Chapter 03 Test Bank

Transcription

1 Test Bank International Financial Management: Canadian Perspective 3rd Edition Brean Eun Resnick International Financial Management: Canadian Perspective 3rd Edition TEST BANK by Don Brean, Cheol Eun, Bruce Resnick. All chapters instant download: Chapter 03 Test Bank Student: 1. Balance of payment A. records a country's commerce with one other country B. provides detailed information concerning the demand and supply of a country's currency C. cannot be used to evaluate the performance of a country in international economic competition D. may or may not balance 2. A country's international transactions can be grouped into the following three main types: A. Current Account, Medium term Account, and Long term Account B. Current Account, Long term Account, and Capital account C. Current Account, Capital Account, and Reserve Account D. Capital Account, Reserve Account, Trade Account 3. Invisible trade refers to: A. services that avoid tax payments B. underground economy C. legal, consulting, and engineering services D. tourist expenditures, only 4. FDI is a part of A. BCA B. BKA C. BRA D. IMF 5. The "J curve effect" shows: A. the initial deterioration and the eventual improvement of a country's trade balance following a currency depreciation B. the initial improvement and the eventual depreciation of a country's trade balance following a currency depreciation C. the trade balance's lack of responsiveness to the interest rate changes D. short term price elasticity of exports and imports to the change in the economic growth

2 6. Which of the following must be true under the flexible exchange rate regime: A. BRA = BKA B. Export = Import C. A Current Account deficit (surplus) must be matched by a Capital Account deficit (surplus). D. A Current Account surplus (deficit) must be matched by a Capital Account deficit (surplus).

3 7. Which of the following is true under a pure flexible exchange rate regime? A. Balance of current account Balance of capital account > 0 B. Balance of current account + Balance of capital account < 0 C. Balance of current account + Balance of capital account = 0 D. Balance of current account Balance of capital account = 0x 8. If BCA = BKA = $100 mn, then it must be true that A. BRA = 0 B. BRA > 0 C. BRA < 0 D. BCA = BRA 9. Which of the following is true about Canada's BCA in ? A. Canada had positive BCA B. Canada had negative BCA C. Canada's BCA was increasing during that period D. Canada's BCA was decreasing during that period 10. Foreign direct investment (FDI) occurs: A. when an investor acquires a measure of control of a foreign business B. when an investor buys foreign bonds directly C. with sales and purchases of foreign stocks and bonds that do not involve a transfer of control D. when a company buys foreign government bonds directly 11. The reserve account of the Balance of Payments records: A. the stock of foreign exchange held by the public B. changes in foreign exchange reserves held by the government C. the stock of gold held by foreign governments D. changes in foreign exchange reserves held by foreign governments Assume that the balance of payments accounts for a country are recorded correctly. The results are: balance on the current account = BCA = $130 billion balance on the capital account = BKA = $86 billion balance on the reserves account = BRA =? 12. The balance on the reserves account (BRA), under the fixed exchange regime is: A. $44 billion B. $44 billion C. $216 billion D. $0 billion 13. The balance on the reserves account (BRA), under the pure flexible exchange regime is: A. $44 billion B. $44 billion C. $216 billion D. BRA will not be considered.

4 14. PetroCanada exports oil to New York. This transaction will be recorded in the balance of payments as 15. Encana, a Canadian firm, buys equipment from Germany. This transaction will be recorded in the balance of payments as 16. A Chinese state owned company buys a Canadian saw mill. This transaction will be recorded in the balance of payments as 17. The Ontario Teachers' Pension Fund buys shares in DaimlerChrysler. This transaction will be recorded in the balance of payments as 18. Portfolio investment refers to: A. changes in Canadian holdings of noncontrolling equity in foreign companies B. changes in Canadian holdings of controlling equity in foreign companies C. changes in foreign holdings of controlling equity in Canadian companies D. changes in foreign holdings of controlling stock in Canadian companies 19. If a country has a flexible exchange rate system and a deficit on current account A. the balance of payments must be negative. B. The balance of payments must be positive. C. The balance on capital account must be negative. D. The balance on capital account must be positive. 20. If a country has a flexible exchange rate system and a deficit on capital account A. the balance of payments must be negative. B. The balance of payments must be positive. C. The balance on current account must be positive. D. The balance on current account must be negative.

