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In many countries, hostile takeovers are relatively rare. This is so partly because FINC400 Testbank

Updated: Aug 13, 2022

Corporate governance can be defined as: A. the economic, legal, and institutional framework in which corporate control and cash flow rights are distributed among shareholders, managers and other stakeholders of the company. B. the general framework in which company management is selected and monitored. C. the rules and regulations adopted by boards of directors specifying how to manage companies. D. the government-imposed rules and regulations affecting corporate management.

When managerial self-dealings are excessive and left unchecked, A. they can have serious negative effects on share values. B. they can impede the proper functions of capital markets. C. they can impede such measures as GDP growth. D. all of the above

The genius of public corporations stems from their capacity to allow efficient sharing or spreading of risk among many investors, who can buy and sell their ownership shares on liquid stock exchanges and let professional managers run the company on behalf of shareholders. This risk sharing stems from A. the liquidity of the shares. B. the limited liability of shareholders. C. the limited liability of bondholders. D. the limited ability of shareholders.

The key weakness of the public corporation is A. too many shareholders, which makes it difficult to make corporate decisions. B. relatively high corporate income tax rates. C. conflicts of interest between managers and shareholders. D. conflicts of interests between shareholders and bondholders.

When company ownership is diffuse, A. a "free rider" problem discourages shareholder activism. B. the large number of shareholders ensures strong monitoring of managerial behavior because with a large enough group, there's almost always someone who will incur the costs of monitoring management. C. few shareholders have a strong enough incentive to incur the costs of monitoring management. D. both a and c are correct

In many countries with concentrated ownership A. the conflicts of interest between shareholders and managers are worse than in countries with diffuse ownership of firms. B. the conflicts of interest are greater between large controlling shareholders and small outside shareholders than between managers and shareholders. C. the conflicts of interest are greater between managers and shareholders than between large controlling shareholders and small outside shareholders. D. corporate forms of business organization with concentrated ownership are rare.

The central issue of corporate governance is A. how to protect creditors from managers and controlling shareholders. B. how to protect outside investors from the controlling insiders. C. how to alleviate the conflicts of interest between managers and shareholders. D. how to alleviate the conflicts of interest between shareholders and bondholders.

The strongest protection for investors is provided by A. English common law countries, such as Canada, the United States, and the U.K. B. French civil law countries, such as Belgium, Italy, and Mexico. C. a weak board of directors. D. socialized firms.

The separation of the company's ownership and control, A. is especially prevalent in such countries as the United States and the United Kingdom, where corporate ownership is highly diffused. B. is especially prevalent in such countries as the Italy and Mexico, where corporate ownership is highly concentrated. C. is a rational response to the agency problem. D. none of the above

Outside the United States and the United Kingdom, A. concentrated ownership of the company is more the exception than the rule. B. diffused ownership of the company is more the exception than the rule. C. partnerships are more important than corporations. D. none of the above

A complete contract between shareholders and managers A. would specify exactly what the manager will do under each of all possible future contingencies. B. would be an expensive contract to write and a very expensive contract to monitor. C. would eliminate any conflicts of interest (and managerial discretion). D. all of the above

Free cash flow refers to A. a firm's cash reserve in excess of tax obligation. B. a firm's funds in excess of what's needed for undertaking all profitable projects. C. a firm's cash reserve in excess of interest and tax payments. D. a firm's income tax refund that is due to interest payments on borrowing.

Why do managers tend to retain free cash flow? A. Managers are in the best position to decide the best use of those funds. B. These funds are needed for undertaking profitable projects and the issue costs are less than new issues of stocks or bonds. C. Managers may not be acting in the shareholders best interest, and for a variety of reasons, want to use the free cash flow. D. None of the above

The agency problem tends A. to be more serious in firms with free cash flows. B. to be more serious in firms with excessive amounts of excess cash. C. to be less serious in firms with few numbers of shareholders. D. all of the above

It is important for society as a whole to solve the agency problem, since the agency problem A. leads to waste of scarce resources. B. hampers capital market functions. C. retards economic growth. D. all of the above

In the U.S., the chief role of the board of directors is A. to hire the management team. B. to decide on the annual capital budget. C. to design an effective incentive compatible compensation scheme for themselves. D. none of the above

In Germany the corporate board is A. legally charged with representing the interests of shareholders exclusively. B. legally charged with looking after the interests of stakeholders (e.g., workers, creditors, etc.) in general, not just shareholders. C. legally charged as a supervisory board only. D. legally charged as a management board only.

In the United States, it is not uncommon for the same person to serve as both CEO and chairman of the board. A. This situation must not have much conflict of interest since it is common. B. This situation has a built-in conflict of interest. C. This is only legal if that individual owns a controlling number of shares in the firm. D. None of the above

If an incentive contract specifies certain accounting performance A. that accounting number will likely be the focus of managers. B. managers will set aside the accounting goal if it conflicts with the goal of maximizing shareholder wealth. C. managers will be unable to manipulate the GAAP, so shareholders can be confident of having their wealth maximized.

