International Business, 12e (Hill)
Chapter 1
Globalization
1) Since Wally's Whistles is a medium-size business, it wouldn't benefit from globalization.
Answer: FALSE
Explanation: A company does not have to be the size of multinational giants to facilitate, and
benefit from, the globalization of markets. In the United States, for example, according to the
International Trade Administration, more than 300,000 small and medium-size firms with fewer
than 500 employees exported in 2017, accounting for 98 percent of the companies that exported
that year.
Difficulty: 1 Easy
Topic: What Is Globalization?
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
2) Globalization of production can help companies lower their overall cost structure or improve
the quality or functionality of their product offering.
Answer: TRUE
Explanation: The globalization of production refers to the sourcing of goods and services from
locations around the globe to take advantage of national differences in the cost and quality of
factors of production. By doing this, companies hope to lower their overall cost structure or
improve the quality or functionality of their product offering, thereby allowing them to compete
more effectively.
Difficulty: 1 Easy
Topic: What Is Globalization?
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
1
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
3) Johann's business does not make consumer products; therefore, it would not be likely to
participate in global markets.
Answer: FALSE
Explanation: Most global markets currently are not markets for consumer products—where
national differences in tastes and preferences are still often important enough to act as a brake on
globalization—but markets for industrial goods and materials that serve a universal need the world
over.
Difficulty: 1 Easy
Topic: What Is Globalization?
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
4) Outsourcing is a process that is limited to manufacturing enterprises.
Answer: FALSE
Explanation: Early outsourcing efforts were primarily confined to manufacturing activities.
Increasingly, however, companies are taking advantage of modern communications technology,
particularly the Internet, to outsource service activities to low-cost producers in other nations.
Difficulty: 1 Easy
Topic: What Is Globalization?
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
5) The World Bank has focused on policing the world trading system and making sure
nation-states adhere to the rules laid down in trade treaties.
Answer: FALSE
Explanation: The World Trade Organization is primarily responsible for policing the world
trading system and making sure nation-states adhere to the rules laid down in trade treaties signed
by WTO member states. The World Bank was set up to promote economic development.
Difficulty: 1 Easy
Topic: What Is Globalization?
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
2
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
6) When Cyprus had a financial crisis, it went to the World Bank, known as the lender of last
resort, to bail it out.
Answer: FALSE
Explanation: The IMF was established to maintain order in the international monetary system. It
is often seen as the lender of last resort to nation-states whose economies are in turmoil and whose
currencies are losing value against those of other nations.
Difficulty: 1 Easy
Topic: What Is Globalization?
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
7) One of the UN's central mandates is the promotion of higher standards of living, full
employment, and conditions of economic and social progress and development.
Answer: TRUE
Explanation: Although the UN is perhaps best known for its peacekeeping role, one of the
organization's central mandates is the promotion of higher standards of living, full employment,
and conditions of economic and social progress and development—all issues that are central to the
creation of a vibrant global economy.
Difficulty: 1 Easy
Topic: What Is Globalization?
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
8) The Uruguay Round, finalized in December 1993, reduced protection for patents, trademarks,
and copyrights.
Answer: FALSE
Explanation: Under the umbrella of GATT, the most recent negotiations to be completed, known
as the Uruguay Round, were finalized in December 1993. The Uruguay Round provided enhanced
protection for patents, trademarks, and copyrights.
Difficulty: 1 Easy
Topic: Drivers of Globalization
Learning Objective: 01-02 Recognize the main drivers of globalization.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
3
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
9) "Beggar thy neighbor" retaliatory trade policies involved countries progressively lowering trade
barriers against each other, which contributed to the Great Depression of the 1930s.
Answer: FALSE
Explanation: The typical aim of tariffs on imports of manufactured goods was to protect
domestic industries from foreign competition. One consequence, however, was "beggar thy
neighbor" retaliatory trade policies, with countries progressively raising trade barriers against each
other. Ultimately, this depressed world demand and contributed to the Great Depression of the
1930s.
Difficulty: 1 Easy
Topic: Drivers of Globalization
Learning Objective: 01-02 Recognize the main drivers of globalization.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
10) Rivers Inc., a U.S.-based sports apparel manufacturer, sets up a production unit in China to
take advantage of the lower labor costs there. This is an example of foreign direct investment.
Answer: TRUE
Explanation: Foreign direct investment (FDI) occurs when a firm invests resources in business
activities outside its home country.
Difficulty: 2 Medium
Topic: Drivers of Globalization
Learning Objective: 01-02 Recognize the main drivers of globalization.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
11) World Bank gives aid of $100 million to Kenya for creating rural health care facilities. This is
an example of foreign direct investment.
Answer: FALSE
Explanation: Foreign direct investment (FDI) occurs when a firm invests resources in business
activities outside its home country.
Difficulty: 2 Medium
Topic: Drivers of Globalization
Learning Objective: 01-02 Recognize the main drivers of globalization.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
4
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
12) The lowering of barriers to international trade enables firms to view the world, rather than a
single country, as their market.
Answer: TRUE
Explanation: The lowering of barriers to international trade enables firms to view the world,
rather than a single country, as their market.
Difficulty: 1 Easy
Topic: Drivers of Globalization
Learning Objective: 01-02 Recognize the main drivers of globalization.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
13) According to WTO data, the volume of world merchandise trade has grown faster than the
world economy since 1950.
Answer: TRUE
Explanation: According to WTO data, the volume of world merchandise trade has grown faster
than the world economy since 1950.
Difficulty: 1 Easy
Topic: Drivers of Globalization
Learning Objective: 01-02 Recognize the main drivers of globalization.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
14) The cost of microprocessors continues to fall, while their power increases. This statement
supports the predictions made by Moore's Law.
Answer: TRUE
Explanation: The cost of microprocessors continues to fall, while their power increases (a
phenomenon known as Moore's Law, which predicts that the power of microprocessor technology
doubles and its cost of production falls in half every 18 months).
Difficulty: 1 Easy
Topic: Drivers of Globalization
Learning Objective: 01-02 Recognize the main drivers of globalization.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
5
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
15) Foreign direct investment by non-U.S. firms increased because they wanted to disperse
production activities to optimal locations and to build a direct presence in major foreign markets.
Answer: TRUE
Explanation: As the barriers to the free flow of goods, services, and capital fell, and as other
countries increased their shares of world output, non-U.S. firms increasingly began to invest
across national borders. The motivation for much of this foreign direct investment by non-U.S.
firms was the desire to disperse production activities to optimal locations and to build a direct
presence in major foreign markets.
Difficulty: 2 Medium
Topic: The Changing Nature of the Global Economy
Learning Objective: 01-03 Describe the changing nature of the global economy.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
16) A current trend in international business is the decline of medium-sized and small
multinationals, known as mini-multinationals.
Answer: FALSE
Explanation: Since the 1960s, two notable trends in the demographics of the multinational
enterprise have been (1) the rise of non-U.S. multinationals and (2) the growth of
mini-multinationals.
Difficulty: 1 Easy
Topic: The Changing Nature of the Global Economy
Learning Objective: 01-03 Describe the changing nature of the global economy.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
17) The globalization of the world economy has resulted in a relative increase in the dominance of
U.S. firms in the global marketplace.
Answer: FALSE
Explanation: By 2017, some 27 percent, or 540 firms, of the Top 2000 global firms are now U.S.
multinationals, a drop of 236 firms in only about a decade and a half. Japanese and U.K. firms also
saw declines in inclusion among the Top 2000 firms in the world. The globalization of the world
economy has resulted in a relative decline in the dominance of U.S. firms in the global marketplace
Difficulty: 1 Easy
Topic: The Changing Nature of the Global Economy
Learning Objective: 01-03 Describe the changing nature of the global economy.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
6
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
18) Because Russia has shown signs of shifting back toward greater state involvement in economic
activity and authoritarian government, doing business in Russia is considered risky.
Answer: TRUE
Explanation: Disturbing signs of growing unrest and totalitarian tendencies continue to be seen in
several Eastern European and Central Asian states, including Russia, which has shown signs of
shifting back toward greater state involvement in economic activity and authoritarian government.
Thus, the risks involved in doing business in such countries are high, but so may be the returns.
Difficulty: 1 Easy
Topic: The Changing Nature of the Global Economy
Learning Objective: 01-03 Describe the changing nature of the global economy.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
19) According to globalization critics, the decline in unskilled wage rates is due to the migration of
low-wage manufacturing jobs offshore and a corresponding reduction in demand for unskilled
workers.
Answer: TRUE
Explanation: Globalization critics argue that the decline in unskilled wage rates is due to the
migration of low-wage manufacturing jobs offshore and a corresponding reduction in demand for
unskilled workers.
Difficulty: 1 Easy
Topic: The Globalization Debate
Learning Objective: 01-04 Explain the main arguments in the debate over the impact of
globalization.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
20) Evidence suggests that technological change has had a bigger impact than globalization on the
declining share of national income enjoyed by unskilled labor.
Answer: TRUE
Explanation: Evidence suggests that technological change has had a bigger impact than
globalization on the declining share of national income enjoyed by unskilled labor.
Difficulty: 1 Easy
Topic: The Globalization Debate
Learning Objective: 01-04 Explain the main arguments in the debate over the impact of
globalization.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
7
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
21) According to supporters of free trade, as countries get richer they commit greater violation of
environmental and labor regulations.
Answer: FALSE
Explanation: Supporters of free trade and greater globalization argue that tougher environmental
regulations and stricter labor standards go hand in hand with economic progress. In general, as
countries get richer, they enact tougher environmental and labor regulations.
Difficulty: 1 Easy
Topic: The Globalization Debate
Learning Objective: 01-04 Explain the main arguments in the debate over the impact of
globalization.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
22) According to critics of globalization, today's interdependent global economy limits a nation's
national sovereignty.
Answer: TRUE
Explanation: A concern voiced by critics of globalization is that today's increasingly
interdependent global economy shifts economic power away from national governments and
toward supranational organizations such as the World Trade Organization, the European Union,
and the United Nations.
Difficulty: 1 Easy
Topic: The Globalization Debate
Learning Objective: 01-04 Explain the main arguments in the debate over the impact of
globalization.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
23) According to supporters of debt relief, new democratic governments in poor nations should not
be forced to honor debts incurred by corrupt and dictatorial predecessors.
Answer: TRUE
Explanation: Supporters of debt relief argue that new democratic governments in poor nations
should not be forced to honor debts that were incurred and mismanaged long ago by their corrupt
and dictatorial predecessors.
Difficulty: 1 Easy
Topic: The Globalization Debate
Learning Objective: 01-04 Explain the main arguments in the debate over the impact of
globalization.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
8
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
24) A firm needs to become a multinational enterprise to engage in international business.
Answer: FALSE
Explanation: An international business is any firm that engages in international trade or
investment. A firm does not have to become a multinational enterprise, investing directly in
operations in other countries, to engage in international business, although multinational
enterprises are international businesses.
Difficulty: 2 Medium
Topic: Challenges and Opportunities Created by Globalization
Learning Objective: 01-05 Understand how the process of globalization is creating opportunities
and challenges for business managers.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
25) Managing an international business is quite similar to managing a domestic business.
Answer: FALSE
Explanation: International business differs from domestic business because of the greater
complexity of managing an international business. In addition to the problems that arise from the
differences between countries, a manager in an international business is confronted with a range of
other issues that the manager in a domestic business never confronts.
Difficulty: 2 Medium
Topic: Understanding the Differences Between International and Domestic Business
Learning Objective: 01-05 Understand how the process of globalization is creating opportunities
and challenges for business managers.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
26) ________ refers to the shift toward a more integrated and interdependent world economy
A) Outsourcing
B) International marketing
C) Privatization
D) Globalization
Answer: D
Explanation: This is the definition of globalization.
Difficulty: 1 Easy
Topic: What Is Globalization?
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
9
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
27) In 2008 and 2009, the ________ became the forum through which major nations attempted to
launch a coordinated policy response to the global financial crisis, which started in America.
A) GATT
B) Group of Ten (G20)
C) Group of Twenty (G20)
D) World Trade Organization
Answer: C
Explanation: Originally, the G20 was established to formulate a coordinated policy response to
financial crises in developing nations. In 2008 and 2009, it became the forum through which major
nations attempted to launch a coordinated policy response to the global financial crisis that started
in America and then rapidly spread around the world.
Difficulty: 1 Easy
Topic: What Is Globalization?
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
28) The Uruguay Round provided
A) reduced protection for patents, trademarks, and copyrights.
B) enhanced protection for patents, trademarks, and copyrights.
C) increased trade barriers.
D) reduced coverage of services and manufactured goods.
Answer: B
Explanation: Under the umbrella of GATT, the most recent negotiations to be completed, known
as the Uruguay Round, were finalized in December 1993. The Uruguay Round provided enhanced
protection for patents, trademarks, and copyrights.
Difficulty: 2 Medium
Topic: Drivers of Globalization
Learning Objective: 01-02 Recognize the main drivers of globalization.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
10
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
29) Since the collapse of communism over a quarter of a century ago, formerly communist nations
have transformed their economies by globalizing their markets. This involves
A) regulating markets.
B) privatizing state-owned enterprises.
C) decreasing competition.
D) reducing foreign investment.
Answer: B
Explanation: Since the collapse of communism over a quarter of a century ago, the pendulum of
public policy in nation after nation has swung toward the free market end of the economic
spectrum. Regulatory and administrative barriers to doing business in foreign nations have been
reduced, while those nations have often transformed their economies, privatizing state-owned
enterprises, deregulating markets, increasing competition, and welcoming investment by foreign
businesses.
Difficulty: 1 Easy
Topic: What Is Globalization?
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
30) Which of the following is a consequence of globalization?
A) decreasing interdependence between national economies
B) increasing outsourcing of services
C) differentiating of material culture
D) increasing barriers to cross-border trade
Answer: B
Explanation: The process of outsourcing legal services from developed nations to lower-cost
locations is indicative of what is occurring in today's global economy. Because of rapid advances
in telecommunications and the removal of barriers to cross-border trade and investment, such
outsourcing is becoming increasingly common.
Difficulty: 2 Medium
Topic: What Is Globalization?
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
11
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
31) Which of the following factors hinders globalization of consumer goods market?
A) national differences in tastes and preferences
B) higher production costs in developed nations
C) homogenization of material culture
D) increased outsourcing of goods and services
Answer: A
Explanation: The most global markets currently are not markets for consumer products—where
national differences in tastes and preferences are still often important enough to act as a brake on
globalization—but markets for industrial goods and materials that serve a universal need the world
over.
Difficulty: 1 Easy
Topic: What Is Globalization?
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
32) Globalization of markets results in markets becoming
A) more interdependent.
B) less diverse.
C) more protected.
D) less competitive.
Answer: B
Explanation: As markets become global, greater uniformity replaces diversity. In an increasing
number of industries, it is no longer meaningful to talk about "the German market," "the American
market," "the Brazilian market," or "the Japanese market"; for many firms there is only the global
market.
Difficulty: 1 Easy
Topic: What Is Globalization?
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
12
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
33) A U.S. investment firm set up a customer service call center in India to take advantage of lower
labor costs. This is called
A) homogenizing markets.
B) vertical integration.
C) outsourcing.
D) horizontal integration.
Answer: C
Explanation: Early outsourcing efforts were primarily confined to manufacturing activities;
increasingly, however, companies are taking advantage of modern communications technology,
particularly the Internet, to outsource service activities to low-cost producers in other nations.
Difficulty: 3 Hard
Topic: What Is Globalization?
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
34) Early outsourcing efforts were primarily confined to
A) health care.
B) service activities.
C) technological research.
D) manufacturing activities.
Answer: D
Explanation: Early outsourcing efforts were primarily confined to manufacturing activities;
increasingly, however, companies are taking advantage of modern communications technology,
particularly the Internet, to outsource service activities to low-cost producers in other nations.
Difficulty: 1 Easy
Topic: What Is Globalization?
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
13
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
35) What impedes firms from achieving the optimal dispersion of their productive activities to
locations around the globe?
A) transportation costs
B) government deregulations
C) reduction of barriers to trade between countries
D) reduction of barriers to foreign direct investment
Answer: A
Explanation: Substantial impediments still make it difficult for firms to achieve the optimal
dispersion of their productive activities to locations around the globe. These impediments include
formal and informal barriers to trade between countries, barriers to foreign direct investment,
transportation costs, and issues associated with economic and political risk.
Difficulty: 2 Medium
Topic: What Is Globalization?
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
36) The General Agreement on Tariffs and Trade (GATT) was responsible for
A) protecting government-owned enterprises.
B) policing the global marketplace.
C) limiting nuclear testing.
D) promoting environment friendly technology.
Answer: B
Explanation: As markets globalize and an increasing proportion of business activity transcends
national borders, institutions are needed to help manage, regulate, and police the global
marketplace, and to promote the establishment of multinational treaties to govern the global
business system. Over the past half century, a number of important global institutions have been
created to help perform these functions, including the General Agreement on Tariffs and Trade
(GATT).
Difficulty: 1 Easy
Topic: What Is Globalization?
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
14
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
37) The ________ is primarily responsible for policing the world trading system and making sure
nation-states adhere to the rules laid down in trade treaties signed by member states.
A) International Development Association
B) World Bank
C) International Court of justice
D) World Trade Organization
Answer: D
Explanation: The World Trade Organization is primarily responsible for policing the world
trading system and making sure nation-states adhere to the rules laid down in trade treaties signed
by WTO member states. As of 2011, 154 nations that collectively accounted for 97 percent of
world trade were WTO members, thereby giving the organization enormous scope and influence.
Difficulty: 1 Easy
Topic: What Is Globalization?
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
38) The World Trade Organization promotes
A) the lowering of barriers to cross-border trade and investment.
B) the development of poor nations through low-interest loans.
C) state ownership of major enterprises.
D) the regulation of national economies.
Answer: A
Explanation: The WTO is also responsible for facilitating the establishment of additional
multinational agreements between WTO member states. Over its entire history, and that of the
GATT before it, the WTO has promoted the lowering of barriers to cross-border trade and
investment.
Difficulty: 1 Easy
Topic: What Is Globalization?
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
15
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
39) What is true about the International Monetary Fund?
A) It is primarily responsible for policing the world trading system.
B) It is seen as the lender of last resort to nation-states whose economies are in turmoil.
C) It is responsible for establishing multinational treaties to govern the global business system.
D) It was established to formulate a coordinated policy response to financial crises in developing
nations.
Answer: B
Explanation: The IMF is often seen as the lender of last resort to nation-states whose economies
are in turmoil and whose currencies are losing value against those of other nations. During the past
two decades, for example, the IMF has lent money to the governments of troubled states, including
Argentina, Indonesia, Mexico, Russia, South Korea, Thailand, and Turkey.
Difficulty: 2 Medium
Topic: What Is Globalization?
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Analyze
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
40) The ________ was established on October 24, 1945, by 51 countries committed to preserving
peace through international cooperation and collective security.
A) World Trade Organization
B) United Nations
C) G20
D) World Bank
Answer: B
Explanation: The United Nations was established on October 24, 1945, by 51 countries
committed to preserving peace through international cooperation and collective security. Today
nearly every nation in the world belongs to the United Nations; membership now totals 191
countries.
Difficulty: 1 Easy
Topic: What Is Globalization?
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
16
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
41) The G20 was originally established to
A) preserve peace through international cooperation and collective security.
B) maintain order in the international monetary system.
C) formulate a coordinated policy response to financial crises in developing nations.
D) manage, regulate, and police the global marketplace.
Answer: C
Explanation: The G20 was established in 1999 to formulate a coordinated policy response to
financial crises in developing nations. The G20 comprises the finance ministers and central bank
governors of the 19 largest economies in the world, plus representatives from the European Union
and the European Central Bank.
Difficulty: 1 Easy
Topic: What Is Globalization?
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
42) Which of the following is a factor of production?
A) tariffs
B) transportation costs
C) capital
D) government
Answer: C
Explanation: The factors of production are labor, energy, land, and capital.
Difficulty: 1 Easy
Topic: Drivers of Globalization
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
17
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
43) Which of the following focuses on making low-interest loans to cash-strapped governments in
poor nations that wish to undertake significant infrastructure investments?
A) the WTO
B) the GATT
C) the World Bank
D) the IMF
Answer: C
Explanation: The World Bank was set up to promote economic development. It has focused on
making low-interest loans to cash-strapped governments in poor nations that wish to undertake
significant infrastructure investments (such as building dams or roads).
Difficulty: 1 Easy
Topic: Drivers of Globalization
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
44) Which of the following was established to maintain order in the international monetary
system?