5 21. Nokia Inc, a Finnish company, hires a French consulting firm. This transaction will be recorded in Finland's balance of payments as 22. Nokia Inc, a Finnish company, hires a French consulting firm. This transaction will be recorded in France's balance of payments as 23. BMW, a German car manufacturer, opens a new subsidiary in China. This transaction will be recorded in China's balance of payments as 24. Why should the balance of payments always be zero for countries with flexible exchange rates? 25. Can a country have a current account and a capital account surplus at the same time? Explain. 26. Explain balance on current account.

6 27. Explain balance on capital account. 28. Explain the J curve effect.

7 1. Balance of payment 03 KEY A. records a country's commerce with one other country B. provides detailed information concerning the demand and supply of a country's currency C. cannot be used to evaluate the performance of a country in international economic competition D. may or may not balance Brean Chapter 03 #1 Learning Objective: Canadas balance of payments 2. A country's international transactions can be grouped into the following three main types: A. Current Account, Medium term Account, and Long term Account B. Current Account, Long term Account, and Capital account C. Current Account, Capital Account, and Reserve Account D. Capital Account, Reserve Account, Trade Account Brean Chapter 03 #2 3. Invisible trade refers to: A. services that avoid tax payments B. underground economy C. legal, consulting, and engineering services D. tourist expenditures, only Brean Chapter 03 #3 Difficulty: Easy 4. FDI is a part of A. BCA B. BKA C. BRA D. IMF Brean Chapter 03 #4 Difficulty: Easy

8 5. The "J curve effect" shows: A. the initial deterioration and the eventual improvement of a country's trade balance following a currency depreciation B. the initial improvement and the eventual depreciation of a country's trade balance following a currency depreciation C. the trade balance's lack of responsiveness to the interest rate changes D. short term price elasticity of exports and imports to the change in the economic growth 6. Which of the following must be true under the flexible exchange rate regime: Brean Chapter 03 #5 A. BRA = BKA B. Export = Import C. A Current Account deficit (surplus) must be matched by a Capital Account deficit (surplus). D. A Current Account surplus (deficit) must be matched by a Capital Account deficit (surplus). 7. Which of the following is true under a pure flexible exchange rate regime? Brean Chapter 03 #6 A. Balance of current account Balance of capital account > 0 B. Balance of current account + Balance of capital account < 0 C. Balance of current account + Balance of capital account = 0 D. Balance of current account Balance of capital account = 0x Brean Chapter 03 #7 8. If BCA = BKA = $100 mn, then it must be true that A. BRA = 0 B. BRA > 0 C. BRA < 0 D. BCA = BRA Brean Chapter 03 #8

9 9. Which of the following is true about Canada's BCA in ? A. Canada had positive BCA B. Canada had negative BCA C. Canada's BCA was increasing during that period D. Canada's BCA was decreasing during that period Brean Chapter 03 #9 Learning Objective: Balance of payments trends in major countries 10. Foreign direct investment (FDI) occurs: A. when an investor acquires a measure of control of a foreign business B. when an investor buys foreign bonds directly C. with sales and purchases of foreign stocks and bonds that do not involve a transfer of control D. when a company buys foreign government bonds directly 11. The reserve account of the Balance of Payments records: A. the stock of foreign exchange held by the public B. changes in foreign exchange reserves held by the government C. the stock of gold held by foreign governments D. changes in foreign exchange reserves held by foreign governments Brean Chapter 03 #10 Brean Chapter 03 #11 Assume that the balance of payments accounts for a country are recorded correctly. The results are: balance on the current account = BCA = $130 billion balance on the capital account = BKA = $86 billion balance on the reserves account = BRA =? 12. The balance on the reserves account (BRA), under the fixed exchange regime is: A. $44 billion B. $44 billion C. $216 billion D. $0 billion BCA + BKA = BRA $130 + ( $86) = BRA BRA = $44 Brean Chapter 03 Brean Chapter 03 #12 Difficulty: Hard

10 13. The balance on the reserves account (BRA), under the pure flexible exchange regime is: A. $44 billion B. $44 billion C. $216 billion D. BRA will not be considered. BRA is considered only under fixed exchange rate regime. Brean Chapter 03 #13 Difficulty: Hard 14. PetroCanada exports oil to New York. This transaction will be recorded in the balance of payments as Brean Chapter 03 # Encana, a Canadian firm, buys equipment from Germany. This transaction will be recorded in the balance of payments as Brean Chapter 03 # A Chinese state owned company buys a Canadian saw mill. This transaction will be recorded in the balance of payments as Brean Chapter 03 #16