Accounting Transparency A. can only be achieved when managers commit to serving on their own audit committee. B. occurs when the accounting department has translucent cubicles for their workers. C. promises to reduce the information asymmetry between corporate insiders and the public. D. none of the above

While debt can reduce agency costs between shareholders and management,

A. excessive debt may also induce the risk-averse managers to forgo profitable but risky investment projects, causing an underinvestment problem. B. with debt financing companies can misuse debt to finance corporate empire building. C. both a and b D. none of the above

Benetton, an Italian clothier, is listed on the New York Stock Exchange. A. This decision provides their shareholders with a higher degree of protection than is available in Italy. B. This decision can be a signal of the company's commitment to shareholder rights. C. This may make investors both in Italy and abroad more willing to provide capital and to increase the value of the pre-existing shares. D. All of the above

In many countries, hostile takeovers are relatively rare. This is so partly because of A. the language barrier. B. concentrated ownership in these countries. C. cultural values and political environments disapproving hostile corporate takeovers. D. both b and c

Suppose Mr. Lee and his relatives hold 30% of shares outstanding of Samsung Life, which in turn holds 20% of Samsung Electronics. What is the cash flow right of the Lee family in Samsung Electronics? A. 50 percent B. 10 percent C. 20 percent D. 6 percent

D. 30% x 20% = 6%

A pyramidal ownership structure is one in which A. a shareholder controls a holding company that owns a controlling block of another company, which in turn owns controlling interests in yet another company, and so on. B. equity cross-holdings among a group of companies, such as keiretsu and chaebols can be used to concentrate and leverage voting rights to acquire control. C. a combination of these schemes may also be used to leverage control in a pyramidal ownership structure.

What is the difference between control rights and cash flow rights? A. Since all shareholders benefit only from pro-rata cash flows, control rights and cash flow rights are the same thing. B. Large investors may be able to derive private benefits from control, thus control rights can exceed cash flow rights. C. Cash flow rights are more important than control rights since the only reason to invest in anything is to generate cash. D. None of the above

The Sarbanes-Oxley Act of 2002 stipulates that A. a public accounting oversight board be created. B. the company should appoint independent financial experts to its audit committee. C. CEO and CFO sign off the company's financial statements. D. all of the above

The major components of the Sarbanes-Oxley Act are: A. accounting regulation—The creation of a public accounting oversight board charged with overseeing the auditing of public companies, and restricting the consulting services that auditors can provide to clients. B. audit committee—The company should appoint independent "financial experts" to its audit committee. C. internal control assessment—Public companies and their auditors should assess the effectiveness of internal control of financial record keeping and fraud prevention. D. executive responsibility—Chief executive and finance officers (CEO and CFO) must sign off on the company's quarterly and annual financial statements. If fraud causes an overstatement of earnings, these officers must return any bonuses. E. all of the above

The Cadbury Code of Best Practice A. is the U.N. equivalent of the Sarbanes-Oxley Act. B. is voluntary, but firms that fail to comply must explain why they choose not to comply. C. has the force of law, like the Sarbanes-Oxley Act. D. none of the above

The key requirements of the Cadbury Code of Best Practice state that A. boards of directors should include at least three outside directors. B. the positions of CEO and chairman of the board should not reside in the same individual. C. compliance is mandatory for public corporations, optional for listed non-public corporations. D. both a and b

Topic: The Cadbury Code of Best Practice

98) Even though compliance with the Cadbury Code of Best Practice is voluntary, 98)

A) the job security of U.K. chief executives has become more sensitive to the company

performance, strengthening managerial accountability and weakening its

entrenchment.

B) joint CEO/COB (chief executive officer and chairman of the board) positions

declined.

C) the Cadbury Code has made a significant impact on the internal governance

mechanisms of U.K. companies.

D) all of the options

Answer: D

Topic: The Cadbury Code of Best Practice

99) The key requirements of the Cadbury Code of Best Practice state that 99)

A) compliance is mandatory for public corporations, optional for listed non-public

corporations.

B) boards of directors should include at least three outside directors and the positions

of CEO and chairman of the board should not reside in the same individual.

C) boards of directors should include at least three outside directors.

D) the positions of CEO and chairman of the board should not reside in the same

individual.

Answer: B

Topic: The Cadbury Code of Best Practice

100) The key requirements of the Cadbury Code of Best Practice state that 100)

A) the positions of CEO and chairman of the board should not reside in the same

individual.

B) listed companies to have boards of directors with a majority of independents.

C) the compensation, nominating, and audit committees to be entirely composed of

independent directors.

D) none of the options

Answer: A

Topic: The Cadbury Code of Best Practice

The difference between a country's savings and investment is given by A. S - I B. I × S C. X - M D. GNP - Y

If the difference between tax revenue and government expenditures is negative, it implies that A. tax revenue is insufficient to cover government spending. B. a government budget deficit exists. C. the government will be issuing new debt securities. D. all of the above

National income, or Gross National Product is given by A. GNP ≡ Y ≡ C + I + G + X + M B. GNP ≡ Y ≡ C + I + G + X - M C. GNP ≡ I ≡ C + Y + G + X - M D. GNP ≡ Y ≡ C + I + X + M - G

Which of the following is a true statement? A. BCA ≡ X - M B. BKA ≡ X - M C. BKA - BCA ≡ X - M D. BKA ≡ M - X

There is an intimate relationship between a country's BCA and how the country finances its domestic investment and pays for government expenditures. This relationship is given by BCA ≡ X - M ≡ (S - I) + (T - G). Given this, which of the following is a true statement? A. If (S - I) < 0, it implies that a country's domestic savings is insufficient to finance domestic investment. B. If (T - G) < 0, it implies that a country's tax revenue is insufficient to finance government spending. C. both a and b are true D. none of the above

There is an intimate relationship between a country's BCA and how the country finances its domestic investment and pays for government expenditures. Given this, which of the following is a true statement? A. If (S - I) < 0, it implies that a country's domestic savings is insufficient to finance domestic investment. B. If (T - G) < 0, it implies that a country's tax revenue is insufficient to finance government spending. C. both a and b are true D. none of the above

There is an intimate relationship between a country's BCA and how the country finances its domestic investment and pays for government expenditures. This relationship is given by BCA ≡ X - M ≡ (S - I) + (T - G). Given this, in order for a country to reduce a BCA deficit, which of the following must occur? A. For a given level of S and I, the government budget deficit (T - G) must be reduced. B. For a given level of I and (T - G), S must be increased. C. For a given level of S and (T - G), I must fall. D. All of the above would work to reduce a BCA deficit

There is an intimate relationship between a country's BCA and how the country finances its domestic investment and pays for government expenditures. Given this, in order for a country to reduce a BCA deficit, which of the following must occur? A. For a given level of S and I, the government budget deficit (T - G) must be reduced. B. For a given level of I and (T - G), S must be increased. C. For a given level of S and (T - G), I must fall. D. All of the above would work to reduce a BCA deficit

1. Recently, financial markets have become highly integrated. This development A. allows investors to diversify their portfolios internationally. B. allows minority investors to buy and sell stocks. C. has increased the cost of capital for firms. D. answers a) and c) are both correct.

