1.

1 The primary mission of the multinational

corporation is to:

a. Maximize world production.

b. Maximize earnings.
c. Minimize the cost of borrowing globally.
d. Maximize shareholder wealth.
e. Maximize dividends per share
1.2 Which of the following is an example of a
foreign direct investment ?

a. Exporting to a country
b. Establishing licensing agreement in a country
c. Purchasing existing companies in a country
d. Purchasing foreign stocks
e. Purchasing foreign bonds
2.1 Tourism shows up in the:

a. Trade balance
b. Current account balance
c. Capital account balance
d. Both a and b
e. None of the above
2.2 The Purchase of U.S. Treasury Bond by a
French Investor shows up as a:

a. Credit on the trade account.

b. Credit on the long term capital account.
c. Debit on the current account.
d. Debit on short term capital account.
e. Credit on short term performance balance
2.3 If the U.S. ran a deficit of $150m on the current
account in a year when the country was a net

recipient of $250m in long term capital, then the

basic balance would be:

a. $250m
b. $200m
c. $l00m
d. $400m
e. $50m
2.4 A Japanese investment in the U.S. represents
a foreign factor of production located in the
U.S. and the rent or income on such
investment adds to the:

a. GNP of the U.S.

b. GDP of Japan.
c. GNP of Japan.
d. Transfer receipts of Japan.
e. Transfer payments of Japan
2.5 A country's holding of gold, special
drawing rights, and internationally
acceptable currencies comprise its:

a. Bank reserves.
b. Official reserves.
c. Secondary reserves.
d. Liquid reserves.
e. Loan reserves
2.6 A measure of value of final production that
occurs within a country's borders without
regard to whether the production is done
by domestic or foreign factors of production
is commonly referred to as:

a. Gross national product (GNP).

b. Net national product (NNP).
c. Net material product (NMP).
d. Gross domestic product (GDP).
e. Balance of payment (BOP)
2.7 The two main categories in the balance of
payments are:

a. The current account and the capital account.

b. The merchandise trade account and the
services account.
c. The income receipts and payments on assets
account and the unilateral transfers account.
d. The merchandise trade account and the
capital account.
e. The long-term capital and short-term capital
account
2.8 The debt/service ratio is:

a. The ratio of debt to services income.

b. The ratio of interest payments plus
principal amortization to exports.
c. Relatively low in the western hemisphere.
d. Inversely related to a country's rate of
inflation
e. The ratio of debt to GDP
2.9 Visible Exports and Imports are:

a. The sum total of goods and services traded

b. Transactions paid for in money rather
than barter.
c. Merchandise imports and exports.
d. Legal imports and exports rather than
those involving smuggled goods.
e. Current account balances
2.10. The _____ is a record of all international
economic transactions between a nation and the
rest of the world within a given period of time .

a. Foreign Direct Investment

b. Balance of Payments
c. Official Reserves
d. Gross National Product
e. Gross Domestic product
2.11. Analyze each of the following transactions. Indicate
whether it generates a credit/debit and the US BOP account
balance it affects (Trade /Current / Basic / Performance)
1. The Chinese bought $45m worth of US beef.
2. An American bought a hotel in Japan for $55m
3. British investors bought $30m of US bonds.
4. Americans bought $60m worth of Iraqi oil.
5. Microsoft sold $32m worth of software to Mexico
6. Japanese visitors spent $5m at Orlando Theme Parks
7. The French invested $25m in US CDs
8. US residents gave $15m to their relatives in Mexico
9. SunTrust paid $5m in interest to Italian investors
10. US doctors received $10m in service fees from Brazil
2.12.
a. Identify the theory that points to international business
engagement as a natural stage in the evolution of new
products from introduction to growth, maturity and
eventual decline
b. Name the theory that identifies non-transferability of
resources as an explanation for international business
c. Name a theory that identifies risk diversification as the
motivation for international business.
d. Which theory identifies specialization as a motivation
for international business.
e. Firms engage in global exploitation of their proprietary
technologies while protecting them from third parties.
This reflects the theory of --- ?
3.1. Cost advantages from foreign direct
investment are most often due to:

a. The availability of low of cost labor in

the host country.
b. Higher productivity of workers in the
host country.
c. High transportation costs for exports.
d. Any of a number of different factors,
depending on the situation confronting
the investing firm.
 3.2 A synthesis of trade theories which explains
why MNCs make FDI decisions based on
ownership advantages, location advantages,
and internalization advantages is known as:

a. Imperfect market theory.