A) the WTO
B) the GATT
C) the World Bank
D) the IMF
Answer: D
Explanation: The IMF was established to maintain order in the international monetary system.
Difficulty: 1 Easy
Topic: Drivers of Globalization
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
18
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
45) Which of the following is true of the IMF?
A) It is often seen as the lender of first choice to nation-states whose economies are in turmoil.
B) Its loans come with no strings attached.
C) It is the less controversial of the two sister institutions, the IMF and the World Bank.
D) It has emerged as a significant player in the global economy.
Answer: D
Explanation: The IMF was established to maintain order in the international monetary system
and has emerged as a significant player in the global economy. The World Bank is the less
controversial of the two sister institutions. The IMF is often seen as the lender of last resort to
nation-states whose economies are in turmoil and whose currencies are losing value against those
of other nations. In return for loans, the IMF requires nation-states to adopt specific economic
policies.
Difficulty: 2 Medium
Topic: Drivers of Globalization
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
46) The volume of world trade in merchandise is growing faster than world GDP. This implies that
A) more firms are dispersing their production processes to global locations.
B) the economies of the world's nation-states are becoming more independent from each other.
C) the global economy is headed for a large downward correction.
D) the world is becoming poorer.
Answer: A
Explanation: The fact that the volume of world trade has been growing faster than world GDP
implies several things. First, more firms are dispersing parts of their production process to
different locations around the globe. Second, the economies of the world's nation-states are
becoming ever more intertwined. As trade expands, nations are becoming increasingly dependent
on each other for important goods and services. Third, the world has become significantly
wealthier in the last two decades. The implication is that rising trade is the engine that has helped
pull the global economy along.
Difficulty: 2 Medium
Topic: Drivers of Globalization
Learning Objective: 01-02 Recognize the main drivers of globalization.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
19
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
47) ________ occurs when a firm exports goods or services to consumers in another country.
A) International trade
B) Foreign direct investment
C) Inward investment
D) Outsourcing
Answer: A
Explanation: International trade occurs when a firm exports goods or services to consumers in
another country.
Difficulty: 1 Easy
Topic: Drivers of Globalization
Learning Objective: 01-02 Recognize the main drivers of globalization.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
48) In 2009, the financial crisis in the United States was triggered by
A) the global hike in the price of crude oil.
B) the slowdown in U.S. imports, due to political pressure.
C) liberal lending policies by U.S. banks to homeowners.
D) the artificial fixing of the currency rate by China.
Answer: C
Explanation: In 2009, the financial crisis in the United States was triggered by the financial
sector of America, where banks had been too liberal in their lending policies to homeowners,
swept around the world and plunged the global economy into its deepest recession since the early
1980s, illustrating once more that in an interconnected world a severe crisis in one region can
affect the entire globe.
Difficulty: 2 Medium
Topic: The Changing Nature of the Global Economy
Learning Objective: 01-03 Describe the changing nature of the global economy.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
20
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
49) ________ predicts that the power of microprocessor technology doubles and its cost of
production falls in half every 18 months.
A) Keynes's Law
B) Say's Law
C) Moore's Law
D) Sullivan Principle
Answer: C
Explanation: Moore's Law predicts that the power of microprocessor technology doubles and its
cost of production falls in half every 18 months.
Difficulty: 1 Easy
Topic: Drivers of Globalization
Learning Objective: 01-02 Recognize the main drivers of globalization.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
50) Containerization allows
A) reduction of the time needed to get from one location to another.
B) simplification of transshipment from one mode of transport to another.
C) buyers and sellers to find each other easily in a global economy.
D) enterprises to coordinate and control a globally dispersed production system.
Answer: B
Explanation: The introduction of containerization simplifies transshipment from one mode of
transport to another. Before the advent of containerization, moving goods from one mode of
transport to another was very labor intensive, lengthy, and costly.
Difficulty: 1 Easy
Topic: Drivers of Globalization
Learning Objective: 01-02 Recognize the main drivers of globalization.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
21
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
51) The average tariff rates for manufactured goods have fallen significantly since 1950, and now
stand at about
A) 18 percent.
B) 5.9 percent.
C) 4.8 percent.
D) 1.6 percent.
Answer: D
Explanation: The impact of GATT agreements on average tariff rates for manufactured goods is
that average tariff rates have fallen significantly since 1950 and now stand at about 1.6 percent.
Difficulty: 1 Easy
Topic: Drivers of Globalization
Learning Objective: 01-02 Recognize the main drivers of globalization.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
52) The volume of world trade in merchandised goods has been
A) growing at the same rate as world GDP.
B) growing faster than world GDP.
C) growing slower than world GDP.
D) declining faster than world GDP.
Answer: B
Explanation: According to WTO, the volume of world trade in merchandised goods has grown
consistently faster than the growth rate in the world economy since 1950.
Difficulty: 1 Easy
Topic: Drivers of Globalization
Learning Objective: 01-02 Recognize the main drivers of globalization.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
22
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
53) The growth of international trade in service activities has been driven by advances in
A) communications.
B) transportation.
C) agriculture.
D) energy.
Answer: A
Explanation: Increasingly, international trade in services has been driven by advances in
communications, which allow corporations to outsource service activities to different locations
around the globe.
Difficulty: 1 Easy
Topic: Drivers of Globalization
Learning Objective: 01-02 Recognize the main drivers of globalization.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
54) ABC Global has decided to invest resources in business activities outside its home
country. This is called
A) foreign direct investment (FDI).
B) direct international investment (DII).
C) international trade (IT).
D) foreign direct production (FDP).
Answer: A
Explanation: Foreign direct investment (FDI) occurs when a firm invests resources in business
activities outside its home country.
Difficulty: 2 Medium
Topic: Drivers of Globalization
Learning Objective: 01-02 Recognize the main drivers of globalization.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
23
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
55) The relative decline of the United States in the share of world output and world exports reflects
A) an increase in the barriers to foreign trade in the United States.
B) the deepening of the global financial crisis.
C) the reduced industrialization in developing nations.
D) the growth in the economic development of the world economy.
Answer: D
Explanation: The relative decline of the United States reflects the growing economic
development and industrialization of the world economy, as opposed to any absolute decline in the
health of the U.S. economy.
Difficulty: 2 Medium
Topic: The Changing Nature of the Global Economy
Learning Objective: 01-03 Describe the changing nature of the global economy.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
56) Why did many Japanese firms invest in North America and Europe in the 1970s?
A) to avoid a highly competitive domestic market
B) to exploit high domestic tariff barriers
C) to provide a hedge against unfavorable currency movements
D) to take advantage of low labor costs
Answer: C
Explanation: Beginning in the 1970s, European and Japanese firms began to shift labor-intensive
manufacturing operations from their home markets to developing nations where labor costs were
lower. In addition, many Japanese firms invested in North America and Europe—often as a hedge
against unfavorable currency movements and the possible imposition of trade barriers.
Difficulty: 2 Medium
Topic: The Changing Nature of the Global Economy
Learning Objective: 01-03 Describe the changing nature of the global economy.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
24
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
57) The total cumulative value of foreign investments is best referred to as
A) accumulation of foreign shares.
B) portfolio investments.
C) stock of foreign direct investments.
D) stock market investments.
Answer: C
Explanation: The stock of foreign direct investment refers to the total cumulative value of foreign
investments as a percentage of the country's GDP.
Difficulty: 1 Easy
Topic: The Changing Nature of the Global Economy
Learning Objective: 01-03 Describe the changing nature of the global economy.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
58) Throughout the 1990s, the amount of foreign direct investment directed at both developed and
developing nations increased dramatically. This trend reflects
A) a slowdown in global economic activity.
B) the increasing share of the United States in the total FDI stock.
C) the decline in cross-border flows of foreign direct investment.
D) the increasing internationalization of business corporations.
Answer: D
Explanation: Throughout the 1990s, the amount of investment directed at both developed and
developing nations increased dramatically, a trend that reflects the increasing internationalization
of business corporations.
Difficulty: 2 Medium
Topic: The Changing Nature of the Global Economy
Learning Objective: 01-03 Describe the changing nature of the global economy.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
25
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
59) Which of the following countries has been the largest recipient of foreign direct investment
and, in 2016, received a record $249.8 billion in inflows?
A) Brazil
B) Russia
C) India
D) China
Answer: D
Explanation: Among developing nations, the largest recipient of foreign direct investment has
been China, which in 2016 received a record $249.8 billion in inflows.
Difficulty: 1 Easy
Topic: The Changing Nature of the Global Economy
Learning Objective: 01-03 Describe the changing nature of the global economy.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
60) Toyota is a multinational enterprise (MNE), which is a firm that
A) exports its products to multiple countries.
B) has production activities in more than two countries.
C) does most of its business on the Internet.
D) lists its securities on a public exchange.
Answer: B
Explanation: A multinational enterprise (MNE) is any business that has productive activities in
two or more countries.
Difficulty: 1 Easy
Topic: The Changing Nature of the Global Economy
Learning Objective: 01-03 Describe the changing nature of the global economy.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
26
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
61) Since the 1960s, which of the following has been a notable trend in the demographics of the
multinational enterprise?
A) the decline of multinational companies in the manufacturing sector
B) the growth of government-owned multinational enterprises
C) the decline of non-U.S. multinationals
D) the growth of mini-multinationals
Answer: D
Explanation: Since the 1960s, two notable trends in the demographics of the multinational
enterprise have been (1) the rise of non-U.S. multinationals and (2) the growth of
mini-multinationals.
Difficulty: 1 Easy
Topic: The Changing Nature of the Global Economy
Learning Objective: 01-03 Describe the changing nature of the global economy.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
62) In the last two decades, Latin American countries such as Brazil, Mexico, and Chile have
A) embraced communist principles.
B) promoted government ownership of enterprises.
C) experienced increasing debt and inflation.
D) welcomed foreign investment.
Answer: D
Explanation: In the past two decades, throughout most of Latin America, debt and inflation are
down, governments have sold state-owned enterprises to private investors, foreign investment is
welcomed, and the region's economies have expanded. Brazil, Mexico, and Chile have led the
way.
Difficulty: 1 Easy
Topic: The Changing Nature of the Global Economy
Learning Objective: 01-03 Describe the changing nature of the global economy.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
27
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
63) Which of the following is a risk associated with globalization?
A) restrictions on competition
B) global financial contagion
C) excessive market regulation
D) differentiation of markets
Answer: B
Explanation: Greater globalization brings with it risks of its own. The opportunities for doing
business in a global economy may be significantly enhanced; however, the risks associated with
global financial contagion are also greater.
Difficulty: 2 Medium
Topic: The Changing Nature of the Global Economy
Learning Objective: 01-03 Describe the changing nature of the global economy.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
64) The rise in the number of mini-multinationals means that
A) small businesses are becoming increasingly involved in international trade and investment.
B) it is increasingly difficult to enter the large multinational market.
C) countries are working together to minimize MNE influence.
D) there is greater state involvement in industry.
Answer: A
Explanation: Although most international trade and investment are still conducted by large firms,
many medium-size and small businesses are becoming increasingly involved in international trade
and investment.
Difficulty: 2 Medium
Topic: The Changing Nature of the Global Economy
Learning Objective: 01-03 Describe the changing nature of the global economy.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
28
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
65) The downside of increased globalization is
A) global financial contagions are less likely.
B) a severe crisis in one region can affect the entire globe.
C) one nation may become too powerful.
D) the potential for increased exploitation of undeveloped nations by developed nations.
Answer: B
Explanation: Greater globalization brings with it risks of its own. This was starkly demonstrated
in 1997 and 1998 when a financial crisis in Thailand spread first to other East Asian nations and
then to Russia and Brazil. Ultimately, the crisis threatened to plunge the economies of the
developed world, including the United States, into a recession.
Difficulty: 2 Medium
Topic: The Changing Nature of the Global Economy
Learning Objective: 01-03 Describe the changing nature of the global economy.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
66) During the past two decades, change in Latin America has been characterized by
A) an increase in debt.
B) hyperinflation.
C) the sale of state-owned enterprises to private investors.
D) protests against foreign investment.
Answer: C
Explanation: Throughout most of Latin America, debt and inflation are down, governments have
sold state-owned enterprises to private investors, foreign investment is welcomed, and the region's
economies have expanded. Brazil, Mexico, and Chile have led the way.
Difficulty: 1 Easy
Topic: The Changing Nature of the Global Economy
Learning Objective: 01-03 Describe the changing nature of the global economy.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
29
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
67) If China continues to move toward greater free market reforms it
A) may move from industrial superpower to third-world status.
B) will likely see a decrease in GDP per capita.
C) may move from third-world to industrial superpower status.
D) will likely give global market share to Western and Japanese enterprises.
Answer: C
Explanation: China continues to move progressively toward greater free market reforms. If what
is occurring in China continues for two more decades, China may move from third-world to
industrial superpower status even more rapidly than Japan did.
Difficulty: 2 Medium
Topic: The Changing Nature of the Global Economy
Learning Objective: 01-03 Describe the changing nature of the global economy.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
68) After the United States, the second-largest source country of MNEs is
A) a tie between France and the United Kingdom.
B) China.
C) Japan.
D) a tie between Germany and the United Kingdom.
Answer: C
Explanation: By 2017, some 27 percent, or 540 firms, of the Top 2000 global firms are now U.S.
multinationals, a drop of 236 firms in only about a decade and a half. Second-place Japan and
third-place United Kingdom also saw drops in inclusion among the Top 2000 firms in the world.
Difficulty: 1 Easy
Topic: The Changing Nature of the Global Economy
Learning Objective: 01-03 Describe the changing nature of the global economy.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
30
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
69) To be classified as an MNE, a company must have productive activities in at least ________
countries.
A) two
B) three
C) four
D) twenty
Answer: A
Explanation: A multinational enterprise (MNE) is any business that has productive activities in
two or more countries.
Difficulty: 1 Easy
Topic: The Changing Nature of the Global Economy
Learning Objective: 01-03 Describe the changing nature of the global economy.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
70) Supporters of globalization maintain that the apparent decline in real wage rates of unskilled
workers
A) is due to technological changes that create greater demand for skilled workers.
B) is due to the migration of low-wage manufacturing jobs offshore.
C) can be checked by increasing government ownership of enterprises.
D) can be checked by limiting free trade and foreign investment.
Answer: A
Explanation: Supporters of globalization maintain that the weak growth rate in real wage rates
for unskilled workers owes far more to a technology-induced shift within advanced economies
away from jobs where the only qualification was a willingness to turn up for work every day and
toward jobs that require significant education and skills.
Difficulty: 2 Medium
Topic: The Globalization Debate
Learning Objective: 01-04 Explain the main arguments in the debate over the impact of
globalization.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
31
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
71) A study published in 2011 by the OECD noted that
A) the real household income of unskilled workers in the United States increased more in
comparison to that of skilled workers.
B) in almost all countries real income levels declined over the 20-year period studied.
C) the falling unemployment rates brought gains to low-wage workers and fairly broad-based
wage growth.
D) the gap between the poorest and richest segments of society in some OECD countries had
widened.
Answer: D
Explanation: In one study, the OECD found that between 1985 and 2008 real household income
(adjusted for inflation) increased by 1.7 percent annually among its member states. The real
income level of the poorest 10 percent of the population increased at 1.4 percent annually on
average, while that of the richest 10 percent increased by 2 percent annually (i.e., while everyone
got richer, the gap between the most affluent and the poorest sectors of society widened).
Difficulty: 2 Medium
Topic: The Globalization Debate
Learning Objective: 01-04 Explain the main arguments in the debate over the impact of
globalization.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
72) A number of econometric studies have found consistent evidence of a hump-shaped
relationship between income levels and pollution levels. According to this, as an economy grows
and income levels rise
A) initially the pollution levels remain low.
B) after a while, the pollution levels decrease.
C) the pollution levels also rise in proportion to the economic growth.
D) there is increasing industrialization, which leads to greater pollution.
Answer: B
Explanation: A number of econometric studies have found consistent evidence of a hump-shaped
relationship between income levels and pollution levels. As an economy grows and income levels
rise, initially pollution levels also rise. However, past some point, rising income levels lead to
demands for greater environmental protection, and pollution levels then fall.
Difficulty: 2 Medium
Topic: The Globalization Debate
Learning Objective: 01-04 Explain the main arguments in the debate over the impact of
globalization.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
32
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
73) NAFTA was passed only after
A) China agreed to establish a higher minimum wage.
B) the United States agreed to limit the number of jobs that could be outsourced.
C) Mexico committed to tougher enforcement of environmental protection regulations.
D) Canada committed to establish new limits on FDI.
Answer: C
Explanation: NAFTA was passed only after side agreements had been negotiated that committed
Mexico to tougher enforcement of environmental protection regulations. Thus, supporters of free
trade argue that factories based in Mexico are now cleaner than they would have been without the
passage of NAFTA.
Difficulty: 1 Easy
Topic: The Globalization Debate
Learning Objective: 01-04 Explain the main arguments in the debate over the impact of
globalization.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
74) Globalization is criticized because it increases the power of
A) governments to own enterprises.
B) unskilled labor to form labor unions.
C) supranational organizations over nation-states.
D) nation-states to regulate markets and reduce competition.
Answer: C
Explanation: A concern voiced by critics of globalization is that today's increasingly
interdependent global economy shifts economic power away from national governments and
toward supranational organizations such as the World Trade Organization, the European Union,
and the United Nations.
Difficulty: 2 Medium
Topic: The Globalization Debate
Learning Objective: 01-04 Explain the main arguments in the debate over the impact of
globalization.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
33
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
75) The World Trade Organization has estimated that the developed nations of the world can raise
global economic welfare by $128 billion by
A) removing subsidies given to their agricultural producers.
B) increasing tariff barriers to trade in agriculture.
C) increasing outsourcing of manufacturing processes.
D) reducing defense expenditure.
Answer: A
Explanation: The World Trade Organization has estimated that if the developed nations of the
world eradicated subsidies to their agricultural producers and removed tariff barriers to trade in
agriculture, this would raise global economic welfare by $128 billion, with $30 billion of that
going to developing nations, many of which are highly indebted.
Difficulty: 1 Easy
Topic: The Globalization Debate
Learning Objective: 01-04 Explain the main arguments in the debate over the impact of
globalization.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
76) Which of the following is viewed by large segments of the population in many countries as a
detrimental effect of antiglobalization?
A) job growth in industries under attack from foreign competitors
B) upward pressure on the wage rates of unskilled workers
C) environmental degradation
D) cultural isolationism of global media and MNEs
Answer: C
Explanation: Large segments of the population in many countries believe that globalization has
detrimental effects on living standards, wage rates, and the environment. Demonstrators have
protested against a wide range of issues, including job losses in industries under attack from
foreign competitors, downward pressure on the wage rates of unskilled workers, environmental
degradation, and the cultural imperialism of global media and multinational enterprises, which
was seen as being dominated by what some protesters called the "culturally impoverished"
interests and values of the United States.
Difficulty: 2 Medium
Topic: The Globalization Debate
Learning Objective: 01-04 Explain the main arguments in the debate over the impact of
globalization.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
34
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
77) While the hump-shaped relationship between income levels and pollution levels seems to hold
across a wide range of pollutants, ________ represent an important exception.
A) sulfur dioxide emissions
B) lead concentrations
C) carbon dioxide emissions
D) water quality standards
Answer: C
Explanation: While the hump-shaped relationship depicted in Figure 1.5 in the text seems to hold
across a wide range of pollutants—from sulfur dioxide to lead concentrations and water
quality—carbon dioxide emissions are an important exception, rising steadily with higher income
levels.
Difficulty: 1 Easy
Topic: The Globalization Debate
Learning Objective: 01-04 Explain the main arguments in the debate over the impact of
globalization.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
78) Based on several studies, the data suggest that real wages
A) for unskilled workers have decreased while real wages for skilled workers have increased.
B) for both skilled and unskilled labor have decreased.
C) for both skilled and unskilled labor have increased.
D) for unskilled workers have increased while real wages for skilled worker have decreased.
Answer: A
Explanation: The data suggest that over the past two decades, the share of labor in national
income has declined. However, detailed analysis suggests the share of national income enjoyed by
skilled labor has actually increased, suggesting that the fall in labor's share has been due to a fall in
the share taken by unskilled labor.
Difficulty: 2 Medium
Topic: The Globalization Debate
Learning Objective: 01-04 Explain the main arguments in the debate over the impact of
globalization.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
35
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
79) Which of the following is a reason that little progress has been made toward the ambitious
goals set at the 1992 Earth Summit in Rio de Janeiro?
A) China has shown a strong appetite to adopt tighter pollution controls.