A. allows investors to diversify their portfolios internationally.

2. Japan has experienced large trade surpluses. Japanese investors have responded to this by A. liquidating their positions in stocks to buy dollar denominated bonds. B. investing heavily in U.S. and other foreign financial markets. C. lobbying the U.S. government to depreciate its currency. D. lobbying the Japanese government to allow the yen to appreciate.

B. investing heavily in U.S. and other foreign financial markets.

3. Suppose your firm invests $100,000 in a project in Italy. At the time the exchange rate is $1.25 = €1.00. One year later the exchange rate is the same, but the Italian government has expropriated your firm's assets paying only €80,000 in compensation. This is an example of A. exchange rate risk. B. political risk. C. market imperfections. D. none of the above, since $100,000 = €80,000 × $1.25/€1.00

B. political risk.

4. Suppose you start with $100 and buy stock for £50 when the exchange rate is £1 = $2. One year later, the stock rises to £60. You are happy with your 20 percent return on the stock, but when you sell the stock and exchange your £60 for dollars, you only get $45 since the pound has fallen to £1 = $0.75. This loss of value is an example of A. exchange rate risk. B. political risk. C. market imperfections. D. weakness in the dollar.

A. exchange rate risk.

5. Suppose Mexico is a major export market for your U.S.-based company and the

Mexican peso depreciates drastically against the U.S. dollar, as it did in December 1994. This means A. your company's products can be priced out of the Mexican market, as the peso price of American imports will rise following the peso's fall. B. your firm will be able to charge more in dollar terms while keeping peso prices stable. C. your domestic competitors will enjoy a period of facing little price competition from Mexican imports. D. both b) and c) are correct

A. your company's products can be priced out of the Mexican market, as the peso price of American imports will rise following the peso's fall.

6. As capital markets are becoming more integrated, the goal of shareholder wealth maximization A. has been altered to include other goals as well. B. has lost out to other goals, even in the U.S. C. has been given increasing importance by managers in Europe. D. has been shown to be a deterrent to raising funds abroad.

C. has been given increasing importance by managers in Europe.

7. When corporate governance breaks down A. shareholders are unlikely to receive fair returns on their investments. B. managers may be tempted to enrich themselves at shareholder expense. C. the board of directors is not doing its job. D. all of the above

D. all of the above

8. Under the theory of comparative advantage, liberalization of international trade will A. enhance the welfare of the world's citizens. B. create unemployment and displacement of workers permanently. C. result in higher prices in the long run as monopolists are able to charge higher prices after eliminating their competitors. D. all of the above

A. enhance the welfare of the world's citizens.

9. The monetary system of bimetallism is unstable. Due to the fluctuation of the commercial value of the metals, A. the metal with a commercial value lower than the currency value tends to be used as metal and is withdrawn from circulation as money (Gresham's Law). B. the metal with a commercial value higher than the currency value tends to be used as money (Gresham's Law). C. the metal with a commercial value higher than the currency value tends to be used as metal and is withdrawn from circulation as money (Gresham's Law). D. none of the above

C. the metal with a commercial value higher than the currency value tends to be used as metal and is withdrawn from circulation as money (Gresham's Law).

13. Under a gold standard, if Britain exported more to France than France exported to Great Britain, A. such international imbalances of payment will be corrected automatically. B. this type of imbalance will not be able to persist indefinitely. C. net export from Britain will be accompanied by a net flow of gold in the opposite direction. D. all of the above

D. all of the above

14. The choice between the alternative exchange rate regimes (fixed or floating) is likely to involve a trade-off between A. national monetary policy autonomy and international economic integration. B. exchange rate uncertainty and national policy autonomy. C. Balance of Payments autonomy and inflation. D. unemployment and inflation.

B. exchange rate uncertainty and national policy autonomy.

15. Under a purely flexible exchange rate system A. supply and demand set the exchange rates. B. governments can set the exchange rate by buying or selling reserves. C. governments can set exchange rates with fiscal policy. D. answers b) and c) are correct.

A. supply and demand set the exchange rates.

16. If the United States imports more than it exports, then A. the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus. B. one can infer that the U.S. dollar would be under pressure to depreciate against other currencies. C. a) and b) D. None of the above

C. a) and b)

17. If Japan exports more than it imports, then A. the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus. B. one can infer that the yen would be likely to appreciate against other currencies. C. a) and b) D. None of the above

B. one can infer that the yen would be likely to appreciate against other currencies.

18. The current account includes A. the export and import of goods and services. B. all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses. C. all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs). D. nonetheless of the above

A. the export and import of goods and services.

19. The capital account includes A. the export and import of goods and services. B. all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses. C. all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs). D. none of the above

B. all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses.

20. The official reserve account includes A. the export and import of goods and services. B. all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses. C. all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs). D. none of the above

C. all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs).

21. 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 exchanges rate changes. D. none of the above

A. the initial deterioration and the eventual improvement of a country's trade balance following a currency depreciation.

