Archive for July 2018

France has a comparative advantage in the production of:

Use this table
US | France
Pairs of jeans 8 | 12
Bottles of wine 16 | 8


France has a comparative advantage in the production of:




A. jeans only
B. both jeans and wine
C. wine only
D. neither jeans nor wine


Answer: A. jeans only

The US has a comparative advantage in the production of:


A. jeans only
B. both jeans and wine
C. wine only
D. neither jeans nor wine

Answer: C. wine only

What is the opportunity cost of France producing 1 bottle of wine is _____.


A. 2/3 pair of jeans
B. 1 pair of jeans
C. 1.5 pairs of jeans
D. 8 pairs of jeans
E. 12 pairs of jeans

Answer: C. 1.5 pairs of jeans


The opportunity cost of the US producing 1 pair of jeans is ____.



A. 1/2 bottle of wine
B. 2 bottles of wine
C. 6 bottles of wine
D. 8 bottles of wine
E. 12 bottles of wine


Answer: B. 2 bottles of wine




France has an absolute advantage in the production of:

Use this table
US | France
Pairs of jeans 8 | 12
Bottles of wine 16 | 8

France has an absolute advantage in the production of:




A. jeans only
B. both jeans and wine
C. wine only
D. neither jeans nor wine


Answer: A. jeans only

Max electronics produces tiny wireless speakers that can be used with computers and MP3 players. The firm has built new factories to expand capacity and meet increasing domestic and foreign demand. Over the last six months, foreign and domestic competitors have emerged with a similar product in an attempt to benefit from high consumer demand. Max electronics is most likely in the _____ product stage of the product life cycle.

Max electronics produces tiny wireless speakers that can be used with computers and MP3 players. The firm has built new factories to expand capacity and meet increasing domestic and foreign demand. Over the last six months, foreign and domestic competitors have emerged with a similar product in an attempt to benefit from high consumer demand. Max electronics is most likely in the _____ product stage of the product life cycle.




A. globalized
B. standardized
C. maturing
D. new


Answer: C. maturing

Which theory suggests that intra industry trade will occur?

Which theory suggests that intra industry trade will occur?



A. Country Similarity and New Trade
B. Product Life Cycle and Comparative Advantage
C. Dunning's Eclectic and Hecksher-Ohlin
D. National Competitive Advantage and Absolute Advantage


Answer: A. Country Similarity and New Trade

Under the Bretton Woods System, countries pledged to maintain the value of their currencies within _____ of the par value. If a currency's value fell below that range, that country's central bank would ____ gold/foreign currency on the international forex market.

Under the Bretton Woods System, countries pledged to maintain the value of their currencies within _____ of the par value. If a currency's value fell below that range, that country's central bank would ____ gold/foreign currency on the international forex market.




A. ±2.25%; buy
B. ±2.25%; sell
C. ±1%; buy
D. ±1%; sell


Answer: D. ±1%; sell

Under the current international monetary system,

Under the current international monetary system,




A. most countries have dollarized
B. governments are barred from intervening to affect exchange rates
C. supply and demand mainly determine currency values
D. the euro is currently pegged to the dollar


Answer: C. supply and demand mainly determine currency values

As a result of the 1973 OPEC oil embargo,

As a result of the 1973 OPEC oil embargo,




A. world oil prices tripled
B. inflation spiked in oil-importing nations
C. petrodollars were lent to developing countries
D. a and b but not c
E. b and c but not a


Answer: E. b and c but not a

Why did the Bretton Wood System collapse?

Why did the Bretton Wood System collapse?