B) Political cooperation in the U.S. Congress promotes domestic action.
C) There is a culture of denial in the United States.
D) Trade liberalization efforts have not been rolled back.
Answer: C
Explanation: There has been little success in moving toward the ambitious goals for reducing
carbon emissions laid down in the Earth Summit. In part, this is because the largest emitters of
carbon dioxide, the United States and China, have failed to reach agreements about how to
proceed. China, a country whose carbon emissions are increasing at a rapid rate, has shown little
appetite to adopt tighter pollution controls. As for the United States, political divisions in Congress
and a culture of denial have made it difficult for the country to even acknowledge, never mind
move forward with, legislation designed to tackle climate change.
Difficulty: 2 Medium
Topic: The Globalization Debate
Learning Objective: 01-04 Explain the main arguments in the debate over the impact of
globalization.
Bloom's: Evaluate
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
80) The two largest emitters of carbon dioxide are
A) China and the United States.
B) China and the United Kingdom.
C) Canada and the United States.
D) Mexico and the United States.
Answer: A
Explanation: There has been little success in moving toward the ambitious goals for reducing
carbon emissions laid down in the Earth Summit. In part, this is because the largest emitters of
carbon dioxide, the United States and China, have failed to reach agreements about how to
proceed.
Difficulty: 1 Easy
Topic: The Globalization Debate
Learning Objective: 01-04 Explain the main arguments in the debate over the impact of
globalization.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
36
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
81) In 2000, the United Nations established the ________ to reduce the number of people who live
in extreme poverty by 2015.
A) Millennium Development Goals
B) Twenty-First Century Goals
C) Globalization Rejuvenation Goals
D) U.N. Humanistic Goals
Answer: A
Explanation: In 2000, the United Nations established the Millennium Development Goals to
reduce the number of people who live in extreme poverty by 2015. Subsequently, in September
2015, the United Nations and its 193-member countries ratified the Sustainable Development
Goals that set targets to end poverty, protect the planet, and ensure prosperity for all countries by
2030 as part of a new sustainability agenda (United Nations 2015).
Difficulty: 1 Easy
Topic: The Globalization Debate
Learning Objective: 01-04 Explain the main arguments in the debate over the impact of
globalization.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
82) Which of the following is true of HIPCs?
A) About 100 nations fall in this category.
B) The average debt burden has never been more than 75 percent of the value of the HIPC's
economy.
C) Servicing heavy debt leaves HIPCs with little left to invest in public infrastructure.
D) The annual cost of serving debt consumes about 30 percent of HIPC export earnings.
Answer: C
Explanation: Many of the world's poorer nations are being held back by large debt burdens. Of
particular concern are the 40 or so "highly indebted poorer countries" (HIPCs), which are home to
some 700 million people. Among these countries, the average government debt burden has been as
high as 85 percent of the value of the economy, as measured by gross domestic product, and the
annual costs of serving government debt consumed 15 percent of the countries' export earnings.
Servicing such a heavy debt load leaves the governments of these countries with little left to invest
in important public infrastructure projects, such as education, health care, roads, and power. The
result is the HIPCs are trapped in a cycle of poverty and debt that inhibits economic development.
Difficulty: 2 Medium
Topic: The Globalization Debate
Learning Objective: 01-04 Explain the main arguments in the debate over the impact of
globalization.
Bloom's: Evaluate
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
37
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
83) Which of the following is true of the supporters of debt relief for HIPCs?
A) They argue that free trade alone is sufficient to bring HIPCs out of poverty.
B) They argue that new democratic governments should be forced to honor debts incurred by
previous corrupt predecessors.
C) They include Bono, the Dalai Lama, and Jeffrey Sachs among their ranks.
D) They are working against the policies of the IMF and World Bank.
Answer: C
Explanation: Free trade alone, some argue, is a necessary but not sufficient prerequisite to help
these countries bootstrap themselves out of poverty. Instead, large-scale debt relief is needed for
the world's poorest nations to give them the opportunity to restructure their economies and start the
long climb toward prosperity. Supporters of debt relief also argue that new democratic
governments in poor nations should not be forced to honor debts that were incurred and
mismanaged long ago by their corrupt and dictatorial predecessors. In the late 1990s, a debt relief
movement began to gain ground among the political establishment in the world's richer nations.
Fueled by high-profile endorsements from Irish rock star Bono, the Dalai Lama, and influential
Harvard economist Jeffrey Sachs, the debt relief movement was instrumental in persuading the
United States to enact legislation in 2000 that provided $435 million in debt relief for HIPCs. The
IMF and World Bank have picked up the banner and have embarked on a systematic debt relief
program.
Difficulty: 2 Medium
Topic: The Globalization Debate
Learning Objective: 01-04 Explain the main arguments in the debate over the impact of
globalization.
Bloom's: Evaluate
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
84) An international business, unlike a multinational enterprise,
A) needs to have manufacturing units in at least two foreign nations.
B) needs to manufacture products or provide services that target a global market.
C) need not customize its products to the requirements of national markets.
D) need not invest directly in operations in other countries.
Answer: D
Explanation: An international business is any firm that engages in international trade or
investment. A firm does not have to become a multinational enterprise, investing directly in
operations in other countries, to engage in international business, although multinational
enterprises are international businesses.
Difficulty: 2 Medium
Topic: Challenges and Opportunities Created by Globalization
Learning Objective: 01-05 Understand how the process of globalization is creating opportunities
and challenges for business managers.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
38
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
85) Issy's Ice Cream is an international business. As such, it
A) needs to have manufacturing units in at least two foreign nations.
B) needs to manufacture products or provide services that target a global market.
C) need not customize its products to the requirements of national markets.
D) invests in international trade or investment.
Answer: D
Explanation: An international business is any firm that engages in international trade or
investment. A firm does not have to become a multinational enterprise, investing directly in
operations in other countries, to engage in international business, although multinational
enterprises are international businesses.
Difficulty: 2 Medium
Topic: Challenges and Opportunities Created by Globalization
Learning Objective: 01-05 Understand how the process of globalization is creating opportunities
and challenges for business managers.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
86) Which of the following statements is true regarding an international business?
A) An international business needs to invest directly in operations in other countries.
B) An international business needs to have homogenous practices across countries.
C) An international business can be managed in the same way that a domestic business is
managed.
D) An international business must find ways to work within the limits imposed by government
intervention.
Answer: D
Explanation: Conducting business transactions across national borders requires understanding
the rules governing the international trading and investment system. Managers in an international
business must also deal with government restrictions on international trade and investment.
Difficulty: 2 Medium
Topic: Challenges and Opportunities Created by Globalization
Learning Objective: 01-05 Understand how the process of globalization is creating opportunities
and challenges for business managers.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
39
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
87) How does managing an international business differ from managing a domestic business?
A) International managers are more experienced.
B) Countries differ in their cultures and systems.
C) Countries want to do business with their neighbors.
D) Countries want to keep their transactions simple.
Answer: B
Explanation: As their organizations increasingly engage in cross-border trade and investment,
managers need to recognize that the task of managing an international business differs from that of
managing a purely domestic business in many ways. At the most fundamental level, the
differences arise from the simple fact that countries are different.
Difficulty: 2 Medium
Topic: Understanding the Differences Between International and Domestic Business
Learning Objective: 01-05 Understand how the process of globalization is creating opportunities
and challenges for business managers.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
88) Which of the following is true regarding international businesses?
A) All MNEs are international businesses.
B) Only firms that export products are international businesses.
C) Only firms that invest abroad are international businesses.
D) All international businesses are MNEs.
Answer: A
Explanation: A firm does not have to become a multinational enterprise, investing directly in
operations in other countries, to engage in international business, although multinational
enterprises are international businesses. All a firm has to do is export or import products from
other countries.
Difficulty: 2 Medium
Topic: Challenges and Opportunities Created by Globalization
Learning Objective: 01-05 Understand how the process of globalization is creating opportunities
and challenges for business managers.
Bloom's: Evaluate
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
40
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
89) Managing an international business is different from managing a purely domestic business for
which of the following reasons?
A) Countries prefer to keep business transactions between domestic partners.
B) The range of problems confronted is wider and more complex.
C) International businesses have an added layer of U.N. regulations.
D) International transactions involve exchanging currencies through each country's treasury.
Answer: B
Explanation: Managing an international business is different from managing a purely domestic
business for at least four reasons: (1) countries are different, (2) the range of problems confronted
by a manager in an international business is wider and the problems themselves more complex
than those confronted by a manager in a domestic business, (3) an international business must find
ways to work within the limits imposed by government intervention in the international trade and
investment system, and (4) international transactions involve converting money into different
currencies.
Difficulty: 2 Medium
Topic: Understanding the Differences Between International and Domestic Business
Learning Objective: 01-05 Understand how the process of globalization is creating opportunities
and challenges for business managers.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
90) Discuss the characteristics of globalization. Use an example in your discussion.
Answer: Globalization refers to a fundamental shift in the world economy in which national
economies are no longer relatively self-contained entities. Instead, nations are moving toward an
interdependent global economic system. Within this new global economy, an American might
drive to work in a car designed in Germany that was assembled in Mexico by DaimlerChrysler
from components made in the United States and Japan that were fabricated from Korean steel and
Malaysian rubber. A company does not have to be the size of these multinational giants to
facilitate, and benefit from, the globalization of markets.
Note: Examples will vary.
Difficulty: 3 Hard
Topic: What Is Globalization?
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
41
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
91) Explain what is meant by the globalization of markets. Provide an example. What are the most
global markets?
Answer: The globalization of markets refers to the idea that historically distinct and separate
national markets are merging into a single, huge global marketplace. For example, consumer
product firms such as Coca-Cola, Starbucks, and McDonald's offer the same basic product
worldwide and are, in fact, not only a part of the trend, but facilitators of the trend as well. The
most global of markets are not typically markets for consumer products—where national
differences in tastes and preferences can still be important enough to act as a brake on
globalization—but markets for industrial goods and materials that serve universal needs the world
over.
Note: Examples will vary.
Difficulty: 3 Hard
Topic: What Is Globalization?
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
92) Discuss the concept of the globalization of production.
Answer: The globalization of production refers to the sourcing of goods and services from
locations around the globe to take advantage of national differences in the cost and quality of
factors of production (such as labor, energy, land, and capital). By doing this, companies hope to
lower their overall cost structure or improve the quality or functionality of their product offering,
thereby allowing them to compete more effectively.
Difficulty: 3 Hard
Topic: What Is Globalization?
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
42
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
93) What is the World Trade Organization? What is its role in the world economy?
Answer: The World Trade Organization (WTO) is primarily responsible for policing the world
trading system and making sure nation-states adhere to the rules laid down in trade treaties signed
by WTO members. As of 2017, 164 nations that collectively accounted for 98 percent of world
trade were WTO members, thereby giving the organization enormous scope and influence. The
WTO is also responsible for facilitating the establishment of additional multinational agreements
among WTO member states.
Difficulty: 3 Hard
Topic: What Is Globalization?
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
94) What is the International Monetary Fund? What is the World Bank? What is their relationship,
if any, with each other?
Answer: The International Monetary Fund (IMF) and the World Bank were both created in 1944
by 44 nations that met at Bretton Woods, New Hampshire. The IMF was established to maintain
order in the international monetary system; the World Bank was set up to promote economic
development. In the more than seven decades since their creation, both institutions have emerged
as significant players in the global economy. The World Bank is the less controversial of the two
sister institutions. It has focused on making low-interest loans to cash-strapped governments in
poor nations that wish to undertake significant infrastructure investments (such as building dams
or roads)
Difficulty: 3 Hard
Topic: What Is Globalization?
Learning Objective: 01-01 Understand what is meant by the term globalization.
Bloom's: Evaluate
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
43
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
95) What is the Uruguay Round? List the measures implemented in the Uruguay Round.
Answer: Under the umbrella of GATT, eight rounds of negotiations among member states
worked to lower barriers to the free flow of goods and services. The first round of negotiations
went into effect in 1948. The most recent negotiations to be completed, known as the Uruguay
Round, were finalized in December 1993. The Uruguay Round further reduced trade barriers;
extended GATT to cover services as well as manufactured goods; provided enhanced protection
for patents, trademarks, and copyrights; and established the World Trade Organization to police
the international trading system.
Difficulty: 3 Hard
Topic: Drivers of Globalization
Learning Objective: 01-02 Recognize the main drivers of globalization.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
96) Explain the trends in world trade and foreign direct investment since 1950.
Answer: Since 1950, the volume of world merchandise trade has grown faster than the world
economy. In particular, there has been acceleration in world trade since 1980. This trade and
investment pattern implies that firms are dispersing parts of their production to different locations
around the world to drive down production costs and increase product quality, that the economies
of the world's nation-states are becoming more intertwined, that foreign direct investment is
playing an increasing role in the global economy as firms increase their cross-border investments,
and that the world has become significantly wealthier since 1990. The implication is that rising
trade is the engine that has helped pull the global economy along. Evidence also suggests that
foreign direct investment is playing an increasing role in the global economy as firms increase
their cross-border investments.
Difficulty: 3 Hard
Topic: Drivers of Globalization
Learning Objective: 01-02 Recognize the main drivers of globalization.
Bloom's: Analyze
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
44
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
97) Explain how a company competes using outsourcing. Provide an example.
Answer: The lowering of trade and investment barriers also allows firms to base production at the
optimal location for that activity. Thus, a firm might design a product in one country, produce
component parts in two other countries, assemble the product in yet another country, and then
export the finished product around the world. For example, consider Boeing's 777, a commercial
jet airliner. Eight Japanese suppliers make parts for the fuselage, doors, and wings; a supplier in
Singapore makes the doors for the nose landing gear; three suppliers in Italy manufacture wing
flaps; and so on. In total, some 30 percent of the 777, by value, is built by foreign companies.
Note: Examples will vary.
Difficulty: 3 Hard
Topic: Drivers of Globalization
Learning Objective: 01-02 Recognize the main drivers of globalization.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
98) Discuss the impact of technological change on global markets.
Answer: Major advances in communication, information processing, and transportation
technology have facilitated the globalization of markets and production. The microprocessor and
the Internet have been central to the technology explosion. The development of the microprocessor
vastly increased the amount of information that can be processed by individuals and firms, and the
growth of the Internet has allowed companies to expand their global presence at a fraction of the
cost of more traditional methods of business. Jet air travel, by shrinking travel time, has also
helped to link the worldwide operations of international businesses. These changes have enabled
firms to achieve tight coordination of their worldwide operations and to view the world as a single
market.
Difficulty: 3 Hard
Topic: Drivers of Globalization
Learning Objective: 01-02 Recognize the main drivers of globalization.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
45
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
99) Discuss the demographics of world trade since the 1960s. How has the role of the United States
changed? How is world trade expected to change in the future?
Answer: In the early 1960s, the United States was the world's dominant industrial power
accounting for almost 40 percent of world output. By 2012, the United States accounted for 23.1
percent of world output, measured by gross domestic product (GDP). By 2018, the United States
accounted for 15.8 percent of world output, with China now at 17.1 percent of world output and the
global leader in this category. The United States was not the only developed nation to see its
relative standing slip. The same occurred to Germany, France, Italy, the United Kingdom, and
Canada—as just a few examples. These were all nations that were among the first to industrialize
globally. Of course, the change in the U.S. position was not an absolute decline because the U.S.
economy grew significantly between 1960 and 2018 (the economies of Germany, France, Italy, the
United Kingdom, and Canada also grew during this time). Rather, it was a relative decline,
reflecting the faster economic growth of several other economies, particularly China as well as
several other nations in Asia. From 1960 to today, China's share of world output increased from a
trivial amount to 17.1 percent, making it the world's largest economy in terms of its share in world
output (the U.S. is still the largest economy overall). Other countries that markedly increased their
share of world output included Japan, Thailand, Malaysia, Taiwan, Brazil, and South Korea. Most
forecasts now predict a rapid rise in the share of world output accounted for by developing nations
such as China, India, Russia, Indonesia, Thailand, South Korea, Mexico, and Brazil, and a
commensurate decline in the share enjoyed by rich industrialized countries such as Great Britain,
Germany, Japan, and the United States.
Difficulty: 3 Hard
Topic: The Changing Nature of the Global Economy
Learning Objective: 01-03 Describe the changing nature of the global economy.
Bloom's: Analyze
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
100) Why does China represent both opportunities and threats for established international
businesses?
Answer: China represents a huge and largely untapped market. Reflecting this, between 1983 and
2017, annual foreign direct investment in China increased from less than $2 billion to $249.8
billion annually. On the other hand, China's new firms are proving to be very capable competitors,
and they could take global market share away from Western and Japanese enterprises. Thus, the
changes in China are creating both opportunities and threats for established international
businesses.
Difficulty: 2 Medium
Topic: The Changing Nature of the Global Economy
Learning Objective: 01-03 Describe the changing nature of the global economy.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
46
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
101) Consider whether the shift toward a more integrated and interdependent global economy is a
good thing. Discuss the shift from the eyes of the consumer, the worker, the company, and the
environmentalist.
Answer: There are many advantages of globalization. From a broad perspective, globalization
creates economic activity (which stimulates economic growth), creates jobs, raises income levels,
and provides consumers with more choices in regard to the products and services that are available
to them. From the perspective of an individual firm, globalization has the potential to increase
revenues (through expanded market potential), drive down costs (through additional economies of
scale), and boost profits. However, critics argue that globalization destroys manufacturing jobs in
wealthy countries and contributes to pollution. Critics argue that falling trade barriers allow firms
in industrialized countries to move their manufacturing activities offshore to countries where wage
rates are much lower. Critics also argue that globalization encourages firms from advanced nations
to move manufacturing facilities offshore to less developed countries to avoid the more stringent
pollution controls in place in their home countries.
Difficulty: 3 Hard
Topic: The Globalization Debate
Learning Objective: 01-04 Explain the main arguments in the debate over the impact of
globalization.
Bloom's: Evaluate
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
102) Discuss what occurred in Seattle in 1999 at the meeting of the WTO and why the events were
important to the future of global trade.
Answer: In December 1999, more than 40,000 protesters blocked the streets of Seattle in an
effort to shut down a WTO meeting being held in the city. The issue was job losses in industries
under attack from foreign competitors, falling wage rates of unskilled workers, environmental
degradations, and cultural imperialism of global media and MNEs. Protesters believed that all of
these issues were the result of globalization, and felt that the WTO, as a promoter of globalization,
was a legitimate target for blame. The protest was a violent one, and emboldened by the
experience, antiglobalization protesters now turn up at almost every major meeting of a global
institution.
Difficulty: 3 Hard
Topic: The Globalization Debate
Learning Objective: 01-04 Explain the main arguments in the debate over the impact of
globalization.
Bloom's: Analyze
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
47
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
103) Falling barriers to international trade destroy manufacturing jobs in wealthy advanced
economies. Discuss this statement. Do you agree? Why or why not?
Answer: Critics argue that falling trade barriers allow firms to move manufacturing activities to
countries where wage rates are much lower. As a result of such moves, they argue that the wage
rates of poorer Americans have fallen significantly over the past quarter of a century. Supporters of
globalization reply that critics of these trends miss the essential point about free trade—the
benefits outweigh the costs. They argue that free trade will result in countries specializing in the
production of those goods and services that they can produce most efficiently, while importing
goods and services that they cannot produce as efficiently.
Note: Opinions will vary.
Difficulty: 3 Hard
Topic: The Globalization Debate
Learning Objective: 01-04 Explain the main arguments in the debate over the impact of
globalization.
Bloom's: Evaluate
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
104) Why is managing an international business different from managing a purely domestic
business?
Answer: Managing an international business is different from managing a purely domestic
business for at least four reasons: (1) countries are different, (2) the range of problems confronted
by a manager in an international business is wider and the problems themselves more complex
than those confronted by a manager in a domestic business, (3) an international business must find
ways to work within the limits imposed by government intervention in the international trade and
investment system, and (4) international transactions involve converting money into different
currencies.
Difficulty: 3 Hard
Topic: Understanding the Differences Between International and Domestic Business
Learning Objective: 01-05 Understand how the process of globalization is creating opportunities
and challenges for business managers.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
48
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
105) What are some of the issues a manager of an international business must confront that a
manager of a domestic business never confronts?
Answer: In addition to the problems that arise from the differences between countries, managers
of an international business must decide where in the world to site production activities to
minimize costs and to maximize value added. They must decide whether it is ethical to adhere to
the lower labor and environmental standards found in many less developed nations. Then they
must decide how best to coordinate and control globally dispersed production activities, which is
not a trivial problem. Managers in an international business must also decide which foreign
markets to enter and which ones to avoid.