22. When a country's currency depreciates against the currencies of major trading partners, A. the country's exports tend to rise and imports fall. B. the country's exports tend to fall and imports rise. C. the country's exports tend to rise and imports rise. D. the country's exports tend to fall and imports fall.

A. the country's exports tend to rise and imports fall.

23. With regard to the capital account A. the capital account balance measures the difference between U.S. sales of assets to foreigners and U.S. purchases of foreign assets. B. U.S. sales (or exports) of assets are recorded as credits, as they result in capital inflow. C. U.S. purchases (imports) of foreign assets are recorded as debits, as they lead to capital outflow. D. all of the above

D. all of the above

24. The difference between Foreign Direct Investment and Portfolio Investment is that A. Portfolio Investment mostly represents the sale and purchase of foreign financial assets such as stocks and bonds that do not involve a transfer of control. B. Foreign Direct Investment mostly represents the sale and purchase of foreign financial assets such as stocks whereas Portfolio Investment mostly involves the sales and purchase of foreign bonds. C. Foreign Direct Investment is about buying land and building factories, whereas portfolio investment is about buying stocks and bonds. D. All of the above

A. Portfolio Investment mostly represents the sale and purchase of foreign financial assets such as stocks and bonds that do not involve a transfer of control.

25. Government controlled investment funds, known as sovereign wealth funds, A. are playing a less-important role in international finance following the end of the fixed exchange rate era. B. are mostly domiciled in Asian and Middle Eastern countries. C. are usually responsible for converting trade surpluses and oil revenues into foreign exchange reserves. D. none of the above

B. are mostly domiciled in Asian and Middle Eastern countries.

26. Since security returns tend to have low correlations among countries, A. investors can reduce risk more effectively if they diversify their portfolio holdings internationally rather than purely domestically. B. investors who have a domestically diversified portfolio, with exposures across industry types will not gain much from diversifying abroad. C. investors who diversify internationally will likely underperform investors who keep all their investments in one country. D. none of the above

A. investors can reduce risk more effectively if they diversify their portfolio holdings internationally rather than purely domestically.

27. Which of the following is most indicative of the pressure that a country's currency faces for depreciation or appreciation? A. The current account B. The capital account C. The statistical discrepancies D. The official settlement balance

A. The current account

28. The vast majority of the foreign-exchange reserves held by central banks are denominated in A. local currencies. B. U.S. dollars. C. Yen. D. Euro.

B. U.S. dollars.

29. The balance of payments identity is given by BCA + BKA + BRA = 0. Rearrange the identity for a country with a pure flexible exchange rate regime. A. BCA + BKA + BRA = 0 B. BCA = -BKA C. BCA + BKA = -BRA D. BRA = -BCA

B. BCA = -BKA

30. In a pure flexible exchange rate regime, a country's central banks will not need to maintain official reserves. Under this regime A. -BCA = BKA. B. BCA = - BRA = 0. C. BKA = -BRA. D. BSA = BCA.

A. -BCA = BKA.

31. Under the pure flexible exchange rate regime A. the combined balance on the current and capital accounts will be equal in size, but opposite in sign, to the change in the official reserves. B. the balance on the current and capital accounts will be equal in size, but opposite in sign. C. a current account surplus or deficit must be matched by an official reserves deficit or surplus. D. a capital account surplus or deficit must be matched by an official reserves deficit or surplus.

A. the combined balance on the current and capital accounts will be equal in size, but opposite in sign, to the change in the official reserves.

32. The central issue of corporate governance is A. how to protect creditors from managers and controlling shareholders. B. how to protect outside investors from the controlling insiders. C. how to alleviate the conflicts of interest between managers and shareholders. D. how to alleviate the conflicts of interest between shareholders and bondholders.

C. how to alleviate the conflicts of interest between managers and shareholders.

33. . The public corporation has a key weakness: A. the conflicts of interest between bondholders and shareholders. B. the conflicts of interest between managers and bondholders. C. the conflicts of interest between stakeholders and shareholders. D. the conflicts of interest between managers and shareholders.

D. the conflicts of interest between managers and shareholders.

34. The separation of the company's ownership and control, A. is especially prevalent in such countries as the United States and the United Kingdom, where corporate ownership is highly diffused. B. is especially prevalent in such countries as the Italy and Mexico, where corporate ownership is highly concentrated. C. is a rational response to the agency problem. D. none of the above

A. is especially prevalent in such countries as the United States and the United Kingdom, where corporate ownership is highly diffused.

35. The agency problem refers to the possible conflicts of interest between A. self-interested managers as principals and shareholders of the firm who are the agents. B. altruistic managers as agents and shareholders of the firm who are the principals. C. self-interested managers as agents and shareholders of the firm who are the principals. D. dutiful managers as principals and shareholders of the firm who are the agents.

C. self-interested managers as agents and shareholders of the firm who are the principals.

36. . It is important for society as a whole to solve the agency problem, since the agency problem A. leads to waste of scarce resources. B. hampers capital market functions. C. retards economic growth. D. all of the above

D. all of the above

37. Suppose you are the CEO of company A, and you serve on the board of company B, while the CEO of B is on your board. A. This is a potential conflict of interest for both parties. B. This is normal and even a desirable situation since it allows for efficient information sharing between the firms. C. There is a potential conflict for the shareholders of the two firms. D. All of the above are true.

A. This is a potential conflict of interest for both parties.

38. Most foreign exchange transactions are for A. intervention by central banks. B. interbank trades between international banks or nonbank dealers. C. retail trade. D. purchase of hard currencies.