11 17. The Ontario Teachers' Pension Fund buys shares in DaimlerChrysler. This transaction will be recorded in the balance of payments as Brean Chapter 03 # Portfolio investment refers to: A. changes in Canadian holdings of noncontrolling equity in foreign companies B. changes in Canadian holdings of controlling equity in foreign companies C. changes in foreign holdings of controlling equity in Canadian companies D. changes in foreign holdings of controlling stock in Canadian companies 19. If a country has a flexible exchange rate system and a deficit on current account A. the balance of payments must be negative. B. The balance of payments must be positive. C. The balance on capital account must be negative. D. The balance on capital account must be positive. 20. If a country has a flexible exchange rate system and a deficit on capital account A. the balance of payments must be negative. B. The balance of payments must be positive. C. The balance on current account must be positive. D. The balance on current account must be negative. Brean Chapter 03 #18 Brean Chapter 03 #19 Difficulty: Easy Brean Chapter 03 #20 Difficulty: Easy

12 21. Nokia Inc, a Finnish company, hires a French consulting firm. This transaction will be recorded in Finland's balance of payments as Brean Chapter 03 # Nokia Inc, a Finnish company, hires a French consulting firm. This transaction will be recorded in France's balance of payments as Brean Chapter 03 # BMW, a German car manufacturer, opens a new subsidiary in China. This transaction will be recorded in China's balance of payments as Brean Chapter 03 # Why should the balance of payments always be zero for countries with flexible exchange rates? If the currency of a country is flexible, the current account and the capital account should balance each other out. If Canada buys more goods, services, and the like than it sells, it must finance that deficit on the current account by means of a capital account surplus. In other words, foreigners must buy real or financial assets to finance the current account deficit. Conversely, if a country has a surplus on the current account, it must have a deficit on the capital account. This means that the country sells more goods and services to the world than it buys and the capital earned is spent on buying real or financial assets abroad. Brean Chapter 03 #24

13 25. Can a country have a current account and a capital account surplus at the same time? Explain. Yes. The balance of payments identity states that BCA + BKA + BRA = 0. If BCA and BKA are positive, the balance on the reserve account must be negative which means that the country has increased its foreign exchange reserves. China is an example for a country in this position. 26. Explain balance on current account. Brean Chapter 03 #25 The current account records flows of goods, services, investment income and international financial transfers. Transactions involving the purchase of Canadian dollars, e.g. exports of goods and services, investment income from abroad, are entered as credits. Transactions involving the sale of Canadian dollars (or purchase of foreign currencies), e.g. imports of goods and services, investment income paid to foreign parent firms, are entered as debits. The balance on current account tells us whether there was an excess demand for Canadian dollars (the balance on current account is positive) or an excess supply of Canadian dollars (the balance on current account is negative) resulting from the flow of goods, services, investment income and international financial transfers. 27. Explain balance on capital account. Brean Chapter 03 #26 The capital account records the flow of capital, in the form of foreign direct investment or portfolio investment, in and out of Canada. Inflows of capital are recorded as credits, since they give rise to the demand of the Canadian dollar. Outflows of capital are recorded as debits, since they give rise to the supply of the Canadian dollar. The balance on capital account tells us whether there was an excess demand for Canadian dollars (the balance on capital account is positive) or an excess supply of Canadian dollars (the balance on capital account is negative) resulting from the flow of capital. 28. Explain the J curve effect. Brean Chapter 03 #27 The J curve effect explains the reaction of a country's trade balance to a depreciation of the country's currency. The depreciation of the currency means that imports will become more expensive and exports will become cheaper. Therefore, a depreciation of the currency should lead to an increase in the trade balance (more exports and less imports). This will happen, however, only in the long run. In the short run, the demand for imports and exports is price inelastic, i.e. consumers and businesses will keep buying the same goods as before at the new prices. Therefore, the trade balance will worsen in the short run after a deprecation of the currency. In the long run, consumers and businesses adjust to the new prices and change their purchasing behaviour, resulting in an improved trade balance. Brean Chapter 03 #28

14 Category 03 Summary # of Questions 23 Brean Chapter Difficulty: Easy 4 Difficulty: Hard Learning Objective: Balance of payments trends in major countries 1 Learning Objective: Canadas balance of payments 1 More download links: international financial management canadian perspectives 3rd edition test bank international financial management canadian perspectives 3rd edition pdf international financial management, canadian perspectives pdf international financial management canadian perspectives 2nd edition pdf international financial management canadian perspectives 3rd edition solutions international financial management canadian perspectives test bank international financial management 3rd edition pdf international financial management pdf