Difficulty: 3 Hard
Topic: Understanding the Differences Between International and Domestic Business
Learning Objective: 01-05 Understand how the process of globalization is creating opportunities
and challenges for business managers.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
49
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
International Business, 12e (Hill)
Chapter 2
National Differences in Political, Economic, and Legal Systems
1) The central message of collectivism is that individual economic and political freedoms are the
ground rules on which a society should be based.
Answer: FALSE
Explanation: Collectivism refers to a political system that stresses the primacy of collective goals
over individual goals. When collectivism is emphasized, the needs of society as a whole are
generally viewed as being more important than individual freedoms.
Difficulty: 1 Easy
Topic: Differences in Political Systems
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
2) The communists believed that socialism could be achieved by democratic means and turned
their backs on violent revolution and dictatorship.
Answer: FALSE
Explanation: The communists believed that socialism could be achieved only through violent
revolution and totalitarian dictatorship, whereas the social democrats committed themselves to
achieving socialism by democratic means, turning their backs on violent revolution and
dictatorship.
Difficulty: 1 Easy
Topic: Differences in Political Systems
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
3) Some believe the Cold War was simply about nuclear proliferation, but in many respects, it was
a war between collectivism and individualism.
Answer: TRUE
Explanation: The Cold War, in many respects, was a war between collectivism, championed by
the former Soviet Union, and individualism, championed by the United States.
Difficulty: 1 Easy
Topic: Differences in Political Systems
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
1
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
4) Most modern democratic states practice representative democracy.
Answer: TRUE
Explanation: In complex, advanced societies with populations in the tens or hundreds of millions
the pure form of democracy is impractical. Most modern democratic states practice representative
democracy.
Difficulty: 1 Easy
Topic: Different Forms of Government
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
5) Democracy is a form of government that prohibits opposing political parties.
Answer: FALSE
Explanation: Democracy refers to a political system in which government is by the people,
exercised either directly or through elected representatives. Totalitarianism is a form of
government in which one person or political party exercises absolute control over all spheres of
human life and prohibits opposing political parties.
Difficulty: 1 Easy
Topic: Different Forms of Government
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
6) In a totalitarian country, there are safeguards to protect an individual's right to freedom of
expression, opinion, and organization.
Answer: FALSE
Explanation: In a totalitarian country, all the constitutional guarantees on which representative
democracies are built—an individual's right to freedom of expression and organization, a free
media, and regular elections—are denied to the citizens.
Difficulty: 1 Easy
Topic: Different Forms of Government
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
2
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
7) The number of command economies has fallen dramatically since the demise of communism in
the late 1980s.
Answer: TRUE
Explanation: Historically, command economies were found in communist countries where
collectivist goals were given priority over individual goals. Since the demise of communism in the
late 1980s, the number of command economies has fallen dramatically.
Difficulty: 1 Easy
Topic: Differences in Economic Systems
Learning Objective: 02-02 Understand how the economic systems of countries differ.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
8) The Republic of Elbow has a command economy, and as such, its objective is to encourage free
and fair competition between private producers.
Answer: FALSE
Explanation: The objective of a command economy is for government to allocate resources for
"the good of society." In addition, in a pure command economy, all businesses are state owned.
Difficulty: 2 Medium
Topic: Differences in Economic Systems
Learning Objective: 02-02 Understand how the economic systems of countries differ.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
9) In mixed economies, governments tend to take into state ownership troubled firms whose
continued operation is thought to be vital to national interests.
Answer: TRUE
Explanation: In a mixed economy, certain sectors of the economy are left to private ownership
and free market mechanisms while other sectors have significant state ownership and government
planning. In mixed economies, governments also tend to take into state ownership troubled firms
whose continued operation is thought to be vital to national interests.
Difficulty: 2 Medium
Topic: Differences in Economic Systems
Learning Objective: 02-02 Understand how the economic systems of countries differ.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
3
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
10) A nation's legal system is usually of very little interest to international business managers,
because international businesses are headquartered in different countries.
Answer: FALSE
Explanation: The legal system of a country refers to the rules, or laws, that regulate behavior
along with the processes by which the laws are enforced and through which redress for grievances
is obtained. The legal system of a country is of immense importance to international business.
Difficulty: 2 Medium
Topic: Differences in Legal Systems
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
11) Judge Michaels operates in a country with a civil law system. This system has more flexibility
than a common law system.
Answer: FALSE
Explanation: A civil law system is based on a detailed set of laws organized into codes. Judges
under a civil law system have less flexibility than those under a common law system.
Difficulty: 2 Medium
Topic: Differences in Legal Systems
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
12) A theocratic law system is one in which the law is based on religious teachings.
Answer: TRUE
Explanation: A theocratic law system is one in which the law is based on religious teachings.
Difficulty: 1 Easy
Topic: Civil Law, Common Law, and Theocratic Law
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
4
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
13) The parties to an agreement normally resort to contract law when one party feels the other has
violated either the letter or the spirit of an agreement.
Answer: TRUE
Explanation: Contract law is the body of law that governs contract enforcement. The parties to an
agreement normally resort to contract law when one party feels the other has violated either the
letter or the spirit of an agreement.
Difficulty: 1 Easy
Topic: Civil Law, Common Law, and Theocratic Law
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
14) Contracts under a civil law system tend to be very detailed with all contingencies spelled out.
Answer: FALSE
Explanation: Because common law tends to be relatively ill specified, contracts drafted under a
common law framework tend to be very detailed with all contingencies spelled out. In civil law
systems, however, contracts tend to be much shorter and less specific because many of the issues
are already covered in a civil code.
Difficulty: 1 Easy
Topic: Civil Law, Common Law, and Theocratic Law
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
15) Many of the world's larger trading nations, including India and the United Kingdom, have not
ratified the United Nations Convention on Contracts for the International Sale of Goods (CISG).
Answer: TRUE
Explanation: One problem with the CISG is that only 83 nations have ratified the convention (the
CISG went into effect in 1988). Many of the world's larger trading nations, including India and the
United Kingdom, have not ratified the CISG.
Difficulty: 1 Easy
Topic: Laws Affecting International Business
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
5
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
16) To facilitate international business, property rights are defined in a consistent way across
countries.
Answer: FALSE
Explanation: Countries differ in the extent to which their legal systems define and protect
property rights.
Difficulty: 1 Easy
Topic: Property Rights and Intellectual Property Rights
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
17) Property rights can be violated in two ways—through private action and through public action.
Answer: TRUE
Explanation: Property rights can be violated in two ways—through private action and through
public action.
Difficulty: 1 Easy
Topic: Property Rights and Intellectual Property Rights
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
18) The Foreign Corrupt Practices Act does not allow for grease payments.
Answer: FALSE
Explanation: Both U.S. law and OECD convention include language that allows for exceptions
known as facilitating or expediting payments (also called grease payments or speed money), the
purpose of which is to expedite or to secure the performance of a routine governmental action.
Difficulty: 1 Easy
Topic: Laws Affecting International Business
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
6
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
19) Fred wanted to protect his novel from piracy, so he copyrighted it. Patents, copyrights, and
trademarks establish ownership rights over intellectual property.
Answer: TRUE
Explanation: Patents, copyrights, and trademarks establish ownership rights over intellectual
property.
Difficulty: 1 Easy
Topic: Property Rights and Intellectual Property Rights
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
20) Patents discourage companies from committing themselves to extensive basic research.
Answer: FALSE
Explanation: The philosophy behind intellectual property laws is to reward the originator of a
new invention, book, musical recording, and the like, for his or her idea and effort. Without the
guarantees provided by patents, companies would be unlikely to commit themselves to extensive
basic research.
Difficulty: 2 Medium
Topic: Property Rights and Intellectual Property Rights
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
21) The Trade-Related Aspects of Intellectual Property Rights agreement attempts to reduce
intellectual property protections to enhance trade.
Answer: FALSE
Explanation: Under the agreement known as the Trade-Related Aspects of Intellectual Property
Rights (TRIPS), as of 1995 a council of the World Trade Organization is overseeing enforcement
of much stricter intellectual property regulations. These regulations oblige WTO members to grant
and enforce patents lasting at least 20 years and copyrights lasting 50 years.
Difficulty: 2 Medium
Topic: Property Rights and Intellectual Property Rights
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
7
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
22) Product liability sets certain safety standards to which a product must adhere.
Answer: FALSE
Explanation: Product safety laws set certain safety standards to which a product must adhere.
Product liability involves holding a firm and its officers responsible when a product causes injury,
death, or damage.
Difficulty: 1 Easy
Topic: Product Liability
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
23) Product liability can be much lower if a product does not conform to required safety standards.
Answer: FALSE
Explanation: Product liability involves holding a firm and its officers responsible when a product
causes injury, death, or damage. Product liability can be much greater if a product does not
conform to required safety standards.
Difficulty: 1 Easy
Topic: Product Liability
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
24) The political systems of a country raise ethical issues that have implications for the practice of
international business.
Answer: TRUE
Explanation: The political, economic, and legal systems of a country raise important ethical
issues that have implications for the practice of international business. For example, what ethical
implications are associated with doing business in totalitarian countries where citizens are denied
basic human rights, corruption is rampant, and bribes are necessary to gain permission to do
business?
Difficulty: 1 Easy
Topic: Ethical Issues in International Business
Learning Objective: 02-04 Explain the implications for management practice of national
differences in political economy.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
8
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
25) When Penelope returned home from vacation, she found her store had been robbed and her
most valuable merchandise was gone. This violation of property rights is considered private
action.
Answer: TRUE
Explanation: In terms of violating property rights, private action refers to theft, piracy,
blackmail, and the like by private individuals or groups.
Difficulty: 1 Easy
Topic: Ethical Issues in International Business
Learning Objective: 02-04 Explain the implications for management practice of national
differences in political economy.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
26) ________ occurs when a political party that represents the interests of a particular tribe (and
not always the majority tribe) monopolizes power.
A) Tribal dictatorship
B) Communist totalitarianism
C) Tribal totalitarianism
D) Privatization
Answer: C
Explanation: Tribal totalitarianism has arisen from time to time in African countries such as
Zimbabwe, Tanzania, Uganda, and Kenya. The borders of most African states reflect the
administrative boundaries drawn by the old European colonial powers rather than tribal realities.
Consequently, the typical African country contains a number of tribes (e.g., in Kenya there are
more than 40 tribes). Tribal totalitarianism occurs when a political party that represents the
interests of a particular tribe (and not always the majority tribe) monopolizes power.
Difficulty: 1 Easy
Topic: Different Forms of Government
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
9
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
27) Who was the author of The Wealth of Nations in which he stated that "an individual who
intends his own gain is led by an invisible hand to promote an end that was no part of his
intention..."?
A) David Hume
B) Adam Smith
C) Karl Marx
D) John Stuart Mill
Answer: B
Explanation: The second tenet of individualism is that the welfare of society is best served by
letting people pursue their own economic self-interest, as opposed to some collective body (such
as government) dictating what is in society's best interest. Or, as Adam Smith put it in a famous
passage from The Wealth of Nations, "an individual who intends his own gain is led by an
invisible hand to promote an end that was no part of his intention… ."
Difficulty: 1 Easy
Topic: Differences in Political Systems
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
28) The term ________ stresses that the political, economic, and legal systems of a country are
interdependent.
A) political economy
B) common law
C) socialism
D) collectivism
Answer: A
Explanation: The term political economy stresses that the political, economic, and legal systems
of a country are interdependent; they interact and influence each other, and in doing so, they affect
the level of economic well-being.
Difficulty: 2 Medium
Topic: Differences in Political Systems
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
10
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
29) Modern socialists trace their intellectual roots to ________, although socialist thought clearly
predates this individual.
A) David Hume
B) Karl Marx
C) Adam Smith
D) John Stuart Mill
Answer: B
Explanation: Modern socialists trace their intellectual roots to Karl Marx (1818–1883), although
socialist thought clearly predates Marx (elements of it can be traced to Plato).
Difficulty: 1 Easy
Topic: Differences in Political Systems
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
30) Manchu believed that socialism could be achieved only through violent revolution and
totalitarian dictatorship. Manchu was likely a
A) libertarian.
B) communist.
C) collectivist.
D) social democrat.
Answer: B
Explanation: The communists believed that socialism could be achieved only through violent
revolution and totalitarian dictatorship, whereas the social democrats committed themselves to
achieving socialism by democratic means, turning their backs on violent revolution and
dictatorship.
Difficulty: 1 Easy
Topic: Differences in Political Systems
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
11
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
31) Plato ________; he believed that society should be stratified into classes, with those best suited
to rule administering society for the benefit of all.
A) equated individualism with equality
B) equated collectivism with equality
C) promoted representative democracy
D) did not equate collectivism with equality
Answer: D
Explanation: Advocacy of collectivism can be traced to the ancient Greek philosopher Plato.
Plato did not equate collectivism with equality; he believed that society should be stratified into
classes, with those best suited to rule (which for Plato, naturally, were philosophers and soldiers)
administering society for the benefit of all.
Difficulty: 2 Medium
Topic: Differences in Political Systems
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
32) When ________ is emphasized, an individual's right to do something may be restricted on the
grounds that it runs counter to "the good of society."
A) individualism
B) totalitarianism
C) collectivism
D) theocracy
Answer: C
Explanation: When collectivism is emphasized, the needs of society as a whole are generally
viewed as being more important than individual freedoms. In such circumstances, an individual's
right to do something may be restricted on the grounds that it runs counter to "the good of society"
or to "the common good."
Difficulty: 2 Medium
Topic: Differences in Political Systems
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
12
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
33) What term is used to describe a state in which authoritarian elements have captured some or
much of the machinery of state and use this in an attempt to deny basic political and civil liberties?
A) authoritarian dictatorship
B) right-wing democracies
C) representative totalitarianism
D) pseudo-democracies
Answer: D
Explanation: Many of the world's nations are neither pure democracies nor iron-clad totalitarian
states. Rather they lie between pure democracies and complete totalitarian systems of government.
They might be described as imperfect or pseudo-democracies, where authoritarian elements have
captured some or much of the machinery of state and use this in an attempt to deny basic political
and civil liberties.
Difficulty: 2 Medium
Topic: Different Forms of Government
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
34) ________ generally permits some individual economic freedom but restricts individual
political freedom, frequently on the grounds that it would lead to the rise of communism.
A) Communist totalitarianism
B) Theoretical totalitarianism
C) Right-wing totalitarianism
D) Tribal totalitarianism
Answer: C
Explanation: Right-wing totalitarianism generally permits some individual economic freedom
but restricts individual political freedom, frequently on the grounds that it would lead to the rise of
communism. A common feature of many right-wing dictatorships is an overt hostility to socialist
or communist ideas.
Difficulty: 1 Easy
Topic: Differences in Political Systems
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
13
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
35) ________ argued that individual diversity and private ownership are desirable.
A) Karl Marx
B) Plato
C) John Stuart Smith
D) Aristotle
Answer: D
Explanation: Aristotle argued that individual diversity and private ownership are desirable.
According to Aristotle, communal property receives little care, whereas property that is owned by
an individual will receive the greatest care and therefore be most productive.
Difficulty: 1 Easy
Topic: Differences in Political Systems
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
36) In a(n) ________ society, the welfare of society is best served by letting people pursue their
own economic self-interest.
A) individualist
B) capitalist
C) democratic
D) totalitarian
Answer: A
Explanation: Individualism refers to a philosophy that an individual should have freedom in his
or her economic and political pursuits. In contrast to collectivism, individualism stresses that the
interests of the individual should take precedence over the interests of the state.
Difficulty: 2 Medium
Topic: Different Forms of Government
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
14
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
37) Systems that emphasize collectivism tend toward
A) totalitarianism.
B) capitalism.
C) democracy.
D) privatization.
Answer: A
Explanation: The democratic–totalitarian dimension is not independent of the individualism–
collectivism dimension. Democracy and individualism go hand in hand, as do the communist
version of collectivism and totalitarianism. However, gray areas exist; it is possible to have a
democratic state in which collective values predominate, and it is possible to have a totalitarian
state that is hostile to collectivism and in which some degree of individualism—particularly in the
economic sphere—is encouraged.
Difficulty: 2 Medium
Topic: Differences in Political Systems
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
38) Interdependent political, economic, and legal systems of a country make up its
A) administrative agenda.
B) socioeconomic fabric.
C) cultural environment.
D) political economy.
Answer: D
Explanation: The term political economy is used to stress that the political, economic, and legal
systems of a country are interdependent; they interact and influence each other, and in doing so
they affect the level of economic well-being.
Difficulty: 1 Easy
Topic: Differences in Political Systems
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
15
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
39) A political system that prioritizes the needs of the society over individual freedoms is called
A) totalitarianism.
B) collectivism.
C) capitalism.
D) egalitarianism.
Answer: B
Explanation: Collectivism refers to a political system that stresses the primacy of collective goals
over individual goals. When collectivism is emphasized, the needs of society as a whole are
generally viewed as being more important than individual freedoms.
Difficulty: 1 Easy
Topic: Differences in Political Systems
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
40) Modern socialism has been popularized largely through the work of
A) Adam Smith.
B) Karl Marx.
C) David Hume.
D) Thomas Hobbes.
Answer: B
Explanation: Modern socialists trace their intellectual roots to Karl Marx (1818–1883), although
socialist thought clearly predates Marx (elements of it can be traced to Plato). Marx argued that the
few benefit at the expense of the many in a capitalist society where individual freedoms are not
restricted.
Difficulty: 1 Easy
Topic: Differences in Political Systems
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
16
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
41) In several Western democracies, the poor performance of state-owned enterprises, because of
protection from competition and guaranteed government financial support, led to
A) privatization.
B) nationalization.
C) liberalization.
D) socialization of production.
Answer: A
Explanation: In many countries, state-owned companies performed poorly. As a consequence, a
number of Western democracies voted many social democratic parties out of office in the late
1970s and early 1980s. They were succeeded by political parties, such as Britain's Conservative
Party and Germany's Christian Democratic Party, that were more committed to free market
economics. These parties sold state-owned enterprises to private investors (a process referred to as
privatization).
Difficulty: 1 Easy
Topic: Nationalization and Privatization of Business
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
42) Which of the following philosophies can be traced back to the ancient Greek philosopher
Aristotle?
A) socialism
B) individualism
C) collectivism
D) anarchism
Answer: B
Explanation: Like collectivism, individualism can be traced to an ancient Greek philosopher, in
this case Plato's disciple Aristotle (384–322 B.C.). In contrast to Plato, Aristotle argued that
individual diversity and private ownership are desirable.
Difficulty: 1 Easy
Topic: Differences in Political Systems
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
17
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
43) The tenet of ________ is that the welfare of society is best served by letting people pursue their
own economic self-interest.
A) socialism
B) communism
C) anarchism
D) individualism
Answer: D
Explanation: A tenet of individualism is that the welfare of society is best served by letting
people pursue their own economic self-interest, as opposed to some collective body (such as
government) dictating what is in society's best interest.
Difficulty: 1 Easy
Topic: Differences in Political Systems
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
44) Which of the following statements about individualism is true?
A) Individualism promotes state ownership of the basic means of production, distribution, and
exchange.
B) Individualism promotes globalization.
C) Individualism creates an antibusiness environment.
D) Individualism and democracy go hand in hand.
Answer: D
Explanation: The central message of individualism is that individual economic and political
freedoms are the ground rules on which a society should be based. This puts individualism in
conflict with collectivism. Collectivism asserts the primacy of the collective over the individual;
individualism asserts the opposite.
Difficulty: 2 Medium
Topic: Differences in Political Systems
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
18
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
45) Which of the following is a safeguard that representative democracies use to ensure that their
elected officials are held responsible for their actions?
A) unlimited terms for elected representatives
B) a court system that is integrated with the political system
C) an individual's right to freedom of expression, opinion, and organization
D) a political police force and armed service
Answer: C
Explanation: To guarantee that elected representatives are being held accountable for their
actions by the electorate, an ideal representative democracy incorporates safeguards that are
enshrined in constitutional law. These safeguards include an individual's right to freedom of
expression, opinion, and organization; a free media; regular elections in which all eligible citizens
are allowed to vote; universal adult suffrage; limited terms for elected representatives; a fair court
system that is separate for the political system; a nonpolitical state bureaucracy; a nonpolitical
police force and armed service; and relatively free access to state information.
Difficulty: 2 Medium
Topic: Different Forms of Government
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
46) Which of the following is a feature of a democracy?