B. interbank trades between international banks or nonbank dealers.

39. Intervention in the foreign exchange market is the process of A. a central bank requiring the commercial banks of that country to trade at a set price level. B. commercial banks in different countries coordinating efforts in order to stabilize one or more currencies. C. a central bank buying or selling its currency in order to influence its value. D. the government of a country prohibiting transactions in one or more currencies.

C. a central bank buying or selling its currency in order to influence its value.

45. A dealer in British pounds who thinks that the pound is about to appreciate A. may want to widen his bid-ask spread by raising his ask price. B. may want to lower his bid price. C. may want to lower his ask price. D. none of the above

D. none of the above

The United States adopted the gold standard in 1973. 1879. 1776. 1864.

1879

The first full-fledged gold standard was not established until 1821 in Great Britain, when notes from the Bank of England were made fully redeemable for gold. was established in 986 during the Han dynasty in China. none of the options was not established until 1780 in the United States, when notes from the Continental Army were made fully redeemable for gold.

was not established until 1821 in Great Britain, when notes from the Bank of England were made fully redeemable for gold.

Gresham's Law states that good money drives bad money out of circulation. none of the options. if a country bases its currency on both gold and silver, at an official exchange rate, it will be the more valuable of the two metals that circulate. bad money drives good money out of circulation.

bad money drives good money out of circulation.

Suppose that the United States is on a bimetallic standard at $30 to one ounce of gold and $2 for one ounce of silver. If new silver mines open and flood the market with silver, only the gold currency will circulate. no change will take place since citizens could exchange their gold currency for silver currency at any time. none of the options. only the silver currency will circulate.

only the silver currency will circulate.

The European Monetary System (EMS) has the chief objective(s) to establish a "zone of monetary stability" in Europe. to pave the way for the eventual European monetary union. to coordinate exchange rate policies vis-à-vis the non-EMS currencies. all of the options

all of the above

During the period between World War I and World War II, many central banks followed a policy of sterilization of gold none of the options by restricting the rate of growth in the supply of gold. by matching inflows and outflows of gold respectively with reductions and increases in domestic money and credit. by matching inflows and outflows of gold respectively with increases and reductions in domestic money and credit.

by matching inflows and outflows of gold respectively with reductions and increases in domestic money and credit.

Under the Bretton Woods system, all currencies of member states were fully convertible to gold. none of the options the U.S. dollar was the only currency that was fully convertible to gold; other currencies were not directly convertible to gold. all currencies of member states were fully convertible to gold or silver.

the U.S. dollar was the only currency that was fully convertible to gold; other currencies were not directly convertible to gold.

The majority of countries got off the gold standard in 1914 when World War I broke out. the American Civil War ended. World War II started. none of the options

World War I broke out.

One potential drawback of the gold standard is that the world economy can be subject to deflationary pressure due to the limited supply of monetary gold. all of the options gold is scarce. the world economy can be subject to inflationary pressure without changes in the supply of monetary gold.

the world economy can be subject to deflationary pressure due to the limited supply of monetary gold.

In the EU, there is a high degree of fiscal integration among EU countries. low degree of fiscal integration among EU countries.

low degree of fiscal integration among EU countries.

A currency board arrangement is a monetary regime based on an explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate, combined with restrictions on the issuing authority to ensure the fulfillment of its legal obligation. when the country belongs to a monetary or currency union in which the same legal tender is shared by the members of the union. when the currency of another country circulates as the sole legal tender. where the country pegs its currency at a fixed rate to a major currency where the exchange rate fluctuates within a narrow margin of less than one percent.

a monetary regime based on an explicit legislative commitment to exchange domestic currency for a specified foreign currency at a fixed exchange rate, combined with restrictions on the issuing authority to ensure the fulfillment of its legal obligation.

Once the changeover to the euro was completed by July 1, 2002, the legal-tender status of national currencies in the euro zone none of the options was canceled, leaving the euro as the sole legal tender in the euro zone countries. was affirmed at the fixed exchange rate. was tied to gold.

was canceled, leaving the euro as the sole legal tender in the euro zone countries.

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Assume that a country is on the gold standard. In order to support unrestricted convertibility into gold, banknotes need to be backed by a gold reserve of some minimum stated ratio. In addition, none of the options the domestic money stock should rise and fall as gold flows in and out of the country and the central bank can control the money supply by buying or selling the foreign currencies. the domestic money stock should rise and fall as gold flows in and out of the country. the central bank can control the money supply by buying or selling the foreign currencies.

the domestic money stock should rise and fall as gold flows in and out of the country.

Under the Bretton Woods system all of the options each country was responsible for maintaining its exchange rate within 1 percent of the adopted par value by buying or selling foreign exchanges as necessary. each country established a par value for its currency in relation to the dollar. the U.S. dollar was pegged to gold at $35 per ounce.

all of the options

The single European currency, the euro, was adopted by 11 member nations on January 1 of what year? 2001 1991 1984 1999

1999

A central bank can fix an exchange rate only for as long as the market believes that it has the political will to do so. in perpetuity. only for as long as it has independence of monetary policy. only for as long as it has reserves of gold.

only for as long as the market believes that it has the political will to do so.

The core of the Bretton Woods system was the United Nations. World Bank. IMF. Interstate Commerce Commission.

