maintaining a trade surplus with foreign countries

C.
By holding foreign currency reserves equal at the fixed exchange rate to at least 100 percent of the domestic currency issued

D.
By importing more goods from foreign countries than it exports

E.
By printing foreign currencies

C.

Which of the following statements is true about a currency board system?

A.
Under a strict currency board system, interest rates adjust automatically based on the supply and demand of domestic currency.

B.
To convert domestic currency on demand into another currency, a currency board takes grants from the International Monetary Fund.

C.
This system is a true fixed exchange rate regime, because the domestic currency is fixed against other currencies.

D.
A currency board can issue additional domestic currency even when there are no foreign exchange reserves to back it.

E.
A currency board authorizes the government to print money and set interest rates.

A.

Which of the following is a drawback of the currency board system?

A.
The ease with which governments can set and manipulate interest rates acts as a limitation.

B.
Higher domestic inflation rates compared to the inflation rate in the country to which the currency is pegged can make the currency uncompetitive.

C.
The currency board can issue additional domestic notes and coins even when there are no foreign exchange reserves to back it.

D.
The system is a true fixed exchange rate regime, because the domestic currency is fixed against other currencies.

E.
The system lacks commitment to convert domestic currency on demand into another currency.

B.

Which of the following is a reason why Great Britain and the United States could finance their deficits by borrowing private money since the early 1970s?

A.
Rapid development of global capital markets

B.
Shortage of International Monetary Fund grants available for disbursal

C.
High interest rate charged by the International Monetary Fund

D.
Establishment of currency boards in these countries

E.
Decline of the Bretton Woods system

A.

Which of the following is an implication of a currency crisis?

A.
It occurs due to a sharp appreciation in the value of a currency.

B.
It forces authorities to block large volumes of international currency reserves.

C.
A country in currency crisis is not eligible for loans from the International Monetary Fund.

D.
It results in the government sharply increasing interest rates to defend the prevailing exchange rate.

E.
A country in currency crisis faces sharp decreases in stock and property prices.

D.

Which of the following is true of a banking crisis?

A.
It leads to individuals and companies withdrawing their deposits from banks.

B.
It results in a sharp appreciation in the value of the currency.

C.
It happens due to a decline in domestic borrowing.

D.
It occurs due to asset price deflation.

E.
It results in low government deficits.

A.

Which of the following is a common underlying macroeconomic cause of financial crises?

A.
Low relative price inflation rates

B.
Narrowing current account deficit

C.
Increases in stock and property prices

D.
Decline in domestic borrowing

E.
Increases in the value of domestic currency

C.

Most of the International Monetary Fund’s loan activities since the mid-1970s have been targeted toward developing nations typically because:

A.
developed nations are not willing to enact certain macroeconomic policies in return for money.

B.
developing nations are more than twice as likely to experience financial crises as developed nations.

C.
it does not have enough funds to lend to large and developed countries.

D.
only developing nations are allowed to be its beneficiaries.

E.
of relatively slow economic growth in the developed countries of Europe.

B.

According to the agreement reached between the International Monetary Fund and the South Korean government in 1997, in return for funding, the South Koreans were required to:

A.
adopt communist ideologies.

B.
reduce their imports by enforcing restrictive import licensing.

C.
open their economy to greater foreign competition.

D.
oppose the ideologies of the World Trade Organization.

E.
engage in competitive currency devaluation.

C.

All International Monetary Fund (IMF) loan packages come with conditions attached. Which of the following is prevented due to these policies of the IMF?

A.
Trade liberalization

B.
Elimination of restrictive import licensing

C.
Excessive government spending and debt

D.
Privatization of state-owned assets

E.
Deregulation of the economy to increase competition

C.

In the context of the 1997 Asian crisis, how did the International Monetary Fund’s "one-size-fits-all" approach to macroeconomic policy affect South Korea?

A.
It led to a decrease in the interest rates of short-term loans.

B.
It made it difficult for companies to service their excessive short-term debt obligations.

C.
It decreased the probability of widespread corporate defaults.

D.
South Korea failed to recover from its financial crises.

E.
South Korea was forced to increase restrictions on foreign direct investment.

B.

Which of the following arises when people behave recklessly because they know they will be saved if things go wrong?

A.
Systemic risk

B.
Moral hazard

C.
Ethical dilemma

D.
Tragedy of the commons

E.
Risk compensation

B.

Jade, a working professional, began driving rashly ever since she got her car insured against damage. She believed that the insurance claim would cover her in case of any accidents. What does Jade’s behavior display?

A.
Cognitive dissonance

B.
Conflict of interest

C.
Systemic risk

D.
Moral hazard

E.
Tragedy of the commons

D.

The International Monetary Fund has been criticized for:

A.
its lack of a "one-size-fits-all" approach to macroeconomic policy.

B.
encouraging moral hazard among banks.

C.
its lack of power and authority.

D.
using external experts to gain knowledge about a country.

E.
keeping its operations open to outside scrutiny.

B.

According to the critics of the International Monetary Fund (IMF), how should the problem of moral hazard exhibited by banks be resolved?

A.
The IMF should use a "one-size-fits-all" approach to macroeconomic policy.

B.
The IMF should establish a mechanism for accountability.

C.
The IMF should free all banks from the obligation of financial reporting.

D.
The banks should be forced to pay the price for their rash lending policies.

E.
The IMF should bail out the banks whose loans gave rise to financial crises.

D.

According to the noted economist Jeffrey Sachs, the International Monetary Fund should:

A.
not be accountable to anyone as it is a powerful institution.

B.
bail out banks that have rash lending policies.

C.
have a "one-size-fits-all" approach to macroeconomic policy.

D.
keep its operations open to greater outside scrutiny.

E.
lend only to countries with safe credit ratings.

D.

In response to the global financial crisis of 2008-2009, the International Monetary Fund began to:

A.
exercise tight controls on fiscal policy of the borrowing countries.

B.
encourage activities that prevent high inflation rates.

C.
display inflexibility in policy responses.

D.
urge countries to adopt policies that included fiscal stimulus and monetary easing.

E.
adopt a "one-size-fits-all" approach to macroeconomic policy.

D.

Which of the following observations about the International Monetary Fund (IMF) is true?

A.
The IMF can force countries to adopt the policies required to correct economic mismanagement.

B.
Internal political problems can affect a government’s commitment to taking corrective action in return for an IMF loan.