A) exercise of absolute control by one person or political party
B) governance by people or elected representatives
C) prohibition of entry to opposing political parties
D) complete restriction of individual political freedom
Answer: B
Explanation: The United States, for example, is a constitutional republic that operates as a
representative democracy. In a representative democracy, citizens periodically elect individuals to
represent them. These elected representatives then form a government whose function is to make
decisions on behalf of the electorate. In a representative democracy, elected representatives who
fail to perform this job adequately will be voted out of office at the next election.
Difficulty: 1 Easy
Topic: Different Forms of Government
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
19
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
47) Totalitarianism
A) refers to a political system in which government is by the people, exercised either directly or
through elected representatives.
B) is based on a belief that citizens should be directly involved in decision making.
C) is a form of government in which one person or political party exercises absolute control over
all spheres of human life.
D) is based on the idea that the welfare of society is best served by letting people pursue their own
economic self-interests.
Answer: C
Explanation: Totalitarianism is a form of government in which one person or political party
exercises absolute control over all spheres of human life and prohibits opposing political parties.
Difficulty: 1 Easy
Topic: Differences in Political Systems
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
48) People's right to protest on issues of accountability in public expenditure would be possible in
a ________ political setup.
A) dictatorial
B) democratic
C) totalitarian
D) fascist
Answer: B
Explanation: In a representative democracy, citizens periodically elect individuals to represent
them. These elected representatives then form a government, whose function is to make decisions
on behalf of the electorate. In a representative democracy, elected representatives who fail to
perform this job adequately will be voted out of office at the next election. To guarantee that
elected representatives can be held accountable for their actions by the electorate, an ideal
representative democracy has a number of safeguards that are typically enshrined in constitutional
law.
Difficulty: 2 Medium
Topic: Differences in Political Systems
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
20
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
49) ________ refers to a state where political power is monopolized by a party, group, or
individual that governs according to religious principles.
A) Representative democracy
B) Theocratic totalitarianism
C) Tribal anarchism
D) Monotheistic communism
Answer: B
Explanation: Theocratic totalitarianism is found in states where political power is monopolized
by a party, group, or individual that governs according to religious principles. The most common
form of theocratic totalitarianism is based on Islam and is exemplified by states such as Iran and
Saudi Arabia.
Difficulty: 1 Easy
Topic: Different Forms of Government
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
50) Which system of government generally permits some individual economic freedom but
restricts individual political freedom, frequently on the grounds that it would lead to the rise of
communism?
A) tribal totalitarianism
B) right-wing totalitarianism
C) democratic totalitarianism
D) theocratic totalitarianism
Answer: B
Explanation: Right-wing totalitarianism generally permits some individual economic freedom
but restricts individual political freedom, frequently on the grounds that it would lead to the rise of
communism. A common feature of many right-wing dictatorships is an overt hostility to socialist
or communist ideas.
Difficulty: 1 Easy
Topic: Different Forms of Government
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
21
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
51) In a pure market economy,
A) all productive activities are owned by the state.
B) production is determined by the interaction of supply and demand.
C) collectivist goals are given priority over individual goals.
D) the prices at which goods are sold are determined by the government.
Answer: B
Explanation: In the archetypal pure market economy, all productive activities are privately
owned, as opposed to being owned by the state. The goods and services that a country produces are
not planned by anyone.
Difficulty: 2 Medium
Topic: Differences in Economic Systems
Learning Objective: 02-02 Understand how the economic systems of countries differ.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
52) The abolition of ________ in a command economy means there is no incentive for individuals
to look for better ways to serve consumer needs.
A) private ownership
B) public ownership
C) government-owned businesses
D) co-operatives
Answer: A
Explanation: In a command economy, state-owned enterprises have little incentive to control
costs and be efficient, because they cannot go out of business. Also, the abolition of private
ownership means there is no incentive for individuals to look for better ways to serve consumer
needs; hence, dynamism and innovation are absent from command economies.
Difficulty: 2 Medium
Topic: Differences in Economic Systems
Learning Objective: 02-02 Understand how the economic systems of countries differ.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
22
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
53) The local grocery in a small southern city is the only option for the residents, so it has a
monopoly on the grocery business there. When the population of the city grows and demand for
groceries increases, what is the grocery store most likely to do?
A) Restrict output to drive prices down.
B) Increase output to drive prices down.
C) Restrict output and let prices rise.
D) Increase output and let prices rise.
Answer: C
Explanation: A supply restriction occurs when a single firm monopolizes a market. In such
circumstances, rather than increase output in response to increased demand, a monopolist might
restrict output and let prices rise. This allows the monopolist to take a greater profit margin on each
unit it sells.
Difficulty: 2 Medium
Topic: Differences in Economic Systems
Learning Objective: 02-02 Understand how the economic systems of countries differ.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
54) In a ________, if demand for a product exceeds supply, prices will rise, signaling to producers
to produce more.
A) mixed economy
B) market economy
C) collectivist economy
D) command economy
Answer: B
Explanation: In a market economy, if demand for a product exceeds supply, prices will rise,
signaling producers to produce more. If supply exceeds demand, prices will fall, signaling
producers to produce less. In this system consumers are sovereign.
Difficulty: 1 Easy
Topic: Differences in Economic Systems
Learning Objective: 02-02 Understand how the economic systems of countries differ.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
23
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
55) In 2008, the U.S. government took an 80 percent stake in AIG to stop that financial institution
from collapsing, the theory being that if AIG did collapse, it would have very serious
consequences for the entire financial system. What type of economy is this an example of?
A) command
B) mixed
C) capitalistic
D) market
Answer: B
Explanation: In mixed economies, governments tend to take into state ownership troubled firms
whose continued operation is thought to be vital to national interests. For example, in 2008 the
U.S. government took an 80 percent stake in AIG to stop that financial institution from collapsing,
the theory being that if AIG did collapse, it would have very serious consequences for the entire
financial system.
Difficulty: 2 Medium
Topic: Differences in Economic Systems
Learning Objective: 02-02 Understand how the economic systems of countries differ.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
56) An economy in which the interaction of supply and demand determines the quantity in which
goods and services are produced is called a
A) planned economy.
B) command economy.
C) closed economy.
D) market economy.
Answer: D
Explanation: In the archetypal pure market economy, all productive activities are privately
owned, as opposed to being owned by the state. Production is determined by the interaction of
supply and demand and signaled to producers through the price system.
Difficulty: 1 Easy
Topic: Differences in Economic Systems
Learning Objective: 02-02 Understand how the economic systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
24
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
57) Which of the following is a reason that command economies tend to stagnate?
A) Costs are tightly controlled and business are forced to be efficient rather than dynamic and
innovative.
B) The abolition of private ownership means there is no incentive for individuals to look for better
ways to serve consumer needs.
C) All economic resources are mobilized for the public good.
D) Individuals in command economy countries lack the skills to be innovative.
Answer: B
Explanation: While the objective of a command economy is to mobilize economic resources for
the public good, the opposite usually occurs. In a command economy, state-owned enterprises
have little incentive to control costs and be efficient, because they cannot go out of business. Also,
the abolition of private ownership means there is no incentive for individuals to look for better
ways to serve consumer needs; hence, dynamism and innovation are absent from command
economies. Instead of growing and becoming more prosperous, such economies tend to stagnate.
Difficulty: 2 Medium
Topic: Differences in Economic Systems
Learning Objective: 02-02 Understand how the economic systems of countries differ.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
58) Antitrust laws in the United States are designed to
A) restrict agricultural subsidies.
B) increase trade barriers.
C) outlaw monopolies.
D) restrict privatization.
Answer: C
Explanation: Given the dangers inherent in monopoly, the role of government in a market
economy is to encourage vigorous free and fair competition between private producers.
Governments do this by outlawing restrictive business practices designed to monopolize a market
(antitrust laws serve this function in the United States).
Difficulty: 1 Easy
Topic: Laws Affecting International Business
Learning Objective: 02-02 Understand how the economic systems of countries differ.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
25
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
59) In a(n) ________ economy, the government plans the goods and services that a country
produces, the quantity in which they are produced, and the prices at which they are sold.
A) market
B) command
C) open
D) laissez-faire
Answer: B
Explanation: In a pure command economy, the government plans the goods and services that a
country produces, the quantity in which they are produced, and the prices at which they are sold.
Difficulty: 1 Easy
Topic: Differences in Economic Systems
Learning Objective: 02-02 Understand how the economic systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
60) In a ________ economy, certain sectors of the economy are left to private ownership and free
market mechanisms while other sectors have significant state ownership and government
planning.
A) market
B) private
C) command
D) mixed
Answer: D
Explanation: In a mixed economy, certain sectors of the economy are left to private ownership
and free market mechanisms while other sectors have significant state ownership and government
planning.
Difficulty: 1 Easy
Topic: Differences in Economic Systems
Learning Objective: 02-02 Understand how the economic systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
26
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
61) In which of the following economies would the government be most likely to take into state
ownership troubled firms whose continued operation is thought to be vital to national interests?
A) market economies
B) laissez-faire economies
C) liberal economies
D) mixed economies
Answer: D
Explanation: In mixed economies, governments tend to take into state ownership troubled firms
whose continued operation is thought to be vital to national interests.
Difficulty: 2 Medium
Topic: Differences in Economic Systems
Learning Objective: 02-02 Understand how the economic systems of countries differ.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
62) Which of the following statements about the legal systems of countries is true?
A) They can affect the attractiveness of a country as an investment site or market.
B) They are not influenced by the prevailing political system of the country.
C) They are almost the same for all countries.
D) They are of little importance to international business.
Answer: A
Explanation: The legal system of a country refers to the rules, or laws, that regulate behavior
along with the processes by which the laws are enforced and through which redress for grievances
is obtained. The legal environments of countries differ in significant ways.
Difficulty: 2 Medium
Topic: Differences in Legal Systems
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
27
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
63) One key component of a country's legal system is
A) establishing a mixed economy.
B) taking a hands-off approach to business practices.
C) defining the rights and obligations of those involved in business transactions.
D) leaving the monitoring of the way business transactions are executed to the United Nations.
Answer: C
Explanation: A country's laws regulate business practice, define the manner in which business
tractions are to be executed, and set down the rights and obligations of those involved in business
transactions. Establishing a mixed economy would be part of a country's economic system, not its
legal system.
Difficulty: 2 Medium
Topic: Differences in Legal Systems
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
64) Under the ________, cases are judged with reference to three characteristics: tradition,
precedent, and custom.
A) theocratic law system
B) civil law system
C) contract law system
D) common law system
Answer: D
Explanation: Common law is based on tradition, precedent, and custom.
Difficulty: 1 Easy
Topic: Civil Law, Common Law, and Theocratic Law
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
28
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
65) A civil law system tends to be less adversarial than a common law system because the
A) judges' decisions are based on detailed legal codes.
B) judges have the freedom to interpret laws based on the situation.
C) judges' decisions are based on religious teachings.
D) judges are guided by interpretations made in prior legal cases.
Answer: A
Explanation: A civil law system tends to be less adversarial than a common law system, because
the judges rely upon detailed legal codes rather than interpreting tradition, precedent, and custom.
Difficulty: 2 Medium
Topic: Civil Law, Common Law, and Theocratic Law
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
66) A common law system is different from a civil law system because
A) a common law system is based on religious teachings, while a civil law system is based on
cultural traditions.
B) a common law system is very rigid, while a civil law system tends to be more flexible.
C) in a common law system a judge relies on legal codes to make rulings, while in a civil law
system a judge relies on his intuition and moral reasoning to make judgments.
D) in a common law system a judge has the power to interpret the law, while in a civil law system
a judge has the power only to apply the law.
Answer: D
Explanation: Judges in a common law system have the power to interpret the law, whereas judges
in a civil law system have the power only to apply the law.
Difficulty: 2 Medium
Topic: Civil Law, Common Law, and Theocratic Law
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
29
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
67) A ________ law system is based on a very detailed set of laws organized into codes.
A) traditional
B) theocratic
C) civil
D) common
Answer: C
Explanation: A civil law system is based on a detailed set of laws organized into codes. When
law courts interpret civil law, they do so with regard to these codes.
Difficulty: 1 Easy
Topic: Civil Law, Common Law, and Theocratic Law
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
68) A theocratic law system is one in which the law is based on
A) religious teachings.
B) tradition, precedent, and custom.
C) a detailed set of laws organized into codes.
D) cultural and social norms.
Answer: A
Explanation: A theocratic law system is one in which the law is based on religious teachings.
Difficulty: 1 Easy
Topic: Civil Law, Common Law, and Theocratic Law
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
30
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
69) Which of the following is the most widely practiced theocratic legal system in the world
today?
A) Hindu law
B) Sikh law
C) Islamic law
D) Jewish law
Answer: C
Explanation: A theocratic law system is one in which the law is based on religious teachings.
Islamic law is the most widely practiced theocratic system in the modern world, although usage of
both Hindu and Jewish law persisted into the twentieth century.
Difficulty: 1 Easy
Topic: Civil Law, Common Law, and Theocratic Law
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
70) ________ rights refer to the legal rights over the use to which a resource is put and over the use
made of any income that may be derived from that resource.
A) Trade
B) Property
C) Positive
D) Common
Answer: B
Explanation: Property rights refer to the legal rights over the use to which a resource is put and
over the use made of any income that may be derived from that resource. In a legal sense, the term
property refers to a resource over which an individual or business holds a legal title, that is, a
resource that it owns. Resources include land, buildings, equipment, capital, mineral rights,
businesses, and intellectual property (ideas, which are protected by patents, copyrights, and
trademarks).
Difficulty: 1 Easy
Topic: Property Rights and Intellectual Property Rights
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
31
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
71) In Russia, in the chaotic period following the collapse of communism, an outdated legal
system, coupled with a weak police force and judicial system, allowed the Russian Mafia to
demand "protection money" from business owners. Any business owner who rebelled had to face
violent retribution. This violation of property rights exemplifies
A) private action.
B) copyright violation.
C) infrastructural failure.
D) public liability.
Answer: A
Explanation: In terms of violating property rights, private action refers to theft, piracy, blackmail,
and the like by private individuals or groups. Although theft occurs in all countries, a weak legal
system allows for a much higher level of criminal action in some than in others.
Difficulty: 2 Medium
Topic: Property Rights and Intellectual Property Rights
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
72) Violation of property rights done through legal mechanisms such as levying excessive taxation
and requiring expensive licenses or permits from property holders is called
A) private action.
B) collective action.
C) public action.
D) copyright violation.
Answer: C
Explanation: Public action to violate property rights occurs when public officials, such as
politicians and government bureaucrats, extort income, resources, or the property itself from
property holders.
Difficulty: 1 Easy
Topic: Property Rights and Intellectual Property Rights
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
32
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
73) Which of the following area of international trade is regulated by the Foreign Corrupt Practices
Act?
A) making and performance of commercial contracts in international trade
B) preventing bribery and unethical acts in the conduct of international business
C) establishing a set of safety standards to which a new product must adhere
D) controlling the mafia activity that hinders trade in Russia, Japan, and the United States.
Answer: B
Explanation: In the 1970s, the United States passed the Foreign Corrupt Practices Act. This law
makes it illegal to bribe a foreign government official to obtain or maintain business over which
that foreign official has authority. It requires all publicly traded companies (whether or not they are
involved in international trade) to keep detailed records that would reveal whether a violation of
the act has occurred.
Difficulty: 2 Medium
Topic: Laws Affecting International Business
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
74) Which of the following is an example of intellectual property?
A) a music score
B) a laser-tag game
C) a software business
D) a theater
Answer: A
Explanation: Intellectual property refers to property that is the product of intellectual activity,
such as computer software, a screenplay, a music score, or the chemical formula for a new drug.
Difficulty: 2 Medium
Topic: Property Rights and Intellectual Property Rights
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
33
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
75) A ________ grants the inventor of a new product or process exclusive rights for a defined
period of time to the manufacture, use, or sale of that invention.
A) copyright
B) trademark
C) contract
D) patent
Answer: D
Explanation: A patent grants the inventor of a new product or process exclusive rights for a
defined period to the manufacture, use, or sale of that invention.
Difficulty: 1 Easy
Topic: Property Rights and Intellectual Property Rights
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
76) Designs and names by which merchants or manufacturers designate and differentiate their
products are known as
A) trademarks.
B) copyrights.
C) patents.
D) licenses.
Answer: A
Explanation: Trademarks are designs and names, officially registered, by which merchants or
manufacturers designate and differentiate their products (e.g., Christian Dior clothes).
Difficulty: 1 Easy
Topic: Property Rights and Intellectual Property Rights
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
34
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
77) The research and development division of a company has recently designed a new coffee
vending machine that is likely to sell very well in the market. It is compact, user-friendly, and
provides unprecedented efficiency in terms of cost per cup. Consequently, the company fears that
its competitors would soon mimic the design of its product. To protect its product, the company is
now seeking a
A) copyright.
B) patent.
C) trademark.
D) certification.
Answer: B
Explanation: A patent grants the inventor of a new product or process exclusive rights for a
defined period to the manufacture, use, or sale of that invention.
Difficulty: 2 Medium
Topic: Property Rights and Intellectual Property Rights
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
78) Which of the following provides exclusive legal rights to authors, composers, playwrights,
artists, and publishers to publish and disperse their work as they see fit?
A) patent
B) copyright
C) trademark
D) license
Answer: B
Explanation: Copyrights are the exclusive legal rights of authors, composers, playwrights, artists,
and publishers to publish and disperse their work as they see fit.
Difficulty: 2 Medium
Topic: Property Rights and Intellectual Property Rights
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
35
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
79) The TRIPS agreement was designed to
A) exclude China from all intellectual property agreements.
B) oversee a much stricter enforcement of intellectual property regulations.
C) hold a firm and its officers responsible when a product causes injury, death, or damage.
D) support traded software and recorded property among developed markets.
Answer: B
Explanation: Under the agreement known as the Trade-Related Aspects of Intellectual Property
Rights (or TRIPS), as of 1995 a council of the World Trade Organization is overseeing
enforcement of much stricter intellectual property regulations.
Difficulty: 1 Easy
Topic: Property Rights and Intellectual Property Rights
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
80) Which of the following statements about the Trade-Related Aspects of Intellectual Property
Rights (or TRIPS) agreement is true?
A) It was designed to oversee the loosening of intellectual property regulations, beginning in 1995.
B) It obliged WTO members to grant and enforce patents lasting at least 20 years and copyrights
lasting 50 years.
C) It directed rich countries to comply with its rules of intellectual property protection within five
years.
D) It provided the very poorest countries amnesty from complying with its rules of intellectual
property protection.
Answer: B
Explanation: Under the agreement known as the Trade-Related Aspects of Intellectual Property
Rights (or TRIPS), as of 1995 a council of the World Trade Organization is overseeing
enforcement of much stricter intellectual property regulations. These regulations oblige WTO
members to grant and enforce patents lasting at least 20 years and copyrights lasting 50 years. Rich
countries had to comply with the rules within a year. Poor countries, in which such protection
generally was much weaker, had five years of grace, and the very poorest had 10 years.
Difficulty: 2 Medium
Topic: Property Rights and Intellectual Property Rights
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
36
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
81) Safety standards to which a product must adhere are set by
A) safety certifications.
B) contract laws.
C) product safety laws.
D) product liability laws.
Answer: C
Explanation: Product safety laws set certain safety standards to which a product must adhere.
Product liability involves holding a firm and its officers responsible when a product causes injury,
death, or damage.
Difficulty: 1 Easy
Topic: Product Liability
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
82) Private action refers to
A) public officials extorting income, resources, or the property itself from property holders.
B) bribing government officials in foreign countries in an attempt to win lucrative contracts.
C) theft, piracy, blackmail, and the like by private individuals or groups.
D) violations of intellectual property rights.
Answer: C
Explanation: Private action refers to theft, piracy, blackmail, and the like by private individuals
or groups. Although theft occurs in all countries, a weak legal system allows for a much higher
level of criminal action in some than in others.
Difficulty: 2 Medium
Topic: Civil Law, Common Law, and Theocratic Law
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
37
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
83) The ________ establishes a uniform set of rules governing certain aspects of the making and
performance of everyday commercial contracts between sellers and buyers that have their places
of business in different nations.
A) Trade-Related Aspects of Intellectual Property Rights (TRIPS)
B) Paris Convention for the Protection of Industrial Property
C) United Nations Convention on Contracts for the International Sale of Goods (CISG)
D) World Trade Organization (WTO)
Answer: C
Explanation: When contract disputes arise in international trade, there is always the question of
which country's laws to apply. To resolve this issue, a number of countries, including the United
States, have ratified the United Nations Convention on Contracts for the International Sale of
Goods (CISG). The CISG establishes a uniform set of rules governing certain aspects of the
making and performance of everyday commercial contracts between sellers and buyers that have
their places of business in different nations. By adopting the CISG, a nation signals to other
adopters that it will treat the convention's rules as part of its law. The CISG applies automatically
to all contracts for the sale of goods between different firms based in countries that have ratified
the convention, unless the parties to the contract explicitly opt out.