A. President Nixon was globally unpopular
B. The IMF had exhausted all its funds trying to support it
C. The U.S. supply of gold could no longer support it
D. The Smithsonian conference failed to save it


Answer: C. The U.S. supply of gold could no longer support it

Large international banks may profit from all of the following except

Large international banks may profit from all of the following except




A. speculation
B. the spread between the spot/ask price for currencies
C. arbitrage
D. interbank transactions conducted for large clients


Answer: B. the spread between the spot/ask price for currencies

According to the international fisher effect, if the forward premium on a country's currency is shrinking, this must mean that

According to the international fisher effect, if the forward premium on a country's currency is shrinking, this must mean that




A. the country's nominal interest rate is falling because the country's inflation rate is expected to fall
B. the country's nominal interest rate is rising because the country's inflation rate is expected to fall
C. the country's nominal interest rate is falling because the country's inflation rate is expected to rise
D. the country's nominal interest rate is rising because the country's inflation rate is expected to rise


Answer: D. the country's nominal interest rate is rising because the country's inflation rate is expected to rise


Assume we are comparing the £ and the $. Suppose the annualized forward premium on the £ = 25%. The forward price of the £ = $1.80, and we are calculating the AFD based on the 6 month forward price. What is the spot price of the £?

Assume we are comparing the £ and the $. Suppose the annualized forward premium on the £ = 25%. The forward price of the £ = $1.80, and we are calculating the AFD based on the 6 month forward price. What is the spot price of the £?




A. 1.60
B. 1.73
C. 1.88
D. 2.03


Answer: A. 1.60

Suppose £1 buys €1.50 in NY, Tokyo, and London. Which of the following statements is true?

Suppose £1 buys €1.50 in NY, Tokyo, and London.
Which of the following statements is true?




A. The cross rate and direct quote are the same, so there is no opportunity for three-point arbitrage
B. The cross rate and direct quote are the same, so there is an opportunity for three-point arbitrage
C. The cross rate and direct quote differ, so there is an opportunity for three-point arbitrage
D. The cross rate and direct quote differ, so there is no opportunity for three-point arbitrage


Answer: C. The cross rate and direct quote differ, so there is an opportunity for three-point arbitrage

Is there an opportunity for two-point arbitrage?

Suppose: £1 buys €1.50 in NY, Tokyo, and London

Is there an opportunity for two-point arbitrage?




A. Yes, because the direct rates are the same in all markets
B. Yes, because the direct rates differ in all markets
C. No, because the direct rates are the same in all markets
D. No, because the direct rates differ in all markets


Answer: C. No, because the direct rates are the same in all markets

Africans pay up to ____ extra for goods because of ____.

Africans pay up to ____ extra for goods because of ____.




A. 10%; transportation costs
B. 40%; transportation costs
C. 10%; underdeveloped infrastructure
D. 40%; underdeveloped infrastructure


Answer: B. 40%; transportation costs

Eurocurrency is

Eurocurrency is




A. another name for the EU's currency, the euro
B. money held outside its country of issue
C. exactly the same thing as Eurodollars
D. b and c, but not a


Answer: B. money held outside its country of issue

Gatorstan has provided subsidies to its football gear manufacturing sector. As a result, the domestic supply of football gear has _____, causing the price to ____. Gatorstan is using a(n) policy.

Gatorstan has provided subsidies to its football gear manufacturing sector. As a result, the domestic supply of football gear has _____, causing the price to ____. Gatorstan is using a(n) policy.




A. decreased; increase; strategic trade
B. decreased; decrease; infant industries
C. increased; increase; strategic trade
D. increased; decrease; infant industries


Answer: D. increased; decrease; infant industries

Assume that the majority of microchips in computers made and sold in the US come from China. If the U.S. imposes a tariff on chinese microchips, the equilibrium price of American-made computers will

Assume that the majority of microchips in computers made and sold in the US come from China. If the U.S. imposes a tariff on chinese microchips, the equilibrium price of American-made computers will




A. stay the same
B. rise
C. fall
D. fall, then rise


Answer: B. rise

You imported 10,000 kilos of fruit into the U.S. worth $500,000 and paid a tariff of $11,000. Then you must have paid a

You imported 10,000 kilos of fruit into the U.S. worth $500,000 and paid a tariff of $11,000. Then you must have paid a




A. specific tariff of 11 cents/kilo
B. specific tariff of 2.2%
C. compound tariff of 10 cents/kilo + 2% ad valorem
D. compound tariff of 20 cents/kilo + 10% ad valorem


Answer: C. compound tariff of 10 cents/kilo + 2% ad valorem

An import tariff has been placed on foreign cars coming into the USA. This will _______ the demand for US cars and ______ the demand for foreign cars. With this change of demand, the price of US cars will _____.