World Bank

The international monetary system went through several distinct stages of evolution. These stages are summarized, in alphabetic order, as follows: (i) Bimetallism (ii) Bretton Woods system (iii) Classical gold standard (iv) Flexible exchange rate regime (v) Interwar period The chronological order that they actually occurred is: (i), (iii), (v), (ii), and (iv) (vi), (i), (iii), (ii), and (v) (iii), (i), (iv), (ii), and (v) (v), (ii), (i), (iii), and (iv)

(i), (iii), (v), (ii), and (iv)

To pave the way for the European Monetary Union, the member countries of the European Monetary System agreed to achieve a convergence of their economies. Which of the following is not a condition of convergence: maintain its currency at a fixed exchange rate to the ERM. keep gross public debts below 60 percent of GDP. keep the ratio of government budget deficits to GDP below 3 percent. achieve a high degree of price stability.

maintain its currency at a fixed exchange rate to the ERM.

Under a purely flexible exchange rate system supply and demand set the exchange rates. governments can set the exchange rate by buying or selling reserves. governments can set the exchange rate by buying or selling reserves and with fiscal policy. governments can set exchange rates with fiscal policy.

supply and demand set the exchange rates.

The Bretton Woods system was named after the treasury secretary of the United States in 1945, Bretton Woods. Bretton Woods, New Hampshire, where the Articles of Agreement of the International Monetary Fund (IMF) were hammered out. none of the options the treasury secretary of the United States in 1945, Bretton Woods, as well as Bretton Woods, New Hampshire, where the Articles of Agreement of the International Monetary Fund (IMF) were hammered out.

Bretton Woods, New Hampshire, where the Articles of Agreement of the International Monetary Fund (IMF) were hammered out.

The main cost of European monetary union is none of the options the loss of national monetary and exchange rate policy independence. lessened political integration. increased exchange rate uncertainty.

the loss of national monetary and exchange rate policy independence.

Gold was officially abandoned as an international reserve asset in the 1944 Bretton Woods Agreement. none of the options in the January 1976 Jamaica Agreement. in the 1971 Smithsonian Agreement.

in the January 1976 Jamaica Agreement.

Since the SDR is a "portfolio" of currencies its value tends to be as stable as the average of the individual currencies included in the SDR. its value tends to be more stable than the value of any of the individual currencies included in the SDR. its value tends to be less stable than the value of any of the individual currencies included in the SDR. none of the options

its value tends to be more stable than the value of any of the individual currencies included in the SDR.

Special Drawing Rights (SDR) are a "portfolio" of currencies, and its value tends to be more stable than the currencies that it is comprised of. All of these choices are correct. an artificial international reserve allotted to the members of the International Monetary Fund (IMF), who can then use it for transactions among themselves or with the IMF.

used in addition to gold and foreign exchanges, to make international payments.

All of these choices are correct.

The Bretton Woods agreement resulted in the creation of the Federal Reserve Bank. the World Bank. the bancor as an international reserve asset. the Exim bank.

the World Bank.

Which country is not using the euro? Greece Italy Portugal Sweden

Sweden

The international monetary system can be defined as the institutional framework within which international payments are made. movement of capital is accommodated. exchange rates among currencies are determined. all of the options

all of the options

Under the Bretton Woods system each country established a par value for its currency in relation to the dollar. And the U.S. dollar was pegged to gold at $350 per ounce. $900 per ounce. $35 per ounce. $1 per ounce.

$35

With regard to the current exchange rate arrangement between the U.S. and the U.K., it is best characterized as pegged exchange rate within a horizontal band. currency board. independent floating (market determined). managed float.

independent floating (market determined).

Monetary policy for the countries using the euro as a currency is now conducted by none of the options the Bundesbank. European Central Bank. the Federal Reserve.

European Central Bank.

Following the demise of the Bretton Woods system, the IMF ceased to exists, since the era of fixed exchange rates had ended. became the central bank of the United Nations. created a new role for itself, providing loans to countries facing balance-of-payments and exchange rate difficulties. became the sole agent responsible for maintaining fixed exchange rates.

created a new role for itself, providing loans to countries facing balance-of-payments and exchange rate difficulties.

Benefits from adopting a common European currency include elimination of exchange rate risk. reduced transaction costs. increased price transparency, which promotes Europe-wide competition. all of the options

all of the options

The Bretton Woods system ended in 1945. 1981. 1973. 2001.

1973.

In the years leading to the collapse of the Bretton Woods system it became clear that the dollar was overvalued. it became clear that the dollar was undervalued.

it became clear that the dollar was overvalued.

During the period of the classical gold standard (1875-1914) there were no exchange rates. highly volatile exchange rates. volatile exchange rates. moderately volatile exchange rates. stable exchange rates.

stable exchange rates.

Another name for the incompatible trinity is the Trilemma. none of the options Triffin Paradox. Tobin Tax.

Triffin Paradox.

Under the Bretton Woods system Multiple Choice the U.S. dollar was the only currency that was fully convertible to gold. there was an explicit set of rules about the conduct of international monetary policies. All the choices are correct. each country was responsible for maintaining its exchange rate within 1 percent of the adopted par value by buying or selling foreign exchanges as necessary.

All the choices are correct.

On January 1, 1999, an epochal event took place in the arena of international finance when eleven of 15 EU countries adopted a common currency called the euro. all EU countries adopted a common currency called the euro. nine of 15 EU countries adopted a common currency called the euro. eight of 15 EU countries adopted a common currency called the euro.

eleven of 15 EU countries adopted a common currency called the euro.

According to the "Trilemma" a country can attain only two of the following three conditions: (1) A fixed exchange rate, (2) free international flows of capital, and (3) an independent monetary policy. This difficulty is also known as the Trilemma. none of the options the Tobin tax. the incompatible trinity.

the incompatible trinity.

An "international" gold standard can be said to exist when gold may be freely exported or imported. all of the options gold alone is assured of unrestricted coinage. there is two-way convertibility between gold and national currencies at stable ratios.

all of the options

During the period between World War I and World War II, while most countries abandoned the gold standard during World War I, international trade and investment flourished during the interwar period under a coherent international monetary system. the U.S. dollar emerged as the dominant world currency, gradually replacing the British pound for the role. none of the options the major European powers and the U.S. returned to the gold standard and fixed exchange rates.

the U.S. dollar emerged as the dominant world currency, gradually replacing the British pound for the role.