Difficulty: 2 Medium
Topic: Laws Affecting International Business
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
38
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
84) The ________ makes it illegal for American companies to bribe a foreign government official
in order to obtain or maintain business over which that foreign official has authority, and requires
all publicly traded companies to keep detailed records that would reveal whether a violation of the
act has occurred.
A) Trade-Related Aspects of Intellectual Property Rights (TRIPS)
B) Foreign Corrupt Practices Act (FCPA)
C) Convention on Combating Bribery of Foreign Public Officials in International Business
Transactions
D) Organisation for Economic Co-operation and Development (OECD)
Answer: B
Explanation: The Foreign Corrupt Practices Act was passed during the 1970s by the United
States. The law makes it illegal for American companies to bribe a foreign government official in
order to obtain or maintain business over which that foreign official has authority, and it requires
all publicly traded companies to keep detailed records that would reveal whether a violation of the
act has occurred.
Difficulty: 3 Hard
Topic: Laws Affecting International Business
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
85) Company Zee has been found guilty of manufacturing a product that caused harm to its users,
violating criminal liability laws. Which of the following is the most likely outcome for Company
Zee?
A) payment and monetary damages
B) more severe punishment if Company Zee is outside the United States
C) fines or imprisonment
D) nothing if it was Company Zee's first offense
Answer: C
Explanation: Product liability involves holding a firm and its officers responsible when a product
causes injury, death, or damage. Product liability can be much greater if a product does not
conform to required safety standards. Both civil and criminal product liability laws exist. Civil
laws call for payment and monetary damages. Criminal liability laws result in fines or
imprisonment. Both civil and criminal liability laws are probably more extensive in the United
States than in any other country, although many other Western nations also have comprehensive
liability laws. Liability laws are typically least extensive in less developed nations.
Difficulty: 2 Medium
Topic: Product Liability
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
39
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
86) ________ are established through patents, copyrights, and trademarks.
A) Digital signatures
B) Ownership rights over private property
C) Origination fees and tributes
D) Ownership rights over intellectual property
Answer: D
Explanation: Ownership rights over intellectual property are established through patents,
copyrights, and trademarks. A patent grants the inventor of a new product or process exclusive
rights for a defined period to the manufacture, use, or sale of that invention. Copyrights are the
exclusive legal rights of authors, composers, playwrights, artists, and publishers to publish and
disperse their work as they see fit. Trademarks are designs and names, officially registered, by
which merchants or manufacturers designate and differentiate their products.
Difficulty: 2 Medium
Topic: Property Rights and Intellectual Property Rights
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
87) In common law, ________ refers to cases that have come before the courts in the past.
A) custom
B) precedent
C) codification
D) tradition
Answer: B
Explanation: Common law is based on tradition, precedent, and custom. Tradition refers to a
country's legal history, precedent to cases that have come before the courts in the past, and custom
to the ways in which laws are applied in specific situations. When law courts interpret common
law, they do so with regard to these characteristics.
Difficulty: 1 Easy
Topic: Civil Law, Common Law, and Theocratic Law
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
40
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
88) Judges in a(n) ________ system have the power to interpret the law so that it applies to the
unique circumstances of an individual case.
A) civil law
B) international law
C) common law
D) theocratic law
Answer: C
Explanation: Common law is based on tradition, precedent, and custom. Judges in a common law
system have the power to interpret the law so that it applies to the unique circumstances of an
individual case.
Difficulty: 2 Medium
Topic: Civil Law, Common Law, and Theocratic Law
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
89) The most widely practiced theocratic legal system in the modern world is
A) Christian.
B) Hindu.
C) Jewish.
D) Islamic.
Answer: D
Explanation: Islamic law is the most widely practiced theocratic system in the modern world,
although usage of both Hindu and Jewish law persisted into the twentieth century.
Difficulty: 1 Easy
Topic: Civil Law, Common Law, and Theocratic Law
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
41
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
90) In the 1970s, the United States ________, which requires all publicly traded companies,
whether or not they are involved in international trade, to keep detailed records that would reveal
whether a violation of the act has occurred.
A) adopted the Convention on Combating Bribery of Foreign Public Officials in International
Business Transactions policy
B) passed the Foreign Corrupt Practices Act
C) joined Transparency International
D) joined the Organisation for Economic Co-operation and Development (OECD)
Answer: B
Explanation: The Foreign Corrupt Practices Act requires all publicly traded companies (whether
or not they are involved in international trade) to keep detailed records that would reveal whether a
violation of the act has occurred.
Difficulty: 2 Medium
Topic: Laws Affecting International Business
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
91) A law system that is based on a detailed set of laws organized into codes is
A) municipal.
B) contract.
C) civil.
D) common
Answer: C
Explanation: A civil law system is based on a detailed set of laws organized into codes. When
law courts interpret civil law, they do so with regard to these codes.
Difficulty: 2 Medium
Topic: Civil Law, Common Law, and Theocratic Law
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
42
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
92) Although many countries have stringent intellectual property regulations on their books, the
enforcement of these regulations has often been lax. This has been the case even among many of
the 185 countries that are now members of the ________, all of which have signed international
treaties designed to protect intellectual property.
A) World Intellectual Property Organization
B) General Agreement on Tariffs and Trade
C) Business Software Alliance
D) Trade-Related Aspects of Intellectual Property Rights (TRIPS)
Answer: A
Explanation: Although many countries have stringent intellectual property regulations on their
books, the enforcement of these regulations has often been lax. This has been the case even among
many of the 185 countries that are now members of the World Intellectual Property Organization,
all of which have signed international treaties designed to protect intellectual property, including
the oldest such treaty, the Paris Convention for the Protection of Industrial Property, which dates to
1883 and has been signed by more than 170 nations.
Difficulty: 2 Medium
Topic: Property Rights and Intellectual Property Rights
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
93) The ________ associated with doing business in a country are a function of that country's
political, economic, and legal systems.
A) ethical considerations
B) profitability
C) simplicity and ease
D) benefits, costs, and risks
Answer: D
Explanation: The political, economic, and legal environments of a country clearly influence the
attractiveness of that country as a market or investment site. The benefits, costs, and risks
associated with doing business in a country are a function of that country's political, economic, and
legal systems.
Difficulty: 2 Medium
Topic: Country Risk Produced by Legal Systems
Learning Objective: 02-04 Explain the implications for management practice of national
differences in political economy.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
43
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
94) Why did Karl Marx criticize capitalism? Describe how he planned to correct those
shortcomings.
Answer: Modern socialists trace their intellectual roots to Karl Marx. Marx argued that the few
benefit at the expense of the many in a capitalist society where individual freedoms are not
restricted. While successful capitalists accumulate considerable wealth, Marx postulated that the
wages earned by the majority of workers in a capitalist society would be forced down to
subsistence levels. He argued that capitalists expropriate for their own use the value created by
workers, while paying workers only subsistence wages in return. According to Marx, the pay of
workers does not reflect the full value of their labor. To correct this perceived wrong, Marx
advocated state ownership of the basic means of production, distribution, and exchange (i.e.,
businesses). His logic was that if the state owned the means of production, the state could ensure
that workers were fully compensated for their labor. Thus, the idea is to manage state-owned
enterprise to benefit society as a whole, rather than individual capitalists.
Difficulty: 3 Hard
Topic: Differences in Political Systems
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Evaluate
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
44
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
95) Discuss collectivism. What ideals does the philosophy support? Where did the philosophy
start? How does collectivism exist in the modern world?
Answer: A collectivist political system is one that stresses the primacy of collective goals over
individual goals. In that sense, the needs of the society as a whole are viewed as being more
important than individual freedoms. Collectivism can trace its roots to the ancient Greek
philosopher Plato who suggested that individual rights be sacrificed for the good of the majority.
Today, collectivism is reflected in the socialist movement started by Karl Marx who argued that
the few benefit at the expense of the many in a capitalist society where individual freedoms are not
restricted. Marx advocated state ownership of the basic means of production, distribution, and
exchange (i.e. businesses). In the early twentieth century, the socialist ideology split into two
broad camps. The communists believed that socialism could be achieved only through violent
revolution and totalitarian dictatorship, whereas the social democrats committed themselves to
achieving socialism by democratic means, turning their backs on violent revolution and
dictatorship. Both versions of socialism waxed and waned during the twentieth century. The
communist version of socialism reached its high point in the late 1970s, when the majority of the
world's population lived in communist states. By the mid-1990s, however, communism was in
retreat worldwide. The Soviet Union had collapsed and had been replaced by a collection of 15
republics, many of which were at least nominally structured as democracies. Communism was
swept out of Eastern Europe by the largely bloodless revolutions of 1989.
Difficulty: 3 Hard
Topic: Differences in Political Systems
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
96) What are state-owned companies? Why do they usually perform poorly?
Answer: A state-owned company is a company that is owned by a nation's government. After
World War II, many social democratic governments nationalized private companies that were to
be run for the public good rather than private profit. Great Britain, for example, nationalized so
many companies that by the end of the 1970s, state-owned monopolies existed in
telecommunications, electricity, gas, coal, and several other industries. However, because
state-run companies such as the ones that existed in Great Britain are protected from competition
by their monopoly position and guaranteed financial support, they become inefficient.
Difficulty: 3 Hard
Topic: Different Forms of Government
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
45
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
97) Discuss individualism. Explain the key positions of the philosophy, it roots, and its role in the
modern economy.
Answer: Individualism refers to a philosophy that an individual should have freedom in his or her
economic and political pursuits. Accordingly, the philosophy stresses that the interests of the
individual should take precedence over the interests of the state. Individualism can be traced to the
ancient Greek philosopher Aristotle who argued that individual diversity and private ownership
are desirable. Aristotle's philosophy was refined by David Hume, Adam Smith, and John Stuart
Mill in the 1700s and 1800s, and more recently by Milton Friedman, Friedrich von Hayek, and
James Buchanan. Individualism is built on two central tenets. The first is an emphasis on the
importance of guaranteeing individual freedom and self-expression. The second tenet of
individualism is that the welfare of society is best served by letting people pursue their own
economic self-interest, as opposed to some collective body (such as government) dictating what is
in society's best interest. The central message of individualism, therefore, is that individual
economic and political freedoms are the ground rules on which a society should be based. Today,
individualism translates into an advocacy for democratic political systems and free market
economies.
Difficulty: 3 Hard
Topic: Differences in Political Systems
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
98) Compare and contrast a pure democracy and a representative democracy. Which type of
democracy is more common today? Why?
Answer: The pure form of democracy is based on a belief that citizens should be directly
involved in decision making. In contrast, in a representative democracy, citizens periodically elect
individuals to represent them. The elected individuals form a government and make decisions on
behalf of the electorate. Because a pure democracy is impractical in advanced societies with tens
or hundreds of millions of people, representative democracies are far more common in today's
world.
Difficulty: 3 Hard
Topic: Different Forms of Government
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
46
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
99) Compare and contrast the four forms of totalitarianism.
Answer: In a totalitarian country, an individual's right to freedom of expression and organization,
a free media, and regular elections are denied to the citizens. There are four forms of
totalitarianism. Communist totalitarianism was until recently the most widespread form of
totalitarianism. This form of totalitarianism advocates that socialism can only be achieved through
totalitarian dictatorship. Theocratic totalitarianism is found in states where political power is
monopolized by a party, group, or individual that governs according to religious principles. Tribal
totalitarianism occurs when a political party that represents the interests of a particular tribe
monopolizes power. Right-wing totalitarianism permits some individual economic freedoms but
restricts individual political freedom, frequently on the grounds that it would lead to the rise of
communism.
Difficulty: 3 Hard
Topic: Differences in Political Systems
Learning Objective: 02-01 Understand how the political systems of countries differ.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
100) Identify the three types of economic systems. How do these three types of economic systems
differ from each other? How are they the same?
Answer: In the archetypal pure market economy, all productive activities are privately owned.
Production is determined by supply and demand, and signaled to producers through the price
system. The role of the government in a pure market economy is to encourage vigorous free and
fair competition between private producers. In a command economy, the goods and services that a
country produces, the quantity in which they are produced, and the prices at which they are sold
are all planned by the government. The government's role is to allocate resources for the good of
the society. In addition, all businesses are state owned. A mixed economy is a combination of the
other economic systems in which certain sectors of the economy are left to private ownership and
free market mechanisms, while other sectors have significant state ownership and government
planning. In mixed economies, governments tend to take into state ownership troubled firms
whose continued operation is thought to be vital to national interests.
Difficulty: 3 Hard
Topic: Differences in Economic Systems
Learning Objective: 02-02 Understand how the economic systems of countries differ.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
47
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
101) Discuss why there is inefficiency in a monopoly situation. What is the role of the government
in such a situation?
Answer: In a monopoly situation, a firm has no competitors, and therefore it has no incentive to
search for ways to lower production costs. Rather, cost increases are simply passed on to
consumers in the form of higher prices. The net result is that the monopolist is likely to become
increasingly inefficient, producing high-priced, low-quality goods. Given the dangers inherent in
monopoly, the role of government in a market economy is to encourage vigorous free and fair
competition between private producers. Governments do this by outlawing restrictive business
practices designed to monopolize a market (antitrust laws serve this function in the United States).
Difficulty: 3 Hard
Topic: Differences in Economic Systems
Learning Objective: 02-02 Understand how the economic systems of countries differ.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
102) Discuss the effects of private ownership of production in a market economy.
Answer: Private ownership encourages vigorous competition and economic efficiency. Private
ownership ensures that entrepreneurs have a right to the profits generated by their own efforts.
This gives entrepreneurs an incentive to search for better ways of serving consumer needs. That
may be through introducing new products, by developing more efficient production processes, by
pursuing better marketing and after-sales service, or simply through managing their businesses
more efficiently than their competitors. In turn, the constant improvement in product and process
that results from such an incentive has been argued to have a major positive impact on economic
growth and development.
Difficulty: 3 Hard
Topic: Differences in Economic Systems
Learning Objective: 02-02 Understand how the economic systems of countries differ.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
48
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
103) What is a country's legal system? Why is it important to international businesses?
Answer: The legal system of a country refers to the rules, or laws, that regulate behavior along
with the processes by which laws are enforced and through which redress for grievances is
obtained. It is critical that international companies understand a country's legal system because its
laws regulate business practice, define the manner in which business transactions are to be
executed, and set down the rights and obligations of those involved in business transactions. The
legal environments of countries differ in significant ways and can affect the attractiveness of a
country as an investment site or market.
Difficulty: 3 Hard
Topic: Differences in Legal Systems
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
104) Explain the differences between common law and civil law systems by the approach of each
to contract law.
Answer: Contracts drafted under a common law framework tend to be very detailed with all
contingencies spelled out. In contrast, contracts in a civil law system tend to be much shorter and
less specific because many of the issues typically covered in a common law contract are already
covered in a civil code.
Difficulty: 3 Hard
Topic: Civil Law, Common Law, and Theocratic Law
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
105) Discuss the ways in which public action to violate property rights can occur.
Answer: Public action to violate property rights occurs when public officials, such as politicians
and government bureaucrats, extort income, resources, or the property itself from property
holders. This can be done through legal mechanisms such as levying excessive taxation, requiring
expensive licenses or permits from property holders, taking assets into state ownership without
compensating the owners, or redistributing assets without compensating the prior owners. It can
also be done through illegal means, or corruption, by demanding bribes from businesses in return
for the rights to operate in a country, industry, or location.
Difficulty: 3 Hard
Topic: Property Rights and Intellectual Property Rights
Learning Objective: 02-03 Understand how the legal systems of countries differ.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
49
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
106) What factors contribute to the attractiveness of a country as a market or investment site
Answer: The political, economic, and legal environments of a country clearly influence the
attractiveness of that country as a market or investment site. The benefits, costs, and risks
associated with doing business in a country are a function of that country's political, economic, and
legal systems. The overall attractiveness of a country as a market or investment site depends on
balancing the likely long-term benefits of doing business in that country against the likely costs
and risks.
Difficulty: 3 Hard
Topic: Managing Political Risk and Differences
Learning Objective: 02-04 Explain the implications for management practice of national
differences in political economy.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
107) Discuss the key factors that companies must be aware of before deciding to do business in
other countries.
Answer: The political, economic, and legal systems of a country raise important issues that have
implications for the practice of international business. For example, what ethical implications are
associated with doing business in totalitarian countries where citizens are denied basic human
rights, corruption is rampant, and bribes are necessary to gain permission to do business? The other
important factor is that the benefits, costs, and risks associated with doing business in another
country are a function of that country's political, economic, and legal systems. Companies must
balance the likely long-term benefits of doing business in that country against likely costs and
risks.
Difficulty: 3 Hard
Topic: Country Risk Produced by Legal Systems
Learning Objective: 02-04 Explain the implications for management practice of national
differences in political economy.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
50
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
International Business, 12e (Hill)
Chapter 3
National Differences in Economic Development
1) GDP allows a more direct comparison of living standards in different countries than other
measures.
Answer: FALSE
Explanation: The purchasing power parity (PPP) adjustment allows a more direct comparison of
living standards in different countries.
Difficulty: 1 Easy
Topic: The Uses of National Income Data
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
2) In Sen's view, development is an economic process that should be assessed primarily by
material output measures such as GNI per capita.
Answer: FALSE
Explanation: The Nobel Prize–winning economist Amartya Sen has argued that development
should be assessed less by material output measures such as GNI per capita and more by the
capabilities and opportunities that people enjoy. In Sen's view, development is not just an
economic process, but it is a political one too.
Difficulty: 1 Easy
Topic: The Uses of National Income Data
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
1
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
3) GDP is one of the measures used by the Human Development Index (HDI) to measure the
quality of human life in different nations.
Answer: FALSE
Explanation: The HDI is based on three measures: life expectancy at birth (a function of health
care); educational attainment (measured by a combination of the adult literacy rate and enrollment
in primary, secondary, and tertiary education); and whether average incomes, based on PPP
estimates, are sufficient to meet the basic needs of life in a country (adequate food, shelter, and
health care).
Difficulty: 1 Easy
Topic: Economic Development
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
4) Political freedom is one of the measures used by the Human Development Index (HDI) to
measure the quality of human life in different nations.
Answer: FALSE
Explanation: The HDI is based on three measures: life expectancy at birth (a function of health
care); educational attainment (measured by a combination of the adult literacy rate and enrollment
in primary, secondary, and tertiary education); and whether average incomes, based on PPP
estimates, are sufficient to meet the basic needs of life in a country (adequate food, shelter, and
health care)
Difficulty: 1 Easy
Topic: Economic Development
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
2
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
5) If a country's economy is to sustain long-term economic growth, the business environment must
be conducive to innovations and entrepreneurial activity.
Answer: TRUE
Explanation: Innovations in production and business processes lead to an increase in the
productivity of labor and capital, which further boosts economic growth rates. Entrepreneurs first
commercialize innovative new products and processes, and entrepreneurial activity provides much
of the dynamism in an economy.
Difficulty: 1 Easy
Topic: Economic Development
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
6) The state of Illinois was having budget difficulties, so it hired several private management
consultancy firms to manage some state-owned enterprises. This is an example of privatization.
Answer: FALSE
Explanation: Privatization refers to the process of selling state-owned enterprises to private
investors.
Difficulty: 1 Easy
Topic: Nationalization and Privatization of Business
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
3
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
7) Peruvian development economist Hernando de Soto has argued that the chronic inability of
property owners to establish legal title to the property they own is a key problem for innovation
and entrepreneurial activity in developing nations.
Answer: TRUE
Explanation: The influential Peruvian development economist Hernando de Soto has argued that
much of the developing world will fail to reap the benefits of capitalism until property rights are
better defined and protected. His arguments are interesting because he says the key problem is not
the risk of expropriation but the chronic inability of property owners to establish legal title to the
property they own.
Difficulty: 1 Easy
Topic: Property Rights and Intellectual Property Rights
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
8) Most property in poor countries is owned legally by investors.
Answer: FALSE
Explanation: Because most property in poor countries is informally "owned," the absence of
legal proof of ownership means that property holders cannot convert their assets into capital,
which could then be used to finance business ventures.
Difficulty: 1 Easy
Topic: Economic Development
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
9) Totalitarian states promote human freedom and human development, which facilitates
economic progress.