b. Monopoly theory.
c. Eclectic theory.
d. Risk diversification theory.
e. Internalization theory
3.3 Investments that give a company control of
additional stages of production or value
chain as a product moves from raw
materials through production to its final
distribution are called:

a. Appropriability theory.
b. Vertical integration.
c. Horizontal expansion.
d. Internalization
e. Indirect investments
3.4 Which of the following products would
most likely move through the changes in
international production location as
predicted by the product life cycle theory?

a. An electronic product for which there is

rapid obsolescence.
b. A luxury product.
c. A consumer durable.
d. A differentiated product that doesn't
compete on the basis of price.
3.5 Assume the following conditions:
In the United States, it takes 4 resources to
produce potatoes and 5 to produce coal. In
Canada it likes 6 resources to produce potatoes
and 10 to produce coal. According to the theory of
comparative advantage:

a. There would be no basis for trade.

b. The United States should export both
potatoes and coal to Canada.
c. The United States should import potatoes from
Canada and export coal to Canada.
d. The United States should export potatoes to Canada
and import coal from Canada.
3.6 Assume the following conditions:
In the United States, it takes 4 resources to produce

potatoes and 5 to produce coal. In Canada it takes 8

resources to produce potatoes and 10 to produce
coal. According to the theory of comparative
advantage:

a. The United States should export both

potatoes and coal to Canada.
b. The Unites States should export potatoes to
Canada and import coal from Canada.
c. The United States should import potatoes
from Canada and export coal to Canada.
d. There would be no basis for trade.
3.7 When a company's product is technologically
complex, it is most apt to handle the foreign
expansion of that product through:

a. Licensing.
b. Turnkey operations.
c. Its own facilities/subsidiaries
d. Joint ventures.
e. Management contracts
3.8 Which of the following theories identifies
specialization as the driving force for
international business activities:

a. Product life cycle theory.

b. Theory of diversification.
c. Theory of comparative advantage.
d. Theory of absolute advantage.
e. Both c and d
3.9 Under mercantilism, central governments
sought to influence trade by:

a. Setting bilateral trade agreements

with other countries.
b. Limiting exports.
c. Encouraging the development of
manufacturing in colonies.
d. Limiting imports and subsidizing
or encouraging exports.
3.10. Adam Smith in “The Wealth of Nations”
stated that the real wealth of a country consists of:

a. The goods and services available to its citizens

b. Its reserves
c. Its holdings of treasure - gold, silver, ..
d. The capacity as measured by its natural and
acquired advantages.
e. The number territories it owns
3.11 The fact that most world trade today
consists of manufactured goods and services is an
indication that the production location is due
largely to:

a. Labor costs.
b. Natural advantages.
c. Acquired advantages.
d. Comparative advantage.
e. Location advantages
3.12 Rationalized production exists when
companies:

a. Produce different components or

different portions of their product line
in different parts of the world.
b. Are characterized by ethnocentric
management practices.
c. Incur very high costs of production for
their most profitable products.
d. Hire engineers to analyze the entire
production process and institute a total
quality management (TQM) program.
3.l3 Internalization theory suggests that a firm
possessing a proprietary technology would:

a. Earn income from the sale of the

technology.
b. Earn income from the sale of the
products of the technology.
c. License it to others for profit.
d. Protect it from encroachment by other firms.
e. Both b and d above
3.14 Governments are often concerned about
foreign investments in their country because:
a. Of the negative effect on the balance of trade.
b. Foreign companies may make decisions
that conflict with the national interests
of the host country.
c. Unemployment usually rises as foreign
the economy
d. Foreign investment impairs governments'
ability to tax.
3.15 The factor proportions analysis becomes
more complicated when the same product:

a. Has different demand intensities in different

countries.
b. Has higher transport action costs in some
parts of the world than in others.
c. Might be produced by different methods.
d. Is priced differently in different countries.
3.16 _____ is commonly referred to as a product
or process technology.