An import tariff has been placed on foreign cars coming into the USA. This will _______ the demand for US cars and ______ the demand for foreign cars. With this change of demand, the price of US cars will _____.




A. Increase, decrease, increase
B. Decrease, increase, decrease
C. Increase, decrease, decrease
D. Decrease, increase, increase


Answer: A. Increase, decrease, increase

Which of the following is true when the forward price is less than the spot price?

Which of the following is true when the forward price is less than the spot price?




A. The currency is selling at a forward premium
B. The currency is selling at a forward discount
C. The nation with this currency is probably experiencing a trade surplus
D. The nation with this currency is probably experiencing low inflation



Answer: B. The currency is selling at a forward discount

What is the difference between a currency futures contract and a swap?

What is the difference between a currency futures contract and a swap?




A. A currency futures contract is an option not an obligation, while a swap is an obligation
B. A swap is an option not an obligation, while a currency futures contract is an obligation
C. The currency pair is exchanged on a future delivery date in a currency futures contract, while the currency pair is exchanged immediately or within a very short period with a swap
D. The price is determined on the delivery date in a currency futures contract, while the price is determined at signing with a swap


Answer: C. The currency pair is exchanged on a future delivery date in a currency futures contract, while the currency pair is exchanged immediately or within a very short period with a swap

Which of the following is a true statement about supply and demand?

Which of the following is a true statement about supply and demand?




A. The currency demand curve is upward sloping
B. As the price of a currency increases, demand increases
C. As the price of a currency decreases, the quantity demanded increases
D. As the price of a currency decreases, demand increases


Answer: C. As the price of a currency decreases, the quantity demanded increases

Assume we are operating under the Bretton Woods system. The British pound is pegged at US $3.50. Which of the following would NOT occur if the British pound depreciates to US $3.395?

Assume we are operating under the Bretton Woods system. The British pound is pegged at US $3.50. Which of the following would NOT occur if the British pound depreciates to US $3.395?




A. The British government could sell gold to buy pounds
B. The British government could sell U.S. dollar reserves to buy pounds
C. The British government could implement policies to increase the international demand for pounds
D. The British government could do nothing as long as the pound remains within 5% of the peg


Answer: D. The British government could do nothing as long as the pound remains within 5% of the peg

Which of the following is an example of capital outflow for Germany?

Which of the following is an example of capital outflow for Germany?




A. GM sells stock in Audi to German resident
B. Volkswagen exports the new 2014 VW Beatle to the United Kingdom
C. German company Haribo sells a production facility in Ireland to an Irish competitor
D. Kinder, another German company, acquires Haribo in a multimillion dollar transaction



Answer: A. GM sells stock in Audi to German resident

Which conclusion could NOT be drawn from the balance of payments regarding a particular country?

Which conclusion could NOT be drawn from the balance of payments regarding a particular country?




A. The Balance of Payments can indicate currency depreciation caused by a sharp increase in exports
B. The Balance of Payments can indicate whether or not the country will emerge into global markets in the near future
C. The Balance of Payments can warn of political policies that may have an effect on the business climate
D. None of the above; the Balance of Payments only shows debits and credits


Answer: A. The Balance of Payments can indicate currency depreciation caused by a sharp increase in exports

A firm experiences economies of scale when

A firm experiences economies of scale when




A. the average cost of producing a good decreases as the firm's output of the good decreases.
B. the average cost of producing a good increases as the firm's output of the good increases.
C. the average cost of producing a good increases as the firm's output of the good decreases.
D. the average cost of producing a good decreases as the firm's output of the good increases.


Answer: D. the average cost of producing a good decreases as the firm's output of the good increases.

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