Answer: FALSE
Explanation: Totalitarian states, by limiting human freedom, also suppress human development
and therefore are detrimental to progress.
Difficulty: 2 Medium
Topic: Economic Development
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
4
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
10) Since the late 1980s, there has been a strong move away from a more free market economic
model and toward more centrally planned and mixed economies.
Answer: FALSE
Explanation: The political economy of many of the world's nation-states has changed radically
since the late 1980s. There has been a strong move away from centrally planned and mixed
economies and toward a more free market economic model.
Difficulty: 1 Easy
Topic: Differences in Economic Systems
Learning Objective: 03-02 Identify the macropolitical and macroeconomic changes occurring
worldwide.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
11) Many totalitarian regimes were able to deliver economic progress to the vast bulk of their
populations, which curbed the spread of democracy during the late 1980s.
Answer: FALSE
Explanation: One of the causes for the spread of democracy is that many totalitarian regimes
failed to deliver economic progress to the vast bulk of their populations.
Difficulty: 1 Easy
Topic: Different Forms of Government
Learning Objective: 03-02 Identify the macropolitical and macroeconomic changes occurring
worldwide.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
12) New information and communication technologies have enabled the spread of democratic
ideals.
Answer: TRUE
Explanation: New information and communication technologies have created new conduits for
the spread of democratic ideals and information from free societies. Today, the Internet is allowing
democratic ideals to penetrate closed societies as never before.
Difficulty: 1 Easy
Topic: How the Physical Environment and Technology Influence Culture
Learning Objective: 03-02 Identify the macropolitical and macroeconomic changes occurring
worldwide.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
5
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
13) Transformation from centrally planned command economies to market-based economies can
be attributed to the fact that command and mixed economies failed to deliver the sustained
economic performance achieved by countries adopting market-based systems.
Answer: TRUE
Explanation: Command and mixed economies failed to deliver the kind of sustained economic
performance that was achieved by countries adopting market-based systems, such as the United
States, Switzerland, Hong Kong, and Taiwan. As a consequence, even more states have gravitated
toward the market-based model.
Difficulty: 1 Easy
Topic: Differences in Economic Systems
Learning Objective: 03-02 Identify the macropolitical and macroeconomic changes occurring
worldwide.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
14) Hong Kong has economic freedom, so it follows that it also has political freedom.
Answer: FALSE
Explanation: Economic freedom does not necessarily equate with political freedom. For
example, the two top states in the Heritage Foundation index, Hong Kong and Singapore, cannot
be classified as politically free.
Difficulty: 1 Easy
Topic: The Political Debate
Learning Objective: 03-02 Identify the macropolitical and macroeconomic changes occurring
worldwide.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
15) In a command economy, the prices are determined by the free interplay of demand and supply.
Answer: FALSE
Explanation: Before the collapse of communism, the governments in most command economies
exercised tight control over prices and output, setting both through detailed state planning.
Difficulty: 1 Easy
Topic: Differences in Economic Systems
Learning Objective: 03-03 Describe how transition economies are moving toward market-based
systems.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
6
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
16) In mixed economies, in certain sectors the state sets prices, owns businesses, limits private
enterprise, restricts investment by foreigners, and restricts international trade.
Answer: TRUE
Explanation: In mixed economies, the role of the state was more limited; but here too, in certain
sectors the state sets prices, owns businesses, limits private enterprise, restricts investment by
foreigners, and restricts international trade.
Difficulty: 1 Easy
Topic: Differences in Economic Systems
Learning Objective: 03-03 Describe how transition economies are moving toward market-based
systems.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
17) Studies of privatization in central Europe have shown that the process often fails to deliver
predicted benefits if the newly privatized firms continue to receive subsidies from the state and if
they are protected from foreign competition.
Answer: TRUE
Explanation: Studies of privatization in central Europe have shown that the process often fails to
deliver predicted benefits if the newly privatized firms continue to receive subsidies from the state
and if they are protected from foreign competition by barriers to international trade and foreign
direct investment.
Difficulty: 1 Easy
Topic: Nationalization and Privatization of Business
Learning Objective: 03-03 Describe how transition economies are moving toward market-based
systems.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
18) For privatization to work, it must also be accompanied by a more general deregulation and
opening of the economy.
Answer: TRUE
Explanation: For privatization to work, it must also be accompanied by a more general
deregulation and opening of the economy.
Difficulty: 2 Medium
Topic: Nationalization and Privatization of Business
Learning Objective: 03-03 Describe how transition economies are moving toward market-based
systems.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
7
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
19) To improve airport security following a major terrorist attack, the government of a country
takes over the airport security industries This is an example of privatization.
Answer: FALSE
Explanation: Privatization transfers the ownership of state property into the hands of private
individuals, frequently by the sale of state assets through an auction.
Difficulty: 2 Medium
Topic: Nationalization and Privatization of Business
Learning Objective: 03-03 Describe how transition economies are moving toward market-based
systems.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
20) A country with a well-functioning market economy does not need laws protecting private
property rights and providing mechanisms for contract enforcement.
Answer: FALSE
Explanation: Without a legal system that protects property rights, and without the machinery to
enforce that system, the incentive to engage in economic activity can be reduced substantially by
private and public entities, including organized crime, that expropriate the profits generated by the
efforts of private-sector entrepreneurs.
Difficulty: 2 Medium
Topic: Country Risk Produced by Legal Systems
Learning Objective: 03-03 Describe how transition economies are moving toward market-based
systems.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
8
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
21) When communism collapsed, many of the communist countries lacked the legal structure
required to protect property rights because all the property was earlier held by the state.
Answer: TRUE
Explanation: When communism collapsed, many of these countries lacked the legal structure
required to protect property rights, all property having been held by the state. Although many
nations have made big strides toward instituting the required system, it will be many more years
before the legal system is functioning as smoothly as it does in the West.
Difficulty: 1 Easy
Topic: Country Risk Produced by Legal Systems
Learning Objective: 03-03 Describe how transition economies are moving toward market-based
systems.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
22) A market with a large number of consumers with low living standards will have a relatively
large market when measured in economic terms.
Answer: FALSE
Explanation: While some markets are very large when measured by number of consumers (e.g.,
China and India), low living standards may imply limited purchasing power and therefore a
relatively small market when measured in economic terms.
Difficulty: 2 Medium
Topic: The Potential, Risks, and Challenges of Emerging Markets
Learning Objective: 03-04 Explain the implications for management practice of national
difference in political economy.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
9
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
23) The long-run monetary benefits of doing business in a country are a function of the size of the
market, the present wealth of consumers in that market, and the likely future wealth of consumers.
Answer: TRUE
Explanation: The long-run monetary benefits of doing business in a country are a function of the
size of the market, the present wealth (purchasing power) of consumers in that market, and the
likely future wealth of consumers.
Difficulty: 1 Easy
Topic: The Potential, Risks, and Challenges of Emerging Markets
Learning Objective: 03-04 Explain the implications for management practice of national
difference in political economy.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
24) A country's economic system and property rights regime are reasonably good predictors of
economic prospects.
Answer: TRUE
Explanation: A country's economic system and property rights regime are reasonably good
predictors of economic prospects. Countries with free market economies in which property rights
are protected tend to achieve greater economic growth rates than command economies or
economies where property rights are poorly protected.
Difficulty: 2 Medium
Topic: The Potential, Risks, and Challenges of Emerging Markets
Learning Objective: 03-04 Explain the implications for management practice of national
difference in political economy.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
25) Economic risks are independent of political risk.
Answer: FALSE
Explanation: Economic risks are not independent of political risk. Economic mismanagement
may give rise to significant social unrest and hence political risk.
Difficulty: 1 Easy
Topic: The Potential, Risks, and Challenges of Emerging Markets
Learning Objective: 03-04 Explain the implications for management practice of national
difference in political economy.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
10
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
26) ________ per person figures can be misleading because they don't consider differences in the
cost of living.
A) Gross domestic product (GDP)
B) Gross national income (GNI)
C) Purchasing power parity (PPP)
D) Human Development Index (HDI)
Answer: B
Explanation: GNI per person figures don't consider differences in the cost of living, so they can
be misleading.
Difficulty: 1 Easy
Topic: The Uses of National Income Data
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
27) GNI per capita can be adjusted by ________ to account for differences in the cost of living.
A) gross domestic product
B) gross values added
C) purchasing power
D) the total value of goods and services produced
Answer: C
Explanation: To account for differences in the cost of living, one can adjust GNI per capita by
purchasing power. Referred to as a purchasing power parity (PPP) adjustment, it allows for a more
direct comparison of living standards in different countries.
Difficulty: 1 Easy
Topic: The Uses of National Income Data
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
11
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
28) The ________ adjustment allows for a more direct comparison of living standards in different
countries.
A) gross domestic product
B) value added
C) gross national income (GNI)
D) purchasing power parity (PPP)
Answer: D
Explanation: Referred to as a purchasing power parity (PPP) adjustment, it allows for a more
direct comparison of living standards in different countries. The base for the adjustment is the cost
of living in the United States.
Difficulty: 1 Easy
Topic: The Uses of National Income Data
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
29) GNI and PPP data are useful because they provide a ________ of economic development.
A) static picture
B) dynamic analysis
C) static analysis
D) global view
Answer: A
Explanation: The GNI and PPP data give a static picture of development. They tell us, for
example, that China is much poorer than the United States, but they do not tell us if China is
closing the gap.
Difficulty: 1 Easy
Topic: The Uses of National Income Data
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
12
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
30) In a ________, the state owns all means of production.
A) mixed economy
B) planned economy
C) market economy
D) totalitarian state
Answer: B
Explanation: In a planned economy, the state owns all means of production. Consequently,
entrepreneurial individuals have few economic incentives to develop valuable new innovations,
because it is the state, rather than the individual, that captures most of the gains.
Difficulty: 1 Easy
Topic: Centrally Planned Economy
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
31) The economic freedom associated with a ________ creates greater incentives for innovation
and entrepreneurship than either a planned or a mixed economy.
A) closed economy
B) political economy
C) market economy
D) command economy
Answer: C
Explanation: It has been argued that the economic freedom associated with a market economy
creates greater incentives for innovation and entrepreneurship than either a planned or a mixed
economy.
Difficulty: 1 Easy
Topic: Differences in Economic Systems
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
13
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
32) Which of the following is a legal means by which the state can expropriate the profits from
innovation?
A) demands for money to grant a license
B) expropriation
C) enforcing property rights
D) excessive taxation
Answer: D
Explanation: The state can expropriate the profits from innovation through legal means, such as
excessive taxation, or through illegal means, such as demands from state bureaucrats for kickbacks
in return for granting an individual or firm a license to do business in a certain area (i.e.,
corruption).
Difficulty: 2 Medium
Topic: Government Policies Affecting Trade
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
33) Some ________ have fostered a market economy and strong property rights protection and
have experienced rapid economic growth.
A) totalitarian regimes
B) command economies
C) dictatorships
D) centrally planned systems
Answer: A
Explanation: Some totalitarian regimes have fostered a market economy and strong property
rights protection and have experienced rapid economic growth.
Difficulty: 2 Medium
Topic: Economic Development
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
14
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
34) Several of the fastest-growing Asian economies adopted more ________ governments during
the past three decades, including South Korea and Taiwan.
A) totalitarian
B) democratic
C) dictatorial
D) socialist
Answer: B
Explanation: Several of the fastest-growing Asian economies adopted more democratic
governments during the past three decades, including South Korea and Taiwan. Thus, although
democracy may not always be the cause of initial economic progress, it seems to be one
consequence of that progress.
Difficulty: 1 Easy
Topic: Different Forms of Government
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
35) The general assertion is that nations investing more in ________ will have higher economic
growth rates.
A) infrastructure
B) centralized urban centers
C) education
D) manufacturing
Answer: C
Explanation: Education emerges as another important determinant of economic development.
The general assertion is that nations that invest more in education will have higher growth rates
because an educated population is a more productive population.
Difficulty: 2 Medium
Topic: Economic Development
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
15
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
36) To account for differences in the cost of living, one can adjust GNI per capita by ________,
which allows for a more direct comparison of living standards in different countries.
A) gross domestic product
B) Human Development Index
C) living standards rate
D) purchasing power
Answer: D
Explanation: A common measure of economic development is a country's gross national income
(GNI) per head of population. GNI is regarded as a yardstick for the economic activity of a
country; it measures the total annual income received by residents of a nation. GNI per person
figures can be misleading because they don't consider differences in the cost of living. To account
for differences in the cost of living, one can adjust GNI per capita by purchasing power. Referred
to as a purchasing power parity (PPP) adjustment, it allows for a more direct comparison of living
standards in different countries.
Difficulty: 1 Easy
Topic: The Uses of National Income Data
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
37) Which of the following are more conducive to economic growth?
A) democratic regimes
B) totalitarian regimes
C) dictatorships
D) benevolent monarchies
Answer: A
Explanation: Some totalitarian regimes have fostered a market economy and strong property
rights protection and have experienced rapid economic growth. However, there is no guarantee
that a dictatorship will continue to pursue such progressive policies. Dictators are rarely
benevolent. Many are tempted to use the apparatus of the state to further their own private ends,
violating property rights and stalling economic growth. Totalitarian states, by limiting human
freedom, also suppress human development and therefore are detrimental to progress. Given this,
it seems likely that democratic regimes are far more conducive to long-term economic growth than
are dictatorships, even benevolent ones.
Difficulty: 2 Medium
Topic: Different Forms of Government
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
16
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
38) In a ________, any individual who has an innovative idea is free to try to make money out of
that idea by starting a business (by engaging in entrepreneurial activity).
A) command economy
B) planned economy
C) market economy
D) mixed economy
Answer: C
Explanation: It has been argued that the economic freedom associated with a market economy
creates greater incentives for innovation and entrepreneurship than either a planned or a mixed
economy.
In a market economy, any individual who has an innovative idea is free to try to make money out
of that idea by starting a business (by engaging in entrepreneurial activity). Similarly, existing
businesses are free to improve their operations through innovation. To the extent that they are
successful, both individual entrepreneurs and established businesses can reap rewards in the form
of high profits. Thus, market economies contain enormous incentives to develop innovations.
Difficulty: 2 Medium
Topic: Differences in Economic Systems
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
39) GNI per person figures can be misleading because
A) they also include barter agreements.
B) they provide a dynamic picture of development.
C) they don't consider differences in the cost of living.
D) they don't consider exchange rate.
Answer: C
Explanation: One common measure of economic development is a country's gross national
income (GNI) per head of population. GNI per person figures can be misleading because they don't
consider differences in the cost of living.
Difficulty: 2 Medium
Topic: The Uses of National Income Data
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
17
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
40) Which of the following helps in adjusting GNI such that it accounts for the differences in the
cost of living?
A) purchasing power parity (PPP) adjustment
B) Human Development Index
C) debt to GNI ratio
D) consumer price index
Answer: A
Explanation: To account for differences in the cost of living, one can adjust GNI per capita by
purchasing power. Referred to as a purchasing power parity (PPP) adjustment, it allows for a more
direct comparison of living standards in different countries.
Difficulty: 2 Medium
Topic: The Uses of National Income Data
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
41) In some countries, the official GNI per capita measured at PPP data does not reflect the actual
total annual income because
A) it doesn't consider differences in the cost of living.
B) it gives a static picture of development.
C) it fails to include income earned from other countries in the form of dividends.
D) large amounts of economic activity may be in the form of barter agreements.
Answer: D
Explanation: In some countries the "official" figures do not tell the entire story because large
amounts of economic activity may be in the form of unrecorded cash transactions, or barter
agreements. Estimates suggest that in India it may be around 50 percent of GDP, which implies
that the Indian economy is half as big again as the officially reported figures.
Difficulty: 2 Medium
Topic: The Uses of National Income Data
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
18
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
42) Which of the following was developed by the United Nations to measure the quality of life in
different nations?
A) gross national income
B) Human Development Index
C) purchasing power parity
D) gross domestic product
Answer: B
Explanation: Sen's influential thesis has been picked up by the United Nations, which has
developed the Human Development Index (HDI) to measure the quality of human life in different
nations.
Difficulty: 1 Easy
Topic: Economic Development
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
43) Many countries in Africa score below 0.5 on the Human Development Index. This means that
these countries have
A) few political freedoms.
B) poor quality of life.
C) low purchasing power parity.
D) no gross domestic product.
Answer: B
Explanation: The HDI is scaled from 0 to 1. Countries scoring less than 0.5 are classified as
having low human development (the quality of life is poor).
Difficulty: 2 Medium
Topic: Economic Development
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
19
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
44) Which of the following is one of the measures that HDI is based on?
A) life expectancy at birth
B) political freedom
C) attainment of housing
D) whether the lowest incomes are sufficient to meet the basic needs of life
Answer: A
Explanation: The HDI comes much closer to Amartya Sen's conception of how development
should be measured than narrow economic measures such as GNI per capita—although Sen's
thesis suggests that political freedoms should also be included in the index, and they are not. The
HDI is based on three measures: life expectancy at birth (a function of health care); educational
attainment (measured by a combination of the adult literacy rate and enrollment in primary,
secondary, and tertiary education); and whether average incomes, based on PPP estimates, are
sufficient to meet the basic needs of life in a country (adequate food, shelter, and health care).
Difficulty: 1 Easy
Topic: Economic Development
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
45) ________, a Nobel Prize–winning economist, has argued that development is not just an
economic process, but it is a political one as well.
A) Hernando de Soto
B) Karl Marx
C) Samuel Huntington
D) Amartya Sen
Answer: D
Explanation: The Nobel Prize-winning economist Amartya Sen has argued that development is
not just an economic process, but it is a political one too, and to succeed requires the
"democratization" of political communities to give citizens a voice in the important decisions
made for the community.
Difficulty: 1 Easy
Topic: Economic Development
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
20
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
46) According to Amartya Sen, development should be
A) seen as a process of expanding the real freedoms that people experience.
B) seen as a nonpolitical concept that focuses on the net income of a country.
C) viewed as a purely economic process.
D) assessed by material output measures such as GNI per capita.
Answer: A
Explanation: The Nobel Prize–winning economist Amartya Sen has argued that development
should be assessed less by material output measures such as GNI per capita and more by the
capabilities and opportunities that people enjoy. According to Sen, development should be seen as
a process of expanding the real freedoms that people experience.
Difficulty: 1 Easy
Topic: Economic Development
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
47) Which of the following statements pertaining to innovation and entrepreneurship is true?
A) They are the engines of growth.
B) They require strong legal systems.
C) They require state ownership of means of production.
D) They require a mixed economy.
Answer: A
Explanation: The lack of economic freedom and incentives for innovation occurred in many
mixed economies in those sectors where the state had a monopoly. This stagnation provided the
impetus for the widespread privatization of state-owned enterprises that was witnessed in many
mixed economies during the mid-1980s and is still going on today.
Difficulty: 2 Medium
Topic: Economic Development
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
21
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
48) A market economy encourages innovation because
A) state ownership of enterprises reduces risks of innovation.
B) economic freedom leads to greater incentives for innovation.
C) government-owned and funded research centers become hubs of innovation.
D) the prices of goods and services, including new products, are fixed by government.
Answer: B
Explanation: The economic freedom associated with a market economy creates greater
incentives for innovation and entrepreneurship than either a planned or a mixed economy. In a
market economy, any individual who has an innovative idea is free to try to make money out of
that idea by starting a business (by engaging in entrepreneurial activity).
Difficulty: 1 Easy
Topic: Differences in Economic Systems
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
49) Stagnation can occur in planned economies because
A) entrepreneurial individuals have few economic incentives for innovation.
B) private ownership of means of production leads to exploitation of workers.
C) prices of goods and services are fixed by market forces of supply and demand.
D) lack of barriers to trade results in increased competition for domestic producers.
Answer: A
Explanation: The lack of economic freedom and incentives for innovation was probably a main
factor in the economic stagnation of many former communist states and led ultimately to their
collapse at the end of the 1980s. Similar stagnation occurred in many mixed economies in those
sectors where the state had a monopoly (such as coal mining and telecommunications in Great
Britain).
Difficulty: 1 Easy
Topic: Centrally Planned Economy
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
22
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
50) ________ is required for a business environment to be conducive to innovation and
entrepreneurial activity.
A) State ownership of means of production
B) Strong legal protection of property rights
C) Barriers to foreign trade and investment
D) Government regulation of the market
Answer: B
Explanation: Strong legal protection of property rights is a requirement for a business
environment to be conducive to innovation, entrepreneurial activity, and hence economic growth.
Difficulty: 1 Easy
Topic: Property Rights and Intellectual Property Rights
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
51) The influential Peruvian development economist Hernando de Soto has argued that much of
the developing world will fail to reap the benefits of capitalism until they
A) have political stability.