a. a patent.
b. an acquired advantage.
c. a natural advantage.
d. a comparative advantage.
3.17. Comparative advantage theory holds that there is a
basis for trade between countries A and B when B:
a. Specializes in producing those goods and
services it can produce more efficiently
than country B.
b. Seeks to rectify its unfavorable balance of
trade with country B.
c. Specializes in producing those products that it
can produce more efficiently than other
products without regard to whether country B
can produce such product more efficiently.
d. Concentrates on products with a high labor
content in order to buy capital intensive
products from country B.
3.18 All of the following are elements of Porter’s
Diamond except:

a. Demand conditions.
b. Government subsidy.
c. Factor endowment.
d. Related and supporting industries.
3.19 All of the following are publicly held
companies' motivations to engage in direct
investment except:

a. to expand markets.
b. to obtain raw materials.
c. to project political power
d. to increase production efficiency.
3.20 When firms move abroad to produce basically
the same products that they produce at home,
their direct investments are known as:

a. internalization.
b. vertical integration.
c. export substitution.
d. horizontal expansion.
3.21 Foreign Direct Investment is:

a. ownership of a minimum of 51% in a

foreign firm.
b. when control follows investment.
c. ownership in private rather than
government bonds
d. the start-up of foreign operation rather
than the acquisition of a foreign firm
3.22 When an investor has a non-controlling
interest in a company or ownership of a loan
to another party, the arrangement is known
as a:

a. portfolio investment.
b. direct investment.
c. mixed venture.
d. management contract.
4.1 Indirect exporting occurs when:

a. A company exports through a third country.

b. A company's products are used as
components in other products that are
subsequently exported.
c. Government restrictions prevent the direct
exporting of goods.
d. Customs agents inadvertently allow illegal
goods to enter a country.
4.2 Construction, performed under contract
involving facilities that are transferred to the
owner when they are ready to begin
operating are known as:

a. Strategic alliances.
b. Joint ventures.
c. Locally responsive operations.
d. Turnkey operations.
4.3. The probability of being an exporter ____
with company size as defined by _____

a. Increases; expenses
b. Decreases; revenues
c. Increases; revenues
d. Decreases; return on investment
e. Increases ; number of shares outstanding
4.4. ______ now make up about 88% of U.S.
exporters, and account for a fifth of the value of
U.S. exports.

a. Large businesses
b. Government owned businesses
c. Small businesses
e. Foreign owned businesses
f. Non-profit organizations
4.5 Which of the following is most likely to cause
a strain on a joint venture ?

a. The partners have similar corporate cultures.

b. The partners' contributions differ in relation to the
benefits they receive from the venture.
c. The partners have either complementary or the same
objectives for the joint venture.
d. Both partners agree that day-to-day operating control
will be ceded to one of them.
4.6. The most common reason joint ventures
dissolve is because:

a. Partner is dissatisfied with the venture.

b. Of government expropriation.
c. They become too big to manage.
d. Partners replace them with managements.
4.7. Internationally, the turnkey operation is
the most common in:

a. Construction.
b. Industrial equipment manufacture.
c. Airline manufacture.
d. Security systems
4.8. An international management contract is:

a. The granting of rights on intangible property in

return for royalties.
b. An agreement for the use of a trademark and
assistance with business operations.
c. A contract for the construction of operating facilities
for a fee.
d. An agreement to manage a business for a fee.
4.9. ______are the means by which a company
may transfer talent by using part of its
management personnel to assist a foreign
company for a specified period for a fee.