The monetary system of bimetallism is unstable. Due to the fluctuation of the commercial value of the metals, the metal with a commercial value higher than the currency value tends to be used as metal and is withdrawn from circulation as money (Gresham's Law). the metal with a commercial value lower than the currency value tends to be used as metal and is withdrawn from circulation as money (Gresham's Law). the metal with a commercial value higher than the currency value tends to be used as money (Gresham's Law).

the metal with a commercial value higher than the currency value tends to be used as metal and is withdrawn from circulation as money (Gresham's Law).

Ecuador does not have its own national currency, circulating the U.S. dollar instead. About how many countries do not have their own national currency? 20 30 10 40

Under a gold standard, if Britain exports more to France than France exports to Great Britain, this type of imbalance will not be able to persist indefinitely. such international imbalances of payment will be corrected automatically. all of the options net export from Britain will be accompanied by a net flow of gold in the opposite direction.

all of the options

The advent of the euro marks the first time that sovereign countries have voluntarily given up their fiscal policy independence to foster economic integration. monetary independence to foster economic integration. national debt to foster economic integration. national borders to foster economic integration.

monetary independence to foster economic integration.

The European Monetary System (EMS)

European Monetary System (EMS) was an arrangement established in 1979 under the Jenkins European Commission where most nations of the European Economic Community (EEC) linked their currencies to prevent large fluctuations relative to one another.

Pierre Werner

Former Prime Minister of Luxembourg. He was appointed to head a committee that would investigate the formation of a monetary union.

Single European Act (SEA)

The Single European Act (SEA) was the first major revision of the 1957 Treaty of Rome. The Act set the European Community an objective of establishing a single market by 31 December 1992. It added new momentum to European integration and strives to complete the internal market. 1986 it was signed. "Europe 1992"

Jacques Delors

President of the Commission (2 Terms) French Politician

Jim Dooge

Irish Politician who suggested the intergovernmental conference (IGC)

The Werner Plan

A committee was formed headed by Pierre Werner to investigate the formation of a monetary union. The Werner Committee created the Werner plan that said a monetary union would be established in three stages.

3 Stages of the Werner Plan

1) The Creation of the EMCF 2) The coordination of monetary and fiscal policies by the EC governments to reduce exchange rate fluctuation 3) The ECMF would be transformed into the Central European Bank and the exchange rates would be fixed

The Werner Plan Failed Because....

1) Collapse of the Bretton Wood System 2) Arab/Israel war (Oil Crisis) 3) Enlargement of the EC by three countries ( ENgland Denmark and Ireland) made decision making harder.

Heimut Schmidt

German Chancellor and French President both committed to economic unity and international cooperation. Were committed to transforming the EC into one area of monetary and exchange stability.

EMS consisted of what 3 components?

1) The European Monetary Cooperation Fund (EMCF) 2) The Exchange Rate Mechanism (ERM) 3) The Economic Currency Unit (ECU)

European Currency Unit (ECU)

A weighted average of all the currencies that were members of the EMS. These weights were based on the size of the economy. Diverse wage rate movements among countries was a reason for realignments.

European Monetary Cooperation Fund

This helped stabilize foreign exchange rates by supporting misaligned currencies. Each EC member contributed 20% of its gold and foreign reserves to the fund. If a country was in trouble it could borrow from the fund to buy back its currency and avoid devaluations.

Exchange Rate Mechanism

Most EC countries agreed to keep their exchange rates within a band of +/- 2.25% . bigger band than the Bretton Wood System and more flexible. Both banks were required to intervene, unlike just the failing one in the Bretton Woods System. Because of the the deviating exchange rate was brought back to is normal value faster.

Economies of Scale

the proportionate saving in costs gained by an increased level of production.

Schengen Agreement

A treaty that abolished international border checks in the Schengen Area.

Dumping

Manufacturers export a product to another country at a price below the normal one to increase market share in a foreign market by driving out competition. Then the exporter can dictate price and quality of the product. Like a monopoly.

Speculative Attacks

The massive selling of a county's currency assets by both domestic and foreign investors.

Interest Rate

opportunity cost of holding money

Optimum Currency Area

the geographical region in which it would maximize economic efficiency to have the entire region share a single currency.

Robert Mundell

The Cost Benefit analysis Nobel Peace Prize

Economic and Monetary Union (EMU)

Economic and Monetary Union (EMU) represents a major step in the integration of EU economies. Launched in 1992, EMU involves the coordination of economic and fiscal policies, a common monetary policy, and a common currency, the euro. Whilst all 28 EU Member States take part in the economic union, some countries have taken integration further and adopted the euro. Together, these countries make up the euro area.

Expected Costs and Benefits of the Optimum currency Area

In your notes I am not about to type all that.....

Asymmetric Shock

Definition of asymmetric shock. When an economic event affects one economy or part of an economy more than another.

Common Agriculture Policy (CAP)

the agricultural policy of the European Union. It implements a system of agricultural subsidies and other programs. It was introduced in 1962 and has undergone several changes since then to reduce the cost (from 71% of the EU budget in 1984 to 39% in 2013) and to also consider rural development in its aims. It has been criticized on the grounds of its cost, and its environmental and humanitarian impacts.