C.
In recent years, the IMF has begun to make its policies more tight and inflexible.

D.
In response to the global financial crisis of 2008-2009, the IMF began to adopt a "one-size-fits-all" approach to macroeconomic policy.

E.
In recent years, the IMF has begun to urge countries to oppose fiscal stimulus and monetary easing.

B.

Which of the following poses a problem for international businesses in the long run?

A.
Using exchange rate instruments like the forward market and swaps

B.
Volatility of the global exchange rate regime

C.
Anti-inflationary monetary policies

D.
Maintaining strategic flexibility by dispersing production to different locations

E.
A policy of reduction in government spending

B.

Which of the following statements is true about the current monetary system?

A.
Use of instruments such as the forward market and swaps has decreased since the breakdown of the Bretton Woods system.

B.
The present monetary system lacks the volatile movements in exchange rates that existed in a fixed exchange rate system.

C.
The current foreign exchange market works exactly as depicted in the purchasing power parity theory.

D.
Instruments such as the forward market and swaps increase the foreign exchange risk a company faces.

E.
A combination of government intervention and speculative activity drives the current foreign exchange market.

E.

Which of the following is a feature of the current monetary system?

A.
It is free from government intervention.

B.
It is free from volatile movements in exchange rates.

C.
It has increased foreign exchange risk for businesses.

D.
It has made it easier to get insurance coverage against exchange rate changes.

E.
Instruments like forward market and swaps have lost their importance in the present system.

C

Vornoda Inc., a multinational clothing and accessory brand, has been facing huge economic losses due to unpredictable exchange rate movements. In order to gain considerable immunity against such currency fluctuations, Vornoda Inc. should:

A.
pursue strategies that increase its economic exposure.

B.
avoid using instruments like forward market and swaps.

C.
disperse production to different locations around the globe.

D.
not contract out manufacturing.

E.
restrict its low-value-added manufacturing to one location.

C.

It is most appropriate for a firm to contract out manufacturing when:

A.
individual manufacturers have few firm-specific skills that contribute to the value of their product.

B.
the value of the host country currency is expected to appreciate.

C.
supplier switching costs are correspondingly high.

D.
firm-specific technology and expertise add significant value to the product.

E.
the currency used for pricing a product is anticipated to stay weak in the long run.

A.

The rate of return that a firm makes on its invested capital is referred to as:

A.
stakeholder return.

B.
profitability.

C.
profit growth.

D.
process value.

E.
strategic fit.

B.

Profit growth is measured by:

A.
dividing the net profits of the firm by total invested capital.

B.
subtracting the previous year’s gross profit from the current year’s gross profit.

C.
calculating the difference between the previous year’s profitability and the current year’s profitability.

D.
the percentage increase in net profits over time.

E.
adding the profitability of the last two fiscal years.

D.

The amount of value a firm creates is measured by:

A.
the difference between the previous year’s profitability and the current year’s profitability.

B.
dividing the market price of its products by the price that customers are actually willing to pay.

C.
the difference between its costs of production and the value that consumers perceive in its products.

D.
dividing the net profits of the firm by total invested capital.

E.
the sum of the profitability of the last two fiscal years.

C.

In general, the more value customers place on a firm’s products:

A.
the lesser the profitability of the firm.

B.
the higher the competitive pressure from other firms.

C.
the lesser the quality of the product.

D.
the lesser the consumer surplus for those products.

E.
the higher the price the firm can charge for those products.

E.

Typically, the price a firm charges for a good or service is:

A.
less than the value placed on that good or service by the customer.

B.
more than what customers assume it would be.

C.
more than the market price for similar goods or services.

D.
the same as the value placed on that good or service by the customer.

E.
less than the lowest priced similar good or service in the market.

A.

As a result of consumer surplus, a firm typically charges a lower price for a good or service than the value placed on it by customers because:

A.
the value creation results in a corresponding reduction in costs of production.

B.
it is highly unlikely that the same good or service will be available to the customers from other firms.

C.
the firm is competing with other firms for the customer’s business.

D.
the firm charges a price that reveals a consumer’s assessment of the product’s value.

E.
the firm creates value for the customer by producing a wide range of products.

C.

One of the reasons why a firm typically charges for a good or service less than the value placed on that good or service by the customer is because:

A.
the firm attempts to create value for the consumers by providing them a wide range of products.

B.
it is normally impossible to segment a market based on each customer’s reservation price.

C.
the value creation results in a corresponding reduction in costs of production.

D.
the firm frequently modifies its products to compete with the products introduced by other firms.

E.
it is highly unlikely that the same good or service will be available to the customers from other firms.

B.

The price that reflects an individual’s assessment of the value of a product is referred to as:

A.
the market price.

B.
the customer’s negotiated price.

C.
the base value of the product.

D.
the customer’s reservation price.

E.
the profit growth price.

D.

The value of a product to an average consumer is V, the average price that the firm can charge a consumer for that product is P, and the average unit cost of producing that product is C. For this scenario, which of the following is true?

A.
The firm makes a profit so long as C is greater than P.

B.
The higher C is relative to P, greater will be the profit.

C.
The consumer surplus per unit is equal to V – P.

D.
The higher the intensity of competitive pressure, the higher the price charged relative to V.

E.
The lower the consumer surplus, the greater the value for the money the consumer gets.

C.

Which of the following of a firm is measured by the difference between the value of a product to an average consumer and the average unit cost of producing that product?

A.
Customer surplus

B.
Value creation

C.
Cost curve

D.
Value efficiency

E.
Customer reservation

B.

Focusing primarily on increasing the attractiveness of a product is referred to as a:

A.
standardization strategy.

B.
differentiation strategy.

C.
target-identification strategy.

D.
low-cost strategy.

E.
profitability strategy.

B.

According to Michael Porter, what are the two basic strategies for creating value and attaining a competitive advantage in an industry?

A.
Differentiation and low-cost

B.
Value creation and generalization

C.
One-size-fits-all and zero-sum

D.
Comparison and standardization

E.
Profitability and strategic fit

A.

According to Michael Porter, superior profitability goes to a firm that:

A.
creates similar products as their competitors.

B.
keeps the gap between value and cost of production smaller than the gap attained by competitors.

C.
drives down the cost structure of its business.

D.
has the highest cost structure in the industry.

E.
has the least valuable product in the industry.

C.

Superior value creation relative to rivals requires that the firm:

A.
creates similar products as its competitors so that consumers do not have to pay a premium price.

B.
has the highest cost structure in the industry.

C.
creates the least valuable product in the eyes of consumers.

D.
ensures that the gap between value and cost of production is greater than the gap attained by competitors.

E.
drives up the cost structure of its business.

D.