a. Management contracts
b. Turnkey operations.
c. Joint ventures.
d. Equity alliances.
4.10. A turnkey operation is:

a. The granting of rights on intangible property in

return for royalties.
b. An agreement to manage a business for a fee.
c. An agreement for the use of trade mark and
assistance with business operations.
d. A contract for the construction of operating
facilities for a fee.
4.11. Franchising can be defined as:

a. An agreement for the use of a trademark and

assistance with business operations.
b. A company owned by two other companies.
c. An agreement to manage a business for a fee.
d. A contract for the construction of operating
facilities for a fee.
4.12. A licensing agreement is a contract between
the licensor and the licensee, where the
licensee pays a royalty to the licensor in
exchange for the granting of the:

a. Rights to sell intangible property in the licensor's

home country.
b. Rights on intangible property for a specified period.
c. Rights on tangible property for a specified period.
d. Rights on tangible property for an indefinite period.
4.13. All of the following are examples of intangible
property that is commonly licensed except:

a. Patents, inventions, and formulas

b. Trademarks, trade names, and brand names
c. Copyrights and literary and artistic compositions
d. Management contracts, turnkey operations, and

swap contracts.
4.14. For companies that are short on resources
for expansion, international collaborative
arrangements may:
a. Free up domestic resources that can then be
shifted abroad
b. Enable companies to produce with fewer resources
because of hiring more efficient management
c. Allow a company to expand internationally while
using most of its scare resources domestically
d. Allow a company to expand domestically while
using most of its scare resources internationally
4.15. The transfer of technology is usually cheaper
when transferred:

a. To an unrelated company
b. Within the existing corporate family (internalization)
c. From parent company to parent company
d. To a government entity
4.16. The more a company depends on
international collaborative arrangements:

a. The less likely it is to lose control over operations

b. The less likely it is to operate abroad
c. The more likely it is to lose control over operations
d. The more likely it is to use its headquarters
personnel to manage operations abroad
4.17. Which of the following best describes a
motive for collaborative arrangements that
would usually apply only to international
operations?

a. Secure horizontal linkages

b. Conform with laws requiring ownership sharing
c. Specializing in one’s own competencies
d. Secure vertical linkage
4.18. A company may minimize its resource
commitments while still expanding abroad by
engaging in:

a. Internalization
b. Collaborative arrangement
c. Multidomestic practice
d. Foreign direct investment
4.19. Which of the following basic methods of
payments is the least secure in term of security
to the exporter?

a. Letter of credit
b. Draft of bill of exchange
c. Open account
d. Cash in advance
4.20. The ….., Japanese equivalent word for
trading company can trace its roots back to
the late nineteenth century, when Japan
embarked on an aggressive modernization
process.

a. Chaebol
b. Sogo shosha
c. Cooperatives
d. Maquiladora
4.21. Korean trading companies are part of the
large Korean business groups called:

a. Sogo Shosha
b. Cooperatives
c. Maquiladora
d. Chaebol
4.22. A document that is a receipt for goods
delivered to the common carrier for
transportation, a contract for the services
rendered by the carriers, and a document of
title is known as a /an:

a. Export license
b. Commercial invoice
c. Consular invoice
d. Bill of lading
4.23. The document that indicates where products
originate so that the applicable specific tariff
schedule can be determined is called:

a. Commercial invoice
b. Shipper’s export declaration
c. Bill of lading
d. Certificate of origin
4.24. Which of the following is typically true of an
Export Management Company (EMC) ?

a. Most EMCs the United States are large, representing

a wide range of products, and a large number of
companies.
b. It is usually a division of a manufacturing company
c. It operates on a contractual basis for a manufacturer
by helping obtain orders for its clients’ product.
d. It usually takes title to products rather than acts as
agents
4.25. Exporter use an export management
company as part of:

a. A direct selling strategy

b. Risk enhancement strategy
c. An indirect selling strategy
d. Forwarding strategy
4.26. As a company designs its export strategy,
it must:

a. Avoid becoming entangled in government agencies

as they rarely provide help
b. Determine if it has the production capacity to
deliver the product
c. Use U.S. custom to determine how to get products
to foreign market
d. Identify several markets in which to concentrate its
efforts so that it does not put all its eggs in a few baskets
4.27. A U.S. government agency that provides
service assistance to companies interested in
export is:

a. The Department of Defense

b. U.S. Customs
c. The Export Trade Agency
d. The International Trade Administration
e. The Ministry of Trade and Industry (MITI)
4.28. ____ is the percentage of total revenues
coming from exports:

a. Import intensity
b. Export intensity
c. Manufacturing intensity
d. Alliance intensity
4.29. The probability of being an exporter:

a. Depends on whether or not the company

establishes a international division
b. Is usually higher for smaller companies, as they
are less preoccupied with the domestic market and
make decisions faster
c. Is independent of the size of the company
d. Increases with the size of the company
4.30. A major pitfall in exporting is:

a. That managers tend to increase their foreign travel

experience and interest in foreign culture, leading
to an increase in costs
b. An over-commitment by top management to
exporting, which tends to get too many people
involved.
c. An unwillingness to modify products to meet other
countries’ regulations or cultural preferences
d. An over-reliance on exports when the domestic
market booms
4.31. All of the following are mistakes companies
new to exporting most frequently make except

a. Failure to obtain qualified export counseling and to

develop a master international marketing plan before
starting an export business
b. Insufficient commitment by top management to
overcome the initial difficulties and financial
requirements of exporting
c. Neglecting domestic business when export business booms
d. Failure to print service, sale, and warranty messages in
locally-understood language
5.1 Based on the theory that exchange rates are
determined by current international flows between
countries, if the domestic income level rises faster
than foreign income levels, the domestic currency
will:

a. Appreciate against foreign currencies.

b. Depreciate against foreign currencies.
c. Fluctuate within narrower bands.
d. Become inconvertible.
e. Be unaffected by national income differences
5.2 Based on the theory that exchange rates are
determined by current international flows between
countries, if the domestic real interest is
higher than foreign real interest, the domestic
currency will:

a. appreciate against foreign currencies

b. depreciate against foreign currencies
c. be unaffected by real interest rate differences
d. fluctuate within wider bands
e. become inconvertible
5.3 Assume that U.S. inflation rate is 6 percent
and U.K. inflation rate is 3 percent for the
year. If the exchange rate $/£ = 1.5000 at
the start of the year, what will be the rate at
the end of the year if relative PPP holds?

a. $1.5437
b. $3.000
c. $1.4575
d. none of the above.
5.4 Which of the following currencies is
currently tied to gold?

a. U.S. Dollar.
b. Japanese Yen.
c. The British Pound
d. The SDR
e. The Euro
f. None of the above
5.5 Assume that the consumer price index in the
United States rose from 100 to 105 and during
the same period the German consumer price
index moved from 100 to 102. This occurred
during a period when the exchange rate at the
beginning of the period was 5 German marks to
the dollar, or $.20 per mark. At the end of this
period, according to the purchasing power
parity theory:
a. the mark is worth less dollars.
b. the mark is worth more dollars.
c. the mark is worth the same in dollars.
d. the purchasing parity theory deals with
interest rates and not exchange rates.
5.6 A theory that explains exchange rate
changes based on differences in price
levels in different countries is:

a. The International Fisher Equation

b. Purchasing Power Parity.
c. The Fisher Effect.
d. Interest Rate Parity.
e. Inflation Theory
5.7 According to the Smithsonian Agreement
of December 1971.

a. the U. S. dollar was allowed to float freely.

b. the U.S. dollar was revalued against gold
and most major currencies.
c. exchange rate flexibility was widened.
d. countries resorted to trade restrictions to
reduce trade deficits rather than rely on
changes in currency values.
5.8 Currencies in the IMF's more flexible
category are:

a. Pegged at a certain value and allowed to fluctuate

within a 2.25 percent band.
b. Not allowed to change value rapidly due to the
neutralizing action of governments.
c. Currencies that float more or less independently.
d. Not allowed to be influenced by government action.
5.9 The Bretton Woods Agreement established a
system of:

a. fixed exchange rates whereby each IMF

member country established a par value
of is currency
based on gold.
b. fixed exchange rates that were allowed to
vary within 2.25 percent of a fixed par value.
c. variable exchange rates, determined by
market forces
d. fixed, but adjustable exchange rates that were
allowed to vary within +/-1 percent of par
values established in terms of the dollar which
was fixed in gold.
5.10 As a result of the Bretton Woods Agreement:

a. the Special Drawing Right (SDR) became the

international unit of account
b. the dollar became the world’s benchmark for
trading currency.
c. the United States was forced to redeem dollars
for gold.
d. an international system of floating exchange
rates was established.
5.11 The Special Drawing Right is denominated:

a. in Gold.
b. by a basket of sixteen currencies.
c. by a basket of five currencies and gold.
d. by a basket of five currencies.
e. by U.S. dollar and gold.
f. by a basket of four currencies.
5.12 If the Fisher Equation holds and real interest
rates are equalized among countries
by arbitrage, then:

a. differences in domestic and foreign nominal interest

rates equal differences in exchange rates.
b. differences in domestic and foreign inflation rates
equal differences in domestic and foreign nominal
interest rates.
c. the International Fisher Equation holds
d. the Purchasing power Parity holds
e. the Law of One Price holds
5.13 Assume that you can purchase a Big Mac in the
U.S. for $2.30 and a Big Mac in Hong Kong for
HK $9.20 and that the actual exchange rate is
HK $7.73 per U.S. dollar. Which of the following
statements is true according to the PPP.

a. The Hong Kong dollar is undervalued

b. The Hong Kong dollar is overvalued
c. The Hong Kong dollar is correctly valued
d. You can buy a Big Mac for more U.S. dollars in
Hong Kong than you can in U.S.
e. Purchasing Power Parity holds true between
HK$ and US$.
5.14 Assume that a Big Mac costs $2.30 in the
U.S. and £1.81 in the U.K. If the actual
exchange rate is $/£ = 1.46, then according
to the absolute PPP, the British Pound is:

a. Undervalued relative to the dollar

b. Overvalued relative to the dollar
c. Correctly valued relative to the dollar
d. It costs more in dollars to buy Big Mac in the U.K.
e. Both b and d
 ADDITIONAL SAMPLE QUESTIONS I

1. International business transactions include:

a. all commercial transactions between two or more

countries.
b. Private, but not governmental, commercial
transactions between two or more countries.
c. Governmental, but not private, commercial
transactions between two or more countries.
d. Only commercial transactions between two or
more countries that are entered for the purpose
of making a profit.
2. International business has recently grown at such
a rapid pace because of:

a. Stricter government policies on cross-border movements.

b. Development of institutions to support / facilitate trade.
c. Decreasing global competition.
d. Companies’ increased concerns with terrorism.
3. Technology has had a tremendous impact on
international business in all of the following
ways except:

a. the demand for new products and services has

increased
b. the number of international business transactions has
increased
c. the managers’ ability to control foreign operations
has been improved
d. it has raised the cost of doing business abroad.
4. Which of the following best describes the mode of
international business used by most companies?

a. mixed ventures
b. foreign direct investment
c. joint ventures.
d. exporting and importing
5. ……………… are tangible products shipped
out of a country.

a. Merchandise exports
b. Merchandise imports
c. Service exports
d. Service imports
e. Current accounts
6. Which of the following best describes the two
form of foreign investment?

a. Direct and portfolio

b. Indirect and common
c. Direct and common
d. Mixed and indirect
e. Direct and indirect
7. A company that takes a global approach to
foreign markets and productions is called a:

a. Multinational enterprise.
b. Multi–global company.
c. Cross–transnational company.
d. Mixed venture company.
e. Unilateral enterprise
8. At an early stage of international involvement,
……… require (s) the least formal commitment
and pose the least risk to the company’s resources.

a. foreign direct investment

b. joint ventures
c. importing and exporting
d. wholly owned subsidiaries
9. The ………… records a country’s international
economic transactions within a given period of
time.

a. balance of payments
b. surplus of payments
c. deficit of payments
d. International reserves
10. The sale of state – owned enterprises to the
private domestic or foreign sector is:

a. internalization.
b. externalization.
c. privatization
d. expropriation
11. A favorable balance of trade indicates which of
the following?

a. A country is importing more than it is exporting.