The international monetary system can be defined as the institutional framework within which A. international payments are made. B. movement of capital is accommodated. C. exchange rates among currencies are determined. D. all of the above

Corporations today are operating in an environment in which exchange rate changes may adversely affect their competitive positions in the marketplace. This situation, in turn, makes it necessary for many firms to A. carefully manage their exchange risk exposure. B. carefully measure their exchange risk exposure. C. both a) and b)

The international monetary system went through several distinct stages of evolution. These stages are summarized, in alphabetic order, as follows: (i)- Bimetallism (ii)- Bretton Woods system (iii)- Classical gold standard (iv)- Flexible exchange rate regime (v)- Interwar period The chronological order that they actually occurred is: A. (iii), (i), (iv), (ii), and (v) B. (i), (iii), (v), (ii), and (iv) C. (vi), (i), (iii), (ii), and (v) D. (v), (ii), (i), (iii), and (iv)

In the United States, bimetallism was adopted by the Coinage Act of 1792 and remained a legal standard until 1873, A. when Congress dropped the silver dollar from the list of coins to be minted. B. when Congress dropped the twenty-dollar gold piece from the list of coins to be minted. C. when gold from the California gold rush drove silver out of circulation. D. when gold from the California gold rush drove gold out of circulation.

The monetary system of bimetallism is unstable. Due to the fluctuation of the commercial value of the metals, A. the metal with a commercial value lower than the currency value tends to be used as metal and is withdrawn from circulation as money (Gresham's Law). B. the metal with a commercial value higher than the currency value tends to be used as money (Gresham's Law). C. the metal with a commercial value higher than the currency value tends to be used as metal and is withdrawn from circulation as money (Gresham's Law). D. none of the above

In the 1850s the French franc was valued by both gold and silver, under the official French ratio which equated a gold franc to a silver franc 15½ times as heavy. At the same time, the gold from newly discovered mines in California poured into the market, depressing the value of gold. As a result, A. the franc effectively became a silver currency. B. the franc effectively became a gold currency. C. silver became overvalued under the French official ratio. D. answers a) and c) are correct

Gresham's Law states that A. bad money drives good money out of circulation. B. good money drives bad money out of circulation. C. if a country bases its currency on both gold and silver, at an official exchange rate, it will be the more valuable of the two metals that circulate. D. none of the above.

Suppose that the pound is pegged to gold at £20 per ounce and the dollar is pegged to gold at $35 per ounce. This implies an exchange rate of $1.75 per pound. If the current market exchange rate is $1.80 per pound, how would you take advantage of this situation? Hint: assume that you have $350 available for investment. A. Start with $350. Buy 10 ounces of gold with dollars at $35 per ounce. Convert the gold to £200 at £20 per ounce. Exchange the £200 for dollars at the current rate of $1.80 per pound to get $360. B. Start with $350. Exchange the dollars for pounds at the current rate of $1.80 per pound. Buy gold with pounds at £20 per ounce. Convert the gold to dollars at $35 per ounce. C. a) and b) both work D. None of the above

Suppose that the pound is pegged to gold at £20 per ounce and the dollar is pegged to gold at $35 per ounce. This implies an exchange rate of $1.75 per pound. If the current market exchange rate is $1.60 per pound, how would you take advantage of this situation? Hint: assume that you have $350 available for investment. A. Start with $350. Buy 10 ounces of gold with dollars at $35 per ounce. Convert the gold to £200 at £20 per ounce. Exchange the £200 for dollars at the current rate of $1.80 per pound to get $360. B. Start with $350. Exchange the dollars for pounds at the current rate of $1.60 per pound. Buy gold with pounds at £20 per ounce. Convert the gold to dollars at $35 per ounce. C. a) and b) both work D. None of the above

Suppose that the United States is on a bimetallic standard at $30 to one ounce of gold and $2 for one ounce of silver. If new silver mines open and flood the market with silver, A. only the silver currency will circulate. B. only the gold currency will circulate. C. no change will take place since citizens could exchange their gold currency for silver currency at any time. D. none of the above

Suppose that your country officially defines gold as ten times more valuable than silver (i.e. the central bank stands ready to redeem the currency in gold and silver and the official price of gold is ten times the official price of silver). If the market price of gold is only eight times as much as silver. A. The central bank could go broke if enough arbitrageurs attempt to take advantage of the pricing disparity. B. The central bank will make money since they are overpricing gold.

Prior to the 1870s, both gold and silver were used as international means of payment and the exchange rates among currencies were determined by either their gold or silver contents. Suppose that the dollar was pegged to gold at $30 per ounce, the French franc is pegged to gold at 90 francs per ounce and to silver at 9 francs per ounce of silver, and the German mark pegged to silver at 1 mark per ounce of silver. What would the exchange rate between the U.S. dollar and German mark be under this system? A. 1 German mark = $2 B. 1 German mark = $0.50 C. 1 German mark = $3 D. 1 German mark = $1

Prior to the 1870s, both gold and silver were used as international means of payment and the exchange rates among currencies were determined by either their gold or silver contents. Suppose that the dollar was pegged to gold at $30 per ounce, the French franc is pegged to gold at 90 francs per ounce and to silver at 6 francs per ounce of silver, and the German mark pegged to silver at 1 mark per ounce of silver. What would the exchange rate between the U.S. dollar and German mark be under this system? A. 1 German mark = $2 B. 1 German mark = $0.50 C. 1 German mark = $3 D. 1 German mark = $1

Suppose that country A and country B are both on a bimetallic standard. In country A the ratio is 15 to one (i.e. an ounce of gold is worth 15 times as much as an ounce of silver in that currency), while in country B the ratio is ten to one. If the free flow of capital is allowed between countries A and B is this a sustainable framework? A. Yes B. No C. There is not enough information to make an informed determination.

In many countries, hostile takeovers are relatively rare. This is so partly because FINC400 Testbank

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