Which of the following shows all of the different positions that a firm can adopt with regard to value creation and low cost assuming that its internal operations are configured adequately to support a particular position?

A.
Demand-value model

B.
Experience curve

C.
Efficiency frontier

D.
Optimal output model

E.
Surplus curve

C.

The efficiency frontier has a convex shape because of:

A.
a high-cost structure.

B.
diminishing returns.

C.
a significantly low product value.

D.
low production costs.

E.
high profit growth.

B.

For a firm to maximize its profitability, it is necessary that it:

A.
creates products similar to the products of its competitors.

B.
does not configure its internal operations to reduce costs.

C.
minimizes the value of the consumer surplus.

D.
picks a position on the efficiency frontier that is viable.

E.
strips all the value out of its product offering.

D.

A firm maximizes its profitability when it:

A.
creates products similar to the products of its competitors.

B.
minimizes the value provided by its products.

C.
picks a position on the efficiency frontier that is not viable.

D.
strips all the value out of its product offering.

E.
configures its internal operations to support the position selected by it on the efficiency frontier.

E.

A firm’s profitability is maximized when it:

A.
creates products similar to the products of its competitors.

B.
strips all the value out of its product offering.

C.
ensures that it has the right organization structure in place to execute its strategy.

D.
picks a position on the efficiency frontier that is not viable.

E.
does not configure its internal operations to reduce costs.

C.

The value creation activities of a firm are categorized as:

A.
primary activities and support activities.

B.
strategic activities and functional activities.

C.
ancillary functions and tertiary functions.

D.
primary activities and core activities.

E.
goal-oriented activities and organizational activities.

A.

Which of the following is a primary activity in the operations of a firm?

A.
Logistics function

B.
Research and development

C.
Information systems

D.
Human resource function

E.
Company infrastructure

B.

For services such as banking or health care, "production" typically occurs when the:

A.
customer specifies the service requirements.

B.
service is paid for by the customer.

C.
service is designed in-house.

D.
service is delivered to the customer.

E.
customer provides feedback.

D.

Which of the following is a support activity in the operations of a firm?

A.
Research and development

B.
Customer service

C.
Marketing and sales

D.
Creation and maintenance of information systems

E.
Production

D.

Of all the value creation activities in a firm, which of the following creates value by discovering consumer needs and communicating them back to the R&D function of the company, which can then design products that better match those needs?

A.
Production

B.
Marketing and sales

C.
Human resources

D.
Logistics

E.
Information systems

B.

Which of the following functions creates a perception of superior value in the minds of consumers by solving consumer problems and by supporting them after they have purchased the product?

A.
Production

B.
Marketing and sales

C.
Human resources

D.
Customer service

E.
Logistics

D.

Which of the following is a value creation activity that falls into the category of primary activities?

A.
Creation and maintenance of information systems

B.
Customer service

C.
Human resources

D.
Logistics

E.
Company infrastructure maintenance

B.

Which of the following is the function of a value chain that controls the transmission of physical materials through the value chain, from procurement through production and into distribution?

A.
Human resource

B.
Finance

C.
Marketing

D.
Logistics

E.
Research and development

D.

Which of the following support functions is most likely to involve dealing with the organizational structure, control systems, and culture of the firm?

A.
Human resources

B.
Logistics

C.
Information systems

D.
Company infrastructure

E.
Inventory management

D.

Who among the following should be viewed as part of a firm’s infrastructure?

A.
Procurement manager

B.
Top management

C.
Production manager

D.
Research and development scientist

E.
Marketing personnel

B.

Which of the following is a part of the organization architecture that consists of the metrics used to measure the performance of subunits and make judgments about how well managers are running those subunits?

A.
Reports

B.
Controls

C.
Rewards

D.
Knowledge flows

E.
Dominions

B.

Processes are the:

A.
manner in which decisions are made and work is performed within the organization.

B.
metrics used to measure the performance of subunits.

C.
devices used to reward appropriate managerial behavior.

D.
metrics used to make judgments about how well managers are running the subunits.

E.
norms and value systems that are shared among the employees of an organization.

A.

Which of the following terms best represents the norms and value systems that are shared among the employees of an organization?

A.
Process scenario

B.
Organizational structure

C.
Business structure

D.
Organizational culture

E.
Management structure

D.

A firm’s ability to increase its profitability and profit growth by expanding globally is constrained:

A.
by the imperative of localization.

B.
by the economies of scale.

C.
due to customer surplus.

D.
due to the leveraging of skills developed in foreign operations.

E.
due to the dispersion of individual value creation activities.

A.

A company can increase its growth rate by taking goods or services developed at home and selling them internationally. The returns from such a strategy are likely to be greater if:

A.
the product is already being offered by local companies in the nations that the company enters.

B.
the product is a generic product that requires little differentiation.

C.
indigenous competitors in the nations that the company enters lack comparable products.

D.
there is a high inflation in the nations that the company enters.

E.
the product is perceived to be very costly in the home country of the company.

C.

How does possessing a core competence help a firm?

A.
It helps a firm to create value in such a way that premium pricing is impossible.

B.
It reduces a firm’s dependence on its logistics function.

C.
It enables a firm to reduce the costs of value creation.

D.
It reduces the scope of transfer of skills to foreign markets.

E.
It reduces the need to replicate a business model in a foreign market.

C.

If a value creation activity of a firm can take place in Mexico most effectively, then that activity of the firm must be based in Mexico. Firms that pursue such a strategy are most likely to realize:

A.
a position inside the efficiency frontier.

B.
the experience curve.

C.
economies of scale.

D.
location economies.

E.
demographic advantages.

D.

Which of the following is most likely to be the advantage of locating a value creation activity in the optimal location for that activity?

A.
It increases the costs of value creation.

B.
It decreases consumer surplus.

C.
It helps the firm to achieve a high-cost position.

D.
It nullifies all trade barriers.

E.
It enables a firm to differentiate its product offering from those of competitors.

E.

By dispersing different stages of its value chain to those locations around the world where the value added is maximized or where the costs of value creation are minimized, a firm creates a(n):

A.
integral circle.

B.
dispersal chain.

C.
global web.

D.
international mesh.

E.
worldwide circle.

C.

Which of the following caveats is most likely to discourage global expansion of businesses?

A.
Economies of scale

B.
High consumers’ reservation prices

C.
Trade barriers

D.
Mass customization

E.
Low transportation costs

C.

