_____ eliminates trade barriers between member nations, adopts a common external policy, and permits factors of production to move freely between member countries but it also requires a common currency, harmonization of members tax rates, and a common monetary and fiscal policy.

A free trade area

A common market

An economic market

An economic union

A Customs union

A country has an absolute advantage in the production of a product when it

has the capability to produce the product within its boundaries

is more efficient than any other country in producing it

has the largest domestic demand for the product

has access to the raw materials needed to produce the product

There are two main trading blocs in Europe, the European Union and the

Multiple Choice

• Mercosur.

• Andean Community.

• European Free Trade Association.

• European Council.

Which of the following statements is true of pegged exchange rates?

Multiple Choice

• A pegged exchange rate allows a countrys currency to be determined by market forces.

• A pegged exchange rate weakens the monetary discipline of a country.

• Pegged exchange rates are popular among many of the worlds smaller nations.

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

Which of the following factors, according to Porter, is most likely to give a country competitive advantage over another country?

Multiple Choice

• natural resources

• climate

• skilled labor

• demographics

What is an advantage that banks have when they deal with foreign currencies?

Multiple Choice

• Interest payments to customers are low when dealing with foreign currencies.

• Accounts need not be maintained when dealing with foreign currencies.

• Risks that investors face are low when dealing with foreign currencies.

• Governments give banks more freedom when dealing with foreign currencies

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

Multiple Choice

• a narrowing current account deficit

• excessive expansion of domestic borrowing

• low relative price inflation rates

• asset price deflation

The United States, Canada, and Mexico are member nations of

Multiple Choice

• CAFTA.

• Mercosur.

• the Andean Pact.

• NAFTA.

Which treaty, signed in February 1992, committed EC members to adopting a common currency by January 1, 1999?

Multiple Choice

• the Maastricht Treaty

• the Treaty of Rome

• the Single European Act

• the Treaty of Lisbon

The risk associated with a portfolio

Multiple Choice

• declines exponentially as the number of stocks purchased increases and continues to decline until a point of zero risk is reached.

• decreases as the investor increases the number of stocks in her portfolio.

• grows exponentially with the number of stocks purchased.

• increases as the investor increases the number of stocks in her portfolio.

A country has an absolute advantage in the production of a product when it

Multiple Choice

• has the capability to produce the product within its boundaries.

• is more efficient than any other country in producing it.

• has the largest domestic demand for the product.

• has access to the raw materials needed to produce the product.

Which treaty, signed in February 1992, committed EC members to adopting a common currency by January 1, 1999?

Multiple Choice

• the Maastricht Treaty

• the Treaty of Rome

• the Single European Act

• the Treaty of Lisbon

Which of the following is a drawback of the Eurocurrency market?

Multiple Choice

• Borrowing funds within its home country can expose a company to foreign exchange risk.

• There is a greater probability of a bank failure that would cause depositors to lose their money.

• The system is overregulated and, therefore, more costly.

• The higher interest rate received on home-country deposits reflects the costs of insuring against bank failure.

Which of the following is true of fixed-rate bonds?

Multiple Choice

• Returns from fixed-rate bonds are dependent on the profitability of the issuing company.

• Investors get back the face value of the bond at maturity of fixed-rate bonds.

• Fixed-rate bonds issue cash payoffs only at maturity of fixed-rate bonds.

The cost of capital is

Multiple Choice

• higher in a purely domestic capital market than in a global market.

• lower in a domestic capital market than in an international market.

• higher in a global market than in a purely domestic capital market.

• the same in either a global market or a purely domestic capital market.

A _____ crisis refers to a loss of confidence in the banking system that leads to a run on banks as individuals and companies withdraw their deposits.

Multiple Choice

• currency

• banking

• foreign debt

• domestic debt

Entering into a forward contract will

Multiple Choice

• increase the risk involved in a transaction.

• lower the borrowers cost of capital.

• benefit the borrower because the interest rate will be lower.

• raise the borrowers cost of capital.

FDI can benefit the home countrys _____ if the foreign subsidiary creates demands for home-country exports of capital equipment, intermediate goods, complementary products, and the like.

Multiple Choice

• balance of payments

• oligopolistic industry

• current accounts

• licensing endeavors