b. The country is importing products and services it
cannot produce itself.
c. A country is exporting more than it is importing
d. The country is growing economically.
12. According to the theory of absolute advantage,
specialization enables countries to increase their
efficiency for all of the following reasons except:

a. labor can become more skilled by repeating the same

tasks
b. developing countries reduce their dependence on
former colonizing countries
c. labor does not lose time by switching from the
production of one kind of product to another
d. long production runs provide incentives for the
development of more effective working methods
13. An assumption that underlies theories of
specialization in international trade is that :

a. Countries without an absolute advantage in product

should specialize in transporting products.
b. Resources are domestically mobile from the
production of one product to another
c. Resources are internationally mobile from the
production of one product to another
d. Producers and countries have objectives other than
economic efficiency.
14. If it costs more to transport goods
internationally than is saved through
specialization, then:

a. The advantages of trade are positively correlated.

b. Countries will import transportation services.
c. The advantages of trade are negated.
d. Companies will divert resources to the development
of more efficient transportation.
15. Bigger countries, as opposed to smaller
countries, tend to:

a. Export a larger portion of their output and import

a larger part of their consumption.
b. Have lower transport costs for foreign trade.
c. Have less variety of resources.
d. Export a smaller portion of output and import a
smaller part of consumption.
16. According to which of the following theories would
countries with large land areas be more apt to have
varied climates and an assortment of natural
resources than smaller countries would, thus making
them more self–sufficient?

a. country size
b. mercantilism
c. absolute advantage
d. comparative advantage
17. According to the ……………., factors in
relative abundance are cheaper than factors
in relative scarcity.

a. theory of mercantilism
b. theory of absolute advantage
c. factor proportions theory
d. theory of comparative advantage
e. internalization theory
18. Which of the following theories indicates that
differences in countries’ endowments of labor
compared to their endowments of land or capital
explain differences in the cost of production factors?

a. mercantilism
b. absolute advantage
c. comparative advantage
d. factor proportions
e. internalization theory
19. Factor–proportions theory holds that if labor
were abundant in comparison to land and
capital, then:

a. Labor costs would be low relative to land and

capitol costs
b. Labor costs would be high relative to land and
capital costs.
c. Labor has immigrated from abroad.
d. It is the result of using labor saving technology.
20. The factor–proportions analysis becomes more
complicated when:

a. labor is homogeneous
b. the same products can be produced by different
methods.
c. product life cycles are short.
d. companies depend primarily on export markets.
21. Most new products are produced in and
exported from:

a. high–income industrial countries.

b. middle–income developing countries.
c. emerging economies
d. developing countries.
e. economies in transition
22. Almost all new technology that results in new
products and production methods originates in
which of the following?

a. developing countries
b. industrial countries
c. emerging economies
d. large countries
23. According to the …………… the production for
many products moves from one country to another
as they go from introduction through decline.

a. factor proportions theory

b. theory of mercantilism
c. theory of absolute advantage
d. product life cycle theory
24. According to the product life cycle theory,
developing countries have their best
production advantage in:

a. Highly standardized products

b. New products.
c. Products in their growth stage.
d. Products with rapidly changing technologies.
25. The introduction stage of the international
product life cycle is marked by all of the
following except:

a. Innovation in response to observed need

b. Innovating country becoming the net importer
c. Exporting by the innovative country
d. Evolving product characteristics
26. The production of a product in the introduction
stage of the international product life cycle is
most likely to occur in:

a. developing countries.
b. emerging economies.
c. industrial countries
d. large countries.
27. Most trade theories emphasize that differences
among countries create a basis for trade. These
differences are base on all of the following
except:

a. climate
b. factor endowment
c. innovative capability
d. country culture
28. The fact that so much trade takes place among
industrial countries is due to the growing
importance of ….. as opposed to ….. in world
trade.

a. acquire advantage, natural advantage

b. natural advantage, acquired advantage
c. absolute advantage, acquired advantage
d. neo-mercantilism, mercantilism
29. The ….. says that once a company has
developed a new product in response to observed
market conditions in the home market, it will
turn to markets it sees as most similar to those at
home.

a. factor-proportions theory
b. theory of mercantilism
c. country-similarity theory
d. theory of absolute advantage
30. In a situation of ………, a country would
have no reliance on other countries for any
goods, services, or technologies.

a. independence
b. dependence
c. interdependence
d. unilateralism
e. socialism
31. Which of the following was organized to
promote exchange rate stability and facilitate the
international flow of currencies?