B) invest in infrastructural development.
C) have better defined and secure property rights.
D) have adequate market regulation.
Answer: C
Explanation: The influential Peruvian development economist Hernando de Soto has argued that
much of the developing world will fail to reap the benefits of capitalism until property rights are
better defined and protected.
Difficulty: 1 Easy
Topic: Property Rights and Intellectual Property Rights
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
23
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
52) According to Hernando de Soto, which of the following factors is essential for the developing
world to be able to reap the benefits of innovation and entrepreneurship?
A) detailed state planning
B) restricting direct investment by foreign enterprises
C) strong property rights
D) market regulation
Answer: C
Explanation: The influential Peruvian development economist Hernando de Soto has argued that
much of the developing world will fail to reap the benefits of capitalism until property rights are
better defined and protected.
Difficulty: 2 Medium
Topic: Property Rights and Intellectual Property Rights
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
53) A free market economy in which property rights are protected leads to subsequent economic
growth that often leads to the establishment of
A) a democratic regime.
B) a planned economy.
C) government-owned enterprises.
D) a socialist economy.
Answer: A
Explanation: While it is possible to argue that democracy is not a necessary precondition for a
free market economy in which property rights are protected, subsequent economic growth often
leads to establishment of a democratic regime.
Difficulty: 1 Easy
Topic: Economic Development
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
24
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
54) The political economy of many of the world's nation-states has changed radically since the late
1980s. Which of the following is a trend that has been evident?
A) A wave of democratic revolutions has swept the world.
B) Totalitarian governments have arisen, replacing democratically elected governments.
C) There has been a strong move toward centrally planned economies and away from free market
economic models.
D) Mixed economies are fast replacing market economies.
Answer: A
Explanation: There has been a strong move away from centrally planned and mixed economies
and toward a more free market economic model.
Difficulty: 2 Medium
Topic: Differences in Economic Systems
Learning Objective: 03-02 Identify the macropolitical and macroeconomic changes occurring
worldwide.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
55) Political scientist ________ predicts that there will be a world that is split into different
civilizations, each of which has its own value systems and ideology.
A) Samuel Huntington
B) Amartya Sen
C) Francis Fukuyama
D) Hernando de Soto
Answer: A
Explanation: Huntington sees a world that is split into different civilizations, each of which has
its own value systems and ideology.
Difficulty: 2 Medium
Topic: The Political Debate
Learning Objective: 03-02 Identify the macropolitical and macroeconomic changes occurring
worldwide.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
25
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
56) Which of the following is one of the three main reasons for the spread of democracy?
A) New information and communication technologies have broken down the ability of the state to
control access to uncensored information.
B) Totalitarian regimes delivered economic progress to the bulk of their populations but not
enough to the power brokers.
C) Democratic regimes failed to deliver economic progress to the vast bulk of their populations.
D) Economic advances in the past quarter-century have led to the emergence of a class of ruling
elite.
Answer: A
Explanation: There are three main reasons for the spread of democracy. First, many totalitarian
regimes failed to deliver economic progress to the vast bulk of their populations. Second, new
information and communication technologies have broken down the ability of the state to control
access to uncensored information. Third, in many countries the economic advances of the past
quarter-century have led to the emergence of increasingly prosperous middle and working classes
who have pushed for democratic reforms.
Difficulty: 2 Medium
Topic: Different Forms of Government
Learning Objective: 03-02 Identify the macropolitical and macroeconomic changes occurring
worldwide.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
57) According to what political scientist's thesis is global terrorism a product of the tension
between civilizations and the clash of value systems and ideology?
A) Amartya Sen
B) Samuel Huntington
C) Francis Fukuyama
D) Hernando de Soto
Answer: B
Explanation: In Huntington's thesis, global terrorism is a product of the tension between
civilizations and the clash of value systems and ideology.
Difficulty: 1 Easy
Topic: Terrorism, Terrorist Activities, and Countermeasures
Learning Objective: 03-02 Identify the macropolitical and macroeconomic changes occurring
worldwide.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
26
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
58) One of the reasons for the spread of democracy is the emergence of ________ who have
pushed for democratic reforms.
A) a more vocal working poor
B) better educated lower classes
C) a desperate urban poor
D) increasingly prosperous middle and working classes
Answer: D
Explanation: In many countries the economic advances of the past quarter century have led to the
emergence of increasingly prosperous middle and working classes who have pushed for
democratic reforms.
Difficulty: 2 Medium
Topic: Different Forms of Government
Learning Objective: 03-02 Identify the macropolitical and macroeconomic changes occurring
worldwide.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
59) Since the late 1980s, there has been a spread of democracy. This is because
A) a state's ability to control access to uncensored information has increased.
B) the socialist model failed to deliver economic progress to the vast bulk of their populations.
C) in many countries the middle and working classes have become less powerful.
D) in many countries state-ownership of firms has encouraged innovation and entrepreneurship.
Answer: B
Explanation: Many totalitarian regimes failed to deliver economic progress to the vast bulk of
their populations. In looking for alternatives to the socialist model, the populations of these
countries could not have failed to notice that most of the world's strongest economies were
governed by representative democracies.
Difficulty: 2 Medium
Topic: Different Forms of Government
Learning Objective: 03-02 Identify the macropolitical and macroeconomic changes occurring
worldwide.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
27
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
60) In many countries entrepreneurs and other business leaders, eager to protect their property
rights and ensure the dispassionate enforcement of contracts, had pushed for ________; this
contributed to a wave of democratic revolutions during the late 1980s and early 1990s
A) state ownership of productive resources
B) regulated markets
C) democratic reforms
D) planned economies
Answer: C
Explanation: In many countries the economic advances of the past quarter century have led to the
emergence of increasingly prosperous middle and working classes who have pushed for
democratic reforms. Entrepreneurs and other business leaders, eager to protect their property
rights and ensure the dispassionate enforcement of contracts, are another force pressing for more
accountable and open government.
Difficulty: 1 Easy
Topic: Differences in Political systems
Learning Objective: 03-02 Identify the macropolitical and macroeconomic changes occurring
worldwide.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
61) Political scientist Samuel Huntington argues that modernization in non-Western societies can
result in a retreat toward the traditional. This is exemplified by the
A) Islamic resurgence.
B) popularization of modern gadgets.
C) adoption of Western culture.
D) higher levels of literacy and education.
Answer: A
Explanation: Huntington maintains that while many societies may be modernizing—they are
adopting the material paraphernalia of the modern world, from automobiles to Coca-Cola and
MTV—they are not becoming more Western. On the contrary, Huntington theorizes that
modernization in non-Western societies can result in a retreat toward the traditional, such as the
resurgence of Islam in many traditionally Muslim societies.
Difficulty: 2 Medium
Topic: Economic and Business Implications of Cultural Change
Learning Objective: 03-02 Identify the macropolitical and macroeconomic changes occurring
worldwide.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
28
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
62) According to political scientist Samuel Huntington, the rise of Islamic fundamentalism is a
response to the
A) corruption prevalent in planned economies.
B) restricted access to formal education.
C) alienation produced by modernization.
D) restrictions associated with totalitarian regimes.
Answer: C
Explanation: Huntington theorizes that modernization in non-Western societies can result in a
retreat toward the traditional, such as the resurgence of Islam in many traditionally Muslim
societies. The rise of Islamic fundamentalism is portrayed as a response to the alienation produced
by modernization.
Difficulty: 1 Easy
Topic: Economic and Business Implications of Cultural Change
Learning Objective: 03-02 Identify the macropolitical and macroeconomic changes occurring
worldwide.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
63) Which of the following statements is true about Samuel Huntington?
A) Samuel Huntington argues that there is a universal civilization based on widespread acceptance
of Western democratic ideals.
B) Samuel Huntington argues that the rise of Islamic fundamentalism is a response to the
alienation produced by modernization.
C) Samuel Huntington argues that global terrorism is a product of the static nature of traditional
values and religious systems.
D) Samuel Huntington argues that many societies, by adopting the material paraphernalia of the
modern world, are becoming more Western.
Answer: B
Explanation: Huntington theorizes that modernization in non-Western societies can result in a
retreat toward the traditional, such as the resurgence of Islam in many traditionally Muslim
societies.
Difficulty: 2 Medium
Topic: Economic and Business Implications of Cultural Change
Learning Objective: 03-02 Identify the macropolitical and macroeconomic changes occurring
worldwide.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
29
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
64) Paralleling the spread of democracy since the 1980s has been the transformation from
A) free-market economies to socialist economies.
B) mixed economies to collectivist economies.
C) open economies to closed economies.
D) command economies to market-based economies.
Answer: D
Explanation: Paralleling the spread of democracy since the 1980s has been the transformation
from centrally planned command economies to market-based economies. More than 30 countries
that were in the former Soviet Union or the Eastern European Communist bloc have changed their
economic systems.
Difficulty: 1 Easy
Topic: Differences in Economic Systems
Learning Objective: 03-02 Identify the macropolitical and macroeconomic changes occurring
worldwide.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
65) Since the 1980s, there has been a transformation from ________ economies to ________
economies.
A) mixed; market-based
B) centrally planned command; market-based
C) centrally planned command; mixed
D) market-based; centrally planned command
Answer: B
Explanation: The rationale for economic transformation has been the same the world over. In
general, command and mixed economies failed to deliver the kind of sustained economic
performance that was achieved by countries adopting market-based systems, such as the United
States, Switzerland, Hong Kong, and Taiwan. As a consequence, even more states have gravitated
toward the market-based model.
Difficulty: 2 Medium
Topic: Differences in Economic Systems
Learning Objective: 03-02 Identify the macropolitical and macroeconomic changes occurring
worldwide.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
30
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
66) Many states in Asia, Latin America, and Western Europe have shifted away from a mixed
economy to a market-based economy. Which of the following measures is most likely to be
promoted by such states?
A) state-ownership of enterprises
B) fixing of prices by the government
C) deregulation of the economy
D) lowering competition
Answer: C
Explanation: Many states in Asia, Latin America, and Western Europe have sold state-owned
businesses to private investors (privatization) and deregulated their economies to promote greater
competition.
Difficulty: 2 Medium
Topic: Differences in Economic Systems
Learning Objective: 03-02 Identify the macropolitical and macroeconomic changes occurring
worldwide.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
67) Which of the following is a step in the shift toward a market-based economic system?
A) increasing trade barriers
B) increasing price controls
C) nationalization
D) creation of a legal system to safeguard property rights
Answer: D
Explanation: The shift toward a market-based economic system often entails a number of steps:
deregulation, privatization, and creation of a legal system to safeguard property rights.
Difficulty: 2 Medium
Topic: Differences in Economic Systems
Learning Objective: 03-03 Describe how transition economies are moving toward market-based
systems.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
31
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
68) ________ involves removing legal restrictions to the free play of markets, the establishment of
private enterprises, and the manner in which private enterprises operate.
A) Privatization
B) Developing command economies
C) Deregulation
D) Globalization
Answer: C
Explanation: Deregulation involves removing legal restrictions to the free play of markets, the
establishment of private enterprises, and the manner in which private enterprises operate.
Difficulty: 1 Easy
Topic: Government Policies Affecting Trade
Learning Objective: 03-03 Describe how transition economies are moving toward market-based
systems.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
69) ________ is seen as a way to stimulate gains in economic efficiency by giving owners a
powerful incentive—the reward of greater profits—to search for increases in productivity, to enter
new markets, and to exit losing ones.
A) Globalization
B) Economic transformation
C) Deregulation
D) Privatization
Answer: D
Explanation: Privatization is seen as a way to stimulate gains in economic efficiency by giving
new private owners a powerful incentive—the reward of greater profits—to search for increases in
productivity, to enter new markets, and to exit losing ones.
Difficulty: 2 Medium
Topic: Nationalization and Privatization of Business
Learning Objective: 03-03 Describe how transition economies are moving toward market-based
systems.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
32
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
70) ________ involves removing legal restrictions to the free play of markets, the establishment of
private enterprises, and the manner in which private enterprises operate.
A) Deregulation
B) Trade certification
C) A product law
D) A liability law
Answer: A
Explanation: Deregulation involves removing legal restrictions to the free play of markets, the
establishment of private enterprises, and the manner in which private enterprises operate.
Difficulty: 1 Easy
Topic: Government Policies Affecting Trade
Learning Objective: 03-03 Describe how transition economies are moving toward market-based
systems.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
71) Which of the following is a step involved in the deregulation of a command economy?
A) adding price controls
B) temporarily restricting international trade
C) abolishing laws regulating the establishment and operation of private enterprises
D) increasing restrictions on direct investment by foreign enterprises
Answer: C
Explanation: Deregulation involves removing legal restrictions to the free play of markets, the
establishment of private enterprises, and the manner in which private enterprises operate.
Deregulation in command economies involved removing price controls, thereby allowing prices to
be set by the interplay between demand and supply; abolishing laws regulating the establishment
and operation of private enterprises; and relaxing or removing restrictions on direct investment by
foreign enterprises and international trade.
Difficulty: 2 Medium
Topic: Government Policies Affecting Trade
Learning Objective: 03-03 Describe how transition economies are moving toward market-based
systems.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
33
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
72) Without a strong legal system in a market economy
A) the incentive to engage in economic activity can be increased substantially.
B) private-sector entrepreneurs can expropriate the profits generated by the efforts of private and
public entities.
C) mechanisms for contract enforcement fall to private and corporate lawyers.
D) private and public entities can expropriate the profits generated by the efforts of private-sector
entrepreneurs.
Answer: D
Explanation: A well-functioning market economy requires laws protecting private property
rights and providing mechanisms for contract enforcement. Without a legal system that protects
property rights, and without the machinery to enforce that system, the incentive to engage in
economic activity can be reduced substantially. Private and public entities, including organized
crime, can expropriate the profits generated by the efforts of private-sector entrepreneurs.
Difficulty: 2 Medium
Topic: Country Risk Produced by Legal Systems
Learning Objective: 03-03 Describe how transition economies are moving toward market-based
systems.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
73) Which of the following is an example of deregulation?
A) a country that implements a simplified income tax filing system
B) a country that takes over a leading private bank to prevent it from filing for bankruptcy
C) a country that provides agricultural subsidies to farmers
D) a country that encourages foreign direct investment
Answer: D
Explanation: Deregulation involves removing legal restrictions to the free play of markets, the
establishment of private enterprises, and the manner in which private enterprises operate.
Difficulty: 2 Medium
Topic: Government Policies Affecting Trade
Learning Objective: 03-03 Describe how transition economies are moving toward market-based
systems.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
34
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
74) Which of the following is a characteristic of a command economy?
A) promotion of foreign direct investment
B) allowing prices to be set by the interplay between demand and supply
C) limited international trade
D) restricted state-ownership of means of production
Answer: C
Explanation: The governments in most command economies exercised tight control over prices
and output. They also prohibited private enterprises from operating in most sectors of the
economy, severely restricted direct investment by foreign enterprises, and limited international
trade.
Difficulty: 1 Easy
Topic: Differences in Economic Systems
Learning Objective: 03-03 Describe how transition economies are moving toward market-based
systems.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
75) The finance minister of a country considers several large, state-owned iron manufacturing
units to be inefficient and a source of corruption. To generate resources for public expenditure and
promote economic growth, the government decides to auction an entire iron manufacturing plant
to sell it to a strategic investor. This process exemplifies
A) nationalization.
B) industrialization.
C) liberalization.
D) privatization.
Answer: D
Explanation: Privatization transfers the ownership of state property into the hands of private
individuals, frequently by the sale of state assets through an auction.
Difficulty: 2 Medium
Topic: Nationalization and Privatization of Business
Learning Objective: 03-03 Describe how transition economies are moving toward market-based
systems.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
35
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
76) Studies of privatization in central Europe have shown that the process often fails to deliver
predicted benefits if the newly privatized firms
A) stop receiving subsidies from the government.
B) are completely owned by private individuals.
C) are sheltered from foreign competition.
D) are allowed to restructure their operations.
Answer: C
Explanation: For privatization to work, it must also be accompanied by a more general
deregulation and opening of the economy.
Difficulty: 1 Easy
Topic: Nationalization and Privatization of Business
Learning Objective: 03-03 Describe how transition economies are moving toward market-based
systems.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
77) The sale of state assets through an auction is most likely to lead to
A) trade certification.
B) privatization.
C) nationalization.
D) market regulation.
Answer: B
Explanation: Privatization transfers the ownership of state property into the hands of private
individuals, frequently by the sale of state assets through an auction.
Difficulty: 1 Easy
Topic: Nationalization and Privatization of Business
Learning Objective: 03-03 Describe how transition economies are moving toward market-based
systems.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
36
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
78) For privatization to work, it must also be accompanied by
A) an increase in trade barriers and tariffs.
B) an increase in government subsidies.
C) stronger barriers to foreign competition.
D) a general deregulation of the economy.
Answer: D
Explanation: For privatization to work, it must also be accompanied by a more general
deregulation and opening of the economy.
Difficulty: 1 Easy
Topic: Nationalization and Privatization of Business
Learning Objective: 03-03 Describe how transition economies are moving toward market-based
systems.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
79) Which of the following factors is likely to make a country a more attractive location for
international business?
A) totalitarian regimes
B) planned economies
C) government ownership of production methods
D) market-based economic policies
Answer: D
Explanation: Countries with democratic regimes, market-based economic policies, and strong
protection of property rights are more likely to attain high and sustained economic growth rates,
and are thus a more attractive location for international business.
Difficulty: 2 Medium
Topic: Differences in Economic Systems
Learning Objective: 03-04 Explain the implications for management practice of national
difference in political economy.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
37
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
80) The benefits of doing business in a country are a function of which of the following?
A) the size of the market
B) its past wealth
C) its past growth
D) its future plans for infrastructure development
Answer: A
Explanation: In the most general sense, the long-run monetary benefits of doing business in a
country are a function of the size of the market, the present wealth of consumers in that market, and
the likely future wealth of consumers.
Difficulty: 2 Medium
Topic: The Potential, Risks, and Challenges of Emerging Markets
Learning Objective: 03-04 Explain the implications for management practice of national
difference in political economy.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
81) Sony was a pioneer in the portable music market segment. The Sony Walkman was an
innovative product that created a new category altogether and made Sony a technological leader.
This gave the company an edge over other consumer electronics brands that introduced portable
music players for a very long time. In this example, Sony had the
A) vertical integration advantage.
B) purchasing power parity advantage.
C) free-rider advantage.
D) first-mover advantage.
Answer: D
Explanation: First-mover advantages are the advantages that accrue to early entrants into a
market.
Difficulty: 2 Medium
Topic: The Potential, Risks, and Challenges of Emerging Markets
Learning Objective: 03-04 Explain the implications for management practice of national
difference in political economy.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
38
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
82) Google launched Google Plus to gain a foothold in the social media market. However, given
that there are numerous social networking platforms and Facebook is already a leader in social
media, Google Plus found it challenging to generate brand loyalty and establish itself in the
market. This was because of
A) incumbent disadvantage.
B) disintermediation disadvantage.
C) late-mover disadvantage.
D) horizontal integration disadvantage.
Answer: C
Explanation: Late-mover disadvantages are the handicaps that late entrants might suffer.
Difficulty: 2 Medium
Topic: The Potential, Risks, and Challenges of Emerging Markets
Learning Objective: 03-04 Explain the implications for management practice of national
difference in political economy.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
83) The costs of doing business in a country tend to be greater if
A) political payoffs are not required to gain market access.
B) supporting infrastructure is sponsored by government.
C) local laws set strict standards with regard to environmental pollution.
D) there are limits or caps on damage awards.
Answer: C
Explanation: The costs of doing business in a country tend to be greater where political payoffs
are required to gain market access, where supporting infrastructure is lacking or underdeveloped,
and where adhering to local laws and regulations is costly. It can also be more costly to do business
in a country like the United States, where the absence of a cap on damage awards has meant
spiraling liability insurance rates.
Difficulty: 1 Easy
Topic: Country Risk Produced by Legal Systems
Learning Objective: 03-04 Explain the implications for management practice of national
difference in political economy.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
39
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
84) ________ are the advantages gained by early entrants into a market.
A) Early-investor advantages
B) First-mover advantages
C) First-to-market advantages
D) Late-mover advantages
Answer: B
Explanation: First-mover advantages are the advantages that are gained by early entrants into a
market.
Difficulty: 1 Easy
Topic: The Potential, Risks, and Challenges of Emerging Markets
Learning Objective: 03-04 Explain the implications for management practice of national
difference in political economy.