Which of the following refers to systematic reductions in production costs that have been observed to occur over the life of a product?

A.
Experience curve

B.
Learning effects

C.
Location economies

D.
Efficiency slope

E.
Economies of scale

A.

A number of studies have observed that a product’s production costs decline by some quantity about each time:

A.
annual output is halved.

B.
cumulative output doubles.

C.
the workforce is trimmed by 75 percent.

D.
fixed investment triples.

E.
foreign domestic investment doubles.

B.

The two phenomena that help explain the experience curve are:

A.
learning effects and economies of scale.

B.
technology inputs and wealth transfer.

C.
leveraging subsidiary and local responsiveness.

D.
standardized manufacturing and global web.

E.
efficiency frontier and location economies.

A.

Which of the following refers to cost savings that come from acquiring knowledge from doing a task?

A.
Learning effects

B.
Exponential effects

C.
Ancillary effects

D.
Economies of scale

E.
Location economies

A.

Labor productivity increases over time as individuals understand the most efficient ways to perform particular tasks. This is a result of:

A.
diminishing returns.

B.
location economies.

C.
economies of time.

D.
learning effects.

E.
an efficiency frontier.

D.

In which of the following tasks will the learning effects be most significant?

A.
Pizza delivery for a fast-food major

B.
Data entry for a loan recovery center

C.
Assembly process involving 1,000 complex steps

D.
Sewing buttons onto shirts in a garment factory

E.
Delivering letters to different recipients

C.

Which of the following is true about learning effects?

A.
They tend to be more significant in nonrepetitive tasks.

B.
They tend to be less significant when a task is technologically complex.

C.
They typically last a lifetime.

D.
They are important only during the start-up period of a new process.

E.
They do not have any effect on the cost of production.

D.

Learning effects tend to be more significant when:

A.
a task involves a few simple steps.

B.
a task is repeated for a period of over five years.

C.
the workforce consists of unskilled labor.

D.
the cumulative output becomes half of what it was originally.

E.
a technologically complex task is repeated.

E.

Which of the following refers to the reductions in unit cost achieved by producing a large volume of a product?

A.
Location economies

B.
Learning effects

C.
Standardization economies

D.
Core economies

E.
Economies of scale

E.

Spreading fixed costs over a large volume results in a cost-savings phenomenon referred to as:

A.
volume synergies.

B.
economies of scale.

C.
captured savings.

D.
size effects.

E.
location economies.

B.

Which of the following statements is true about economies of scale?

A.
Economies of scale lead to an increase in the average unit cost of a product.

B.
Attaining economies of scale increases a firm’s profitability.

C.
The ability to spread variable costs over a large volume is a source of economies of scale.

D.
Economies of scale result due to the increase in the perceived value of a product.

E.
Economies of scale refer to cost savings that come from learning by doing.

B.

Which of the following terms best represents the systematic reductions in production costs that have been observed to occur over the life of a product?

A.
Global web

B.
Dispersion linkage

C.
Economies of scale

D.
Experience curve

E.
Efficiency frontier

D.

Serving a global market from a single location is consistent with:

A.
establishing a high-cost position.

B.
taking advantage of location economies.

C.
moving down the experience curve.

D.
operating from a position which falls inside the efficiency frontier.

E.
going up the global web.

C.

Firms that compete in the global marketplace typically face two types of competitive pressure:

A.
pressures for increasing investment and pressures to minimize consumer surplus.

B.
pressures for labor skill enhancement and pressures to minimize economies of scale.

C.
pressures for cost reductions and pressures to be locally responsive.

D.
pressures for global promotions and pressures to move down the efficiency frontier.

E.
pressures for product standardization and pressures to move up the experience curve.

C.

Cost reduction pressures tend to be particularly intense in industries that:

A.
create products that serve universal needs.

B.
create customized products.

C.
are not involved in international business.

D.
produce products that have inelastic demand.

E.
serve different customers with different needs.

A.

Which of the following terms best represents the requirements that are the same all over the world, such as steel, bulk chemicals, and industrial electronics?

A.
Universal needs

B.
Efficiency frontier

C.
Global web

D.
Lateral requirements

E.
Supreme needs

A.

Pressures for cost reduction are intense in firms:

A.
that produce products that are well differentiated.

B.
whose major competitors are based in high-cost locations.

C.
with persistent low capacity.

D.
in which consumers face low switching costs.

E.
with no international competition.

D.

The liberalization of the world trade and investment environment in recent decades, by facilitating greater international competition, has generally:

A.
increased cost pressures.

B.
decreased the demand for local responsiveness.

C.
decreased pressures for cost reduction.

D.
increased consumer surplus.

E.
reduced the production of conventional commodity products.

A.

Which of the following conditions is most favorable to reap gains from global scale economies?

A.
Low demand for local responsiveness

B.
High pressures for cost reduction

C.
Lack of universal needs

D.
National differences in accepted business practices

E.
High pressure to delegate production to domestic subsidiaries

A.

Which of the following supports the argument that customer demands for local customization are on the decline worldwide?

A.
Local and indigenous industries are increasingly filling up available demand.

B.
High costs of local customization are deterring companies from doing so.

C.
Governments across the world are standardizing their legal procedures.

D.
Customer tastes have converged worldwide.

E.
Managers worldwide ignore the differences in consumer tastes and preferences.

D.

Which of the following is most likely to necessitate the delegation of marketing functions to national subsidiaries?

A.
Differences in distribution channels

B.
Pressures for decreasing consumer surplus

C.
Lack of product customization

D.
Pressures for increasing economies of scale

E.
Pressures for increasing consumers’ reservation price

A.

For an international business, which of the following is most likely to be an outcome of protectionism and nationalism in a host-country?

A.
Increase in the attractiveness of location economies

B.
Pressure for localization of production

C.
Requirement of standardization of products or services

D.
Pressure for cost reduction

E.
Decrease in the significance of local responsiveness

B.

The appropriateness of the strategy that a firm chooses to use in an international market varies with the extent of pressures for:

A.
quality improvement and product standardization.

B.
customer surplus and quality improvements.

C.
customer surplus and product standardization.

D.
cost reductions and local responsiveness.

E.
product standardization and cost reductions.

D.

Firms that pursue which of the following strategies focus on increasing profitability and profit growth by reaping the cost reductions that come from economies of scale, learning effects, and location economies?

A.
International

B.
Transnational

C.
Localization

D.
Global standardization

E.
Nationalization

D.

Which of the following is true of a firm that pursues a global standardization strategy?

A.
It ensures that it pursues a high-cost strategy on a global scale.

B.
It has its production, marketing, and R&D activities in only one optimum location.

C.
It tries to customize its products to local conditions.

D.
It has shorter production runs.

E.
It reaps maximum benefits from economies of scale and learning effects.

E.

A firm is most likely to pursue a global standardization strategy when:

A.
it wants to implement a high-cost strategy on a global scale.

B.
it wants to reduce consumer surplus.

C.
there are no universal needs to be served.

D.
there are strong demands for local responsiveness.

E.
there are strong pressures for cost reduction.

E.

Which of the following strategies is most likely to be pursued by a firm when there are strong pressures for cost reductions and demands for local responsiveness are minimal?

A.
Domestic strategy

B.
Global standardization strategy

C.
International strategy

D.
Transnational strategy

E.
Nationalization strategy

B.

Which of the following strategies focuses on increasing profitability by customizing the firm’s goods or services so that they provide a good match to tastes and preferences in different national markets?

A.
International strategy

B.
Global standardization strategy

C.
Localization strategy

D.
Transnational strategy

E.
Nationalization strategy

C.

Which of the following is true of a localization strategy?

A.
It allows a firm to capture the cost reductions of mass-producing a standardized product.

B.
It reduces duplication of functions.

C.
It involves longer production runs.

D.
It makes sense if the value added by customization supports higher pricing.

E.
It substantially reduces local demand.

D.

A global car manufacturer wants to start production in China. While catering to local responsiveness, what can the firm do to get scale economies?

A.
Increase costs whenever possible.

B.
Use common vehicle platforms and components across many different models.

C.
Shorten the production runs for each component.

D.
Increase the duplication of functions required for each operation.

E.
Manufacture only one type of car and sell it in all the international markets.

B.

Which of the following strategies is a firm most likely to pursue when it simultaneously faces both strong cost pressures and strong pressures for local responsiveness?

A.
Global standardization strategy

B.
Localization strategy

C.
International strategy

D.
Transnational strategy

E.
Nationalization strategy

D.

Which of the following is an observation made by researchers Bartlett and Ghoshal regarding modern multinational enterprises?

A.
Global logistics industry makes the concept of "location economies" redundant for international firms.

B.
Core competencies and skills can develop in any of the firm’s worldwide operations.

C.
Flow of skills between a firm and its global subsidiaries should be unidirectional.

D.
Differentiating across geographic markets helps a firm in reducing costs.

E.
Customer demands for local customization are on the decline worldwide.

B.

Firms that pursue which of the following strategies differentiate their product offering across geographic markets to account for local differences?

A.
International

B.
Global standardization

C.
Transnational

D.
Multidomestic

E.
Nationalization

C.

Which of the following is true of a transnational strategy?

A.
It is easy to implement because it does not place any conflicting demands on a company.

B.
It is used when the pressures for cost reductions are low.

C.
It is usually used when the pressure for local responsiveness is relatively low.

D.
It enables the one-way flow of core competencies.

E.
It is used by firms that try to achieve low costs through location economies, economies of scale, and learning effects.

E.

Firms that pursue which of the following strategies take products first produced for their domestic market and sell them across various markets with only minimal local customization?

A.
Nationalization

B.
Transnational

C.
Global standardization

D.
International

E.
Localization

D.

Xerox had a monopoly on photocopiers for several years as the technology underlying the photocopier was protected by strong patents. As it served a universal need, this favorable position led Xerox to pursue a(n):

A.
global standardization strategy.

B.
localization strategy.

C.
international strategy.

D.
transnational strategy.

E.
nationalization strategy.

C.

Mayer Life Systems, a manufacturer of surgical and medical appliances, invented and patented a new dialysis machine that radically reduced maintenance and operational issues. Responding to a global demand, it decided to sell the machines manufactured at its plant in the United States to various markets across the globe. Since the product features provided by Mayer were not provided by any other competitor, Mayer did not feel any pressure for cost reductions. Which of the following strategies is most likely being pursued by Mayer?

A.
International

B.
Localization

C.
Global standardization

D.
Transnational

E.
Nationalization

A.

Which of the following statements is true about an international strategy?

A.
International strategy typically involves taking products first produced for foreign markets and then customizing them for domestic markets.

B.
International strategy should be pursued by a firm if it manufactures a product that satisfies local, rather than universal, needs.

C.
When a firm pursues an international strategy, the head office of the firm retains fairly tight control over marketing and product strategy.

D.
Firms pursuing the international strategy tend to outsource their development functions such as R&D.

E.
International strategy should be pursued by a firm only if it faces strong competition in foreign markets.

C

Which of the following refers to a cooperative agreement between potential or actual competitors?

A.
Tactical union

B.
Strategic alliance

C.
Political affiliation

D.
Economic association

E.
Nationalization

B

Which of the following allows two or more firms to share the fixed costs (and associated risks) of developing new products or processes?

A.
Franchising agreement

B.
Global web

C.
Free trade agreement

D.
Strategic alliance

E.
Dispersion linkage

D.

Which of the following is a disadvantage of a strategic alliance?

A.
Entering into a strategic alliance makes it difficult for a firm to enter into a foreign market.

B.
As a result of strategic alliance, fixed costs of developing new products tend to increase.

C.
Strategic alliance gives competitors a low-cost route to new technology and markets.

D.
Firms that enter into a strategic alliance with a foreign firm tend to face higher trade barriers.

E.
Strategic alliance always leads to a loss to either of the firms involved.

C.

One of the principal risks associated with a strategic alliance is that:

A.
it brings together the complementary skills of alliance partners.

B.
it makes it difficult for the partner firms to enter into a foreign market.

C.
a firm can give away more than it receives.

D.
it does not allow firms to share fixed costs.

E.
it almost always fails.

C.

Managing an alliance successfully requires building interpersonal relationships between the firms’ managers, or what is sometimes referred to as:

A.
relational capital.

B.
interorganizational synergy.

C.
power equilibrium.

D.
symbiotics.

E.
intraorganizational coordination.

A.

Which of the following is a reason why a relatively poor country may be an attractive target for inward investment?

A.
Rapid economic growth

B.
Political instability

C.
Currency depreciation

D.
High cost of living

E.
Less developed infrastructure

A.

Which of the following countries presents a favorable benefit-cost-risk trade-off scenario for foreign expansion?

A.
A country ridden by private-sector debt

B.
A country with a free market system

C.
A country experiencing a dramatic upsurge in inflation rates

D.
A country that is heavily populated

E.
A country that is less developed and politically unstable

B.

Which of the following factors determines the value that an international business can create in a foreign market?

A.
Population density in the foreign market

B.
Political stability of the foreign market

C.
Nature of indigenous competition

D.
Per capita income in the foreign market

E.
Type of political system in the foreign market

C.

In international business, a product that is not widely available in a foreign market and satisfies an unmet need:

A.
is likely to have greater value.

B.
will have to be priced relatively low.

C.
will see a decrease in sales volume.

D.
is not suited to that particular market.

E.
will fail to make a profit.

A.

In which of the following situations can an international business command higher prices for a particular product in a foreign market?

A.
When the product is widely available in the foreign market

B.
When sales volumes is relatively low in the foreign market

C.
When the product offers greater value to customers in the foreign market

D.
When the product is more suitable to other foreign markets

E.
When domestic competitors are selling alternatives at reduced prices

C.

Which of the following is an example of a first-mover advantage?

A.
The ability to create switching costs that tie customers into one’s products or services

B.
The avoidance of pioneering costs that a later entrant into the foreign market has to bear

C.
The increased probability of surviving in a foreign market

D.
The opportunity to observe and learn from the mistakes of other entrants

E.
The ability to let later entrants ride ahead on the experience curve

A.

First-mover disadvantages refer to:

A.
disadvantages associated with entering a foreign market before other international businesses.

B.
costs that a late entrant to a foreign market has to bear.

C.
a direct restriction on the quantity of a good that can be imported into a country.

D.
imperfections in the operation of the market mechanism.

E.
disadvantages experienced by being a late entrant in a foreign market.

A.

Which of the following is true of the costs and risks associated with doing business in a foreign country?

A.
They are greater for late entrants.

B.
They are higher in politically democratic nations.

C.
They are less pronounced in the case of licensing.

D.
They are lower in economically advanced nations.

E.
They are called opportunity costs.

D.

An early entrant find may find itself at a disadvantage if it:

A.
is trying to realize location and experience curve economies.

B.
incurs low development costs.

C.
faces a subsequent change in business regulations in the host-country.

D.
has a core competence based on control over technological know-how.

E.
considers a greenfield strategy.

C.

The liability associated with foreign expansion is greater for foreign firms that:

A.
choose to ride on an early entrant’s investments.

B.
use countertrade agreements.

C.
enter a national market early.

D.
ride down the experience curve behind their rivals.

E.
avoid pioneering costs.

C.

The probability of survival for an international business increases if it:

A.
enters a national market after several other foreign firms have already done so.

B.
avoids the use of countertrade agreements.

C.
enters a national market early.

D.
enters a foreign market via turnkey projects.

E.
avoids engaging in joint ventures.

A.

Which of the following is a risk of entering developing nations like India and China on a large scale?

A.
Lower potential for long-term rewards

B.
Absence of prior foreign entrants

C.
Lack of control over quality

D.
Fear of rapid imitation of technology

E.
High management turnover

B.

In international business, an advantage of being a late entrant in a foreign market is the ability to:

A.
create switching costs that tie customers into products or services.

B.
capture demand by establishing a strong brand name.

C.
build sales volume and ride down the experience curve before early entrants.

D.
ride on an early entrant’s investments in learning and customer education.

E.
create a cost advantage over first movers.

D.

According to Christopher Bartlett and Sumantra Ghoshal, how can local companies differentiate themselves from foreign multinationals?

A.
By licensing their core technologies

B.
By entering into turnkey projects

C.
By standardizing their product offerings

D.
By focusing on market niches

E.
By raising trade barriers

D.

Which of the following is a disadvantage of large-scale entry into a foreign market?

A.
Decrease in a firm’s exposure to the foreign market

B.
Difficulty attracting customers and distributors for the product

C.
Inability to build rapid market-share irrespective of the scale of entry

D.
Limited product acceptance due to the avoidance of potential losses

E.
Availability of fewer resources to support expansion in other desirable markets

E.

Which of the following types of entry into a foreign market allows a firm to learn about the foreign market while limiting the firm’s exposure to that market?

A.
Early entry

B.
Small-scale entry

C.
Large-scale entry

D.
Late entry

E.
Rapid entry

B.

Which of the following is a disadvantage of small-scale entry for an international firm considering foreign expansion?

A.
The possibility of escalating commitment leading to major financial losses

B.
The limited availability of resources for use in other markets

C.
The lack of flexibility associated with strategic commitments

D.
The increase in economic exposure due to minimal time spent in evaluating a foreign market

E.
The difficulty of building market share and capturing first-mover advantages

E.

Small-scale entry into a foreign market makes it difficult to build market share because it:

A.
necessitates rapid entry into a foreign market.

B.
is associated with a lack of commitment demonstrated by the foreign firm.

C.
leads to escalating strategic commitments.

D.
requires that extra time be spent in analyzing a foreign market.

E.
leads to increased exposure to a foreign market.

B.

Which of the following is the most likely outcome of a foreign firm entering a developed nation on a small scale after other international businesses in the firm’s industry?

A.
Capturing first-mover advantages

B.
Higher pioneering costs

C.
Rapid increase in market share

D.
Limited future growth potential

E.
Increase in sales volume

D.

Which of the following is a course of action suggested by Christopher Bartlett and Sumantra Ghoshal for companies based in developing nations?

A.
Build up financial resources to match those of the largest global competitors.

B.
Enter foreign markets at a similar time and scale as multinational companies.

C.
Enter markets rapidly and exit at an equally rapid pace to avoid heavy losses.

D.
Benchmark one’s operations and performance against foreign multinationals.

E.
Do not focus on market niches that multinational companies ignore.

D.

Which of the following is an advantage of choosing exporting as a mode of entry into foreign markets?

A.
A firm can avoid the cost of establishing manufacturing operations in the host country.

B.
A firm shares the development costs and risks with its host partner.

C.
A firm can earn returns from process technology skills in countries where FDI is restricted.

D.
A firm has access to local partner’s knowledge.

E.
A firm has the ability to engage in global strategic coordination.

A.

How can firms avoid incurring high transport costs when exporting bulk products?

A.
By taking a minority equity interest

B.
By entering into a turnkey project with a foreign firm

C.
By manufacturing bulk products regionally

D.
By setting up subsidiaries irrespective of market reach

E.
By reducing the quantity of the product offering

C.

In exporting, problems with local marketing agents can be overcome by:

A.
selling intangible property to a franchisee and insisting on rules to conduct the business.

B.
changing agents frequently.

C.
engaging in turnkey projects and exporting process technology to foreign firms.

D.
entering into cross-licensing agreements with foreign firms.

E.
setting up wholly owned subsidiaries in foreign nations to handle local marketing.

E.

In which of the following modes of entry into foreign markets does a firm agree to set up an operating plant for a foreign client and hand over the plant when it is fully operational?

A.
Franchising agreement

B.
Turnkey project

C.
Licensing agreement

D.
Wholly owned subsidiary

E.
Joint venture

B.

Which of the following describes a turnkey project?

A.
Granting rights to intangible property to other firms

B.
Establishing firms that are jointly owned by two or more otherwise independent firms

C.
Exporting process technology to other countries

D.
Setting up wholly owned subsidiaries in foreign nations

E.
Selling products produced in one country to residents of other countries

C.

Which of the following is an advantage of turnkey projects as a mode of entry into foreign markets?

A.
It is an ideal way to gain entry into a country where FDI is not limited by government regulations.

B.
It is a useful strategy to earn great returns from the know-how of a technologically complex process.

C.
It is an ideal way to establish a firm’s long-term presence in a foreign country.

D.
It helps protect a firm’s competitive advantage.

E.
The firm that enters into a turnkey project with a foreign enterprise avoids giving rise to potential competitors.

B.

Turnkey projects being short-term propositions can be disadvantageous for a firm if a country subsequently proves to be a major market for the output of the process that has been exported. The firm can get around this problem by:

A.
selling competitive advantage to competitors.

B.
competing with the local firm in the global market.

C.
taking a minority equity interest in the operation.

D.
withholding vital process technology from the local firm.

E.
establishing a joint venture with a local firm.

C.

In terms of licensing, which of the following is an intangible property?

A.
Infrastructure

B.
Machinery

C.
Leased equipment

D.
Advanced computing systems

E.
Patent

E.

Licensing is NOT attractive to which of the following firms?

A.
Firms lacking the capital to develop operations overseas

B.
Firms unwilling to commit substantial financial resources to an unfamiliar market

C.
Firms requiring tight control of operations for realizing experience curve and location economies

D.
Firms wanting to explore markets but prohibited from doing so by investment barriers

E.
Firms with intangible properties with business applications that it does not want to develop itself

C.

Which of the following is a drawback of licensing as a mode of entry into foreign markets?

A.
The licensor has to bear all costs and risks associated with developing a foreign market.

B.
Licensing does not give a firm tight control over manufacturing, marketing, and strategy.

C.
Licensing does not benefit firms lacking the capital to expand operations overseas.

D.
Licensing deals fail when there are barriers to foreign investment in a particular country.

E.
A firm that enters into a licensing deal with a foreign country will have no long-term interest in that country.

B.

Which of the following is an example of an industry in which cross-licensing agreements are increasingly becoming common?

A.
Glass-blowing

B.
Biotechnology

C.
Organic farming

D.
Basketry

E.
Weaving

B.

Franchising as a mode of entry into foreign markets is employed primarily by:

A.
service firms.

B.
manufacturing companies.

C.
online outfits.

D.
high-technology companies.

E.
primary industries.

A.

Which of the following is an advantage of franchising as a mode of entry into foreign markets?

A.
The franchiser is relieved of many of the costs and risks of opening a foreign market on its own.

B.
The franchiser is allowed to take profits out of one country to support competitive attacks in another.

C.
The franchiser can easily maintain uniform quality across many geographically dispersed franchisees.

D.
Manufacturing concerns can be effectively coordinated across adjacent processes.

E.
The franchiser can support its short-term interests in a country with an unstable economy.

A.

Which of the following is a disadvantage of franchising?

A.
The franchiser has to bear development costs and risks associated with foreign expansion.

B.
Franchising leads to undesirable results for service firms.

C.
It is difficult to maintain quality control across foreign franchisees that are distant from the franchiser.

D.
The franchiser has no long-term interests in the foreign country.

E.
It forces a franchiser to take out profits from one country to support competitive attacks in another.

C.

Which of the following is an advantage of joint ventures as a mode of entry into foreign markets?

A.
The foreign firm benefits from a local partner’s knowledge of the host country.

B.
The foreign firm can protect its technology from being appropriated by its local partner.

C.
There is less cause for friction and conflict between the foreign and local partners.

D.
It gives a firm tight control over subsidiaries, which enables it to realize experience curve or location economies.

E.
The foreign firm does not have to bear any development costs and risks associated with opening a foreign market.

A.

What triggers the conflict of interest over strategy and goals in joint ventures?

A.
Local partner’s knowledge of host country’s competitive conditions

B.
Giving control of core technology to the foreign partner

C.
Shifts in relative bargaining power of venture partners

D.
Trying to realize location and experience curve economies

E.
Risk of being subject to adverse government interference

C.

How can a wholly owned subsidiary be established in a foreign market?

A.
Through a turnkey operation with a local partner

B.
Through franchising

C.
By acquiring an established firm in the host nation

D.
By exporting

E.
Through a licensing agreement

C.

Which of the following entry modes into a foreign market best serves a high-tech firm?

A.
Turnkey projects

B.
Franchising

C.
Wholly owned subsidiaries

D.
Joint ventures

E.
Exporting

C.

When should a firm configure its value chain to maximize value at each stage?

A.
When government regulations relax

B.
When cost pressures are intense

C.
When rapid imitation is expected

D.
When the number of consumers increases

E.
When incumbent competitors exist

B.

The risks associated with learning to do business in a new culture are less if the firm:

A.
engages in global strategic coordination.

B.
imposes strict marketing guidelines on how to do business.

C.
enters a greenfield venture in the host country.

D.
realizes substantial location economies.

E.
acquires an established host-country enterprise.

E.

Which of the following is true of international firms considering foreign expansion?

A.
The timing and scale of entry of foreign expansion are minor details in comparison with the choice of foreign market.

B.
The long-run economic benefits of doing business in a country are solely a function of the country’s population size.

C.
If the firm’s core competence is based on proprietary technology, entering a joint venture might risk losing control of that technology to the joint-venture partner.

D.
The costs and risks associated with foreign expansion are higher in economically advanced nations.

E.
Politically unstable and less developed nations offer favorable benefit-cost-risk trade-off conditions.

C.

A distinction can be drawn between firms whose core competency is in which of the following?

A.
Scale of entry and strategic commitments

B.
Location and experience curves

C.
Acquisitions and greenfield ventures

D.
Technological know-how and management know-how

E.
Cost reductions and entry mode

D.

Which of the following modes of entry into foreign markets can result in a lack of control over quality?

A.
Exporting

B.
Franchising

C.
Turnkey projects

D.
Wholly owned subsidiaries

E.
Joint ventures

B.

Why should a high-tech firm avoid selecting licensing as a mode of entry?

A.
Threat of creating efficient partners

B.
Risk of losing control over technology

C.
Fear of rapid imitation of core technology

D.
Lack of a transitory technological advantage

E.
Inability to deter development costs

B.

Axiom International, an Australian company, wants to expand its operations to China, a country that is politically, culturally, and economically different. The firm needs to select a mode of entry that would give it access to local knowledge, allow sharing of development costs and risks, and also be politically acceptable. Which of the following modes of entry into foreign markets is most suitable for Axiom International?

A.
Wholly owned subsidiary

B.
Joint venture

C.
Exporting

D.
Greenfield investments

E.
Licensing

B.

Jupiter Systems is a high-tech firm looking to set up operations in a foreign country. The firm’s core competency is in technological know-how. Which of the following modes of entry would be most favorable to the firm if it wants to keep a tight control over its technology?

A.
Wholly owned subsidiary

B.
Joint venture

C.
Franchising

D.
Licensing

E.
Turnkey project

A.

Which of the following modes of entry is suitable for service firms where the risk of losing control over the management skills or technological know-how is not much of a concern, and where the firms’ valuable asset is their brand name?

A.
Exporting

B.
Franchising

C.
Licensing

D.
Turnkey projects

E.
Cross-licensing

B.

Which of the following is a disadvantage of wholly owned subsidiaries as a mode of entry into foreign markets?

A.
Lack of control over quality

B.
High costs and risks

C.
Problems with local marketing agents

D.
Inability to engage in global strategic coordination

E.
Lack of control over technology

B.

What gives a firm tight control for coordinating a globally dispersed value chain?

A.
Signing joint-venture agreements

B.
Installing manufacturing units in locations with optimal factor conditions

C.
Setting up wholly owned marketing subsidiaries

D.
Establishing a greenfield venture

E.
Using foreign marketing agents

C.

Why do firms pursuing global standardization or transnational strategies tend to prefer establishing wholly owned subsidiaries?

A.
It gives firms sound knowledge of the local markets, culture, and the political environment.

B.
It helps protect competitive advantages based on technology.

C.
It allows firms to use the profits generated in one market to improve its competitive position in another market.

D.
It is the most politically accepted mode of entry into foreign markets.

E.
It has the least costs and risks associated with developing a foreign market.

C.

Which of the following is an advantage of acquisitions as a means of entering foreign markets?

A.
They are quick to execute and help firms to rapidly build their presence in the target foreign market.

B.
It is much easier to change the culture of an existing organization than build a new organization.

C.
It is easier to convert the operating routines of acquired units than establish routines in new subsidiaries.

D.
They give firms access to valuable intangible assets while minimizing a pileup of tangible assets.

E.
Acquired firms are often undervalued and hence assets can be purchased at minimal prices.

A.

Which of the following postulates that top managers typically overestimate their ability to create value from an acquisition?

A.
Bandwagon effect

B.
Fisher effect

C.
Hubris hypothesis

D.
International Fisher effect

E.
Learning effect

C.

Which of the following is a reason why firms often overpay for the assets of an acquired firm?

A.
Studies supporting the rise of failed companies post acquisitions

B.
Evidence of high management turnover post acquisitions

C.
The success rate of acquisitions exceeding that of failures

D.
Interest of more than one party in acquiring a particular firm

E.
Inevitable clash between cultures of acquiring and acquired firms

D.

Why do acquisitions fail sometimes?

A.
There is a clash between the cultures of the acquiring and acquired firm.

B.
Acquisitions take a long time to execute.

C.
Acquisitions are easily preempted by making greenfield investments.

D.
The revenue and profit stream generated by an acquisition’s resources is usually unknown.

E.
Losses produced by intangible assets outweigh profits from acquired tangible assets.

A.

Spring, an American firm, recently acquired another company, Tazel Inc., in Indonesia. The high-level managers at Tazel quit because they could not cope with the domineering and straightforward approach of their American counterparts. This illustrates how acquisitions may fail because:

A.
managers overestimate their ability to create value from an acquisition.

B.
integration of operations between the two firms takes longer than forecasted.

C.
there is a clash between the cultures of the acquired and the acquiring firm.

D.
an acquiring firm overpays for the assets of an acquired firm.

E.
inadequate pre-acquisition screening has been done.

C.

The risk of failure of an acquisition can be reduced by:

A.
undervaluing the assets of an acquired firm.

B.
ensuring that firms are acquired in the home country.

C.
replacing high-level managers of an acquired firm.

D.
a detailed auditing of operations, financial position, and management culture.

E.
investing only in a firm that is managing to break even.

D.

To reduce the risks of failure of an acquisition, managers must:

A.
pay more for the acquired unit to please its existing employees.

B.
encourage and facilitate management turnover.

C.
acquire a firm without wasting time on screening.

D.
move rapidly after an acquisition to put an integration plan in place.

E.
ensure that the work cultures are significantly different from each other.

D.

Which of the following is a disadvantage of greenfield ventures?

A.
They have a higher potential for throwing up unpleasant surprises.

B.
It is much more difficult to build an organizational culture from scratch than to change the culture of an existing unit.

C.
Companies find it difficult to avoid falling into the trap of the hubris hypothesis.

D.
It is slower to establish than acquisitions.

E.
A firm does not have the freedom to build the kind of subsidiary that it wants.

D.

If a firm is seeking to enter a market via a wholly owned subsidiary where there are already well-established incumbent enterprises, and where global competitors are also interested in establishing a presence, a suitable mode of entry is a(n):

A.
acquisition.

B.
licensing deal.

C.
greenfield venture.

D.
turnkey project.

E.
exporting deal.

A.

If a firm is considering entering a country where incumbents exist, and if the competitive advantage of the firm is based on the transfer of organizationally embedded competencies, skills, routines, and culture, what would be the preferable mode of entry?

A.
Greenfield venture

B.
Joint venture

C.
Licensing agreement

D.
Franchising deal

E.
Turnkey project

A.