a. The International Monetary Fund

b. The World Bank
c. The Federal Reserve Bank
d. The Bank for International Settlements
e. The International Finance Corporation
32. Which of the following is not a major objective
of the International Monetary Fund?

a. to facilitate the expansion and balanced growth of

international trade
b. to regulate inflation rates among under developed
countries
c. to promote exchange-rate stability
d. to establish a multilateral system of payments
33. The ……. lends money to countries to help
ease balance of payments difficulties.

a. United nations
b. World Bank
c. Federal Reserve Bank
d. International Monetary Fund
e. Bank for International Settlements
34. Which of the following is likely to exist when
people are willing to pay more for dollars than
the official rate?

a. gray market
b. black market
c. gold market
d. exchange market
35. Which of the following is the central bank of
the United States?

a. the Federal Reserve Bank

b. the Bank of America.
c. the Bank for International Settlement
d. the Central Bank of Washington
36. The … is the most widely used currency as a
central bank reserve asset, with about 68% of
the total in 2001.

a. Euro
b. Japanese yen
c. British pound
d. U.S. dollar
37. Which of the following best describes the type
of currencies that respond to supply-and-
demand condition free from government
intervention?

a. currencies that are pegged to stronger currencies

b. currencies that float freely
c. currencies that are fixed
d. currencies that are tied to treasury bills
38. A strengthening of Japanese yen would result in
which of the following outcomes?

a. Higher unemployment in Japanese import industry

b. Greater competition in Japanese domestic market
c. Higher unemployment in Japanese export industry
d. Higher employment in Japanese export industry
e. Both b and c.
39. A strengthening of U.S. real interest rate
relative to Japanese rate would result in a:

a. Strengthening of the dollar and a weakening of the yen

b. Strengthening of the yen and weakening of the dollar
c. Strengthening of the Mexican peso in comparison to
the Japanese yen
d. Strengthening of the Japanese yen in comparison to
the Mexican peso
40. A drop in U.S. real interest rate relative to
European rate would result in a:

a. Strengthening of the dollar and weakening of the euro

b. A weakening of the dollar and a strengthening of the euro
c. No change in the dollar or the euro
d. A weakening of both the dollar and the euro
41. Which of the following theories of exchange rate
determination is based on relative inflation rates
between countries?

a. The Fisher Effect

b. The International Fisher effect
c. The Purchasing Power Parity
d. The Interest Rate Parity Theory
42. The ….. is the real interest rate plus inflation:

a. Compound interest rate

b. Prime interest rate
c. Global interest rate
d. Nominal interest rate
43. Because real interest rates are equalized among
countries by arbitrage, which of the following is
true?

a. Country with higher interest rate should have higher

inflation
b. The country with the higher interest rate should have
lower inflation
c. The country with the higher interest rate should have
lower taxes
d. The country with the higher interest rate should have
higher tax
45. The theory that the interest rate differential is an
unbiased predictor of future changes in the spot
exchange rate is called the:

a. Interest Rate Parity

b. Purchasing Power Parity
c. International Fisher Effect
d. Foreign Exchange Parity
46. …... forecasting method uses trends/changes in
macro economic variables to predict future
exchange rates.

a. Technical
b. Fundamental
c. Exponential
d. Multidimensional
47. Which of the following types of forecasting
methods uses past trends in exchange rate
movement to predict future trends?

a. Fundamental
b. Exponential
c. Technical
d. Market-based
e. Random walk
48. The strengthening of a country’s currency value
could result in which of the following?

a. Create a problems for importers

b. Raise the inflation rate
c. Create problems for exporters
d. Raise the tax rate
49. Exchange rates can affect financial decisions in
all of the following areas except:

a. Increasing productivity among workers

b. Sourcing financial resources
c. Remittance of funds across national borders
d. Reporting of financial results
50. The purchase of U.S. Commercial Paper by a
French investor shows up on the U.S. BOP as:

a. A credit on trade account.

b. A credit on long-term capital account.
c. A debit on current account.
d. A debit on short-term capital account.
e. A credit on short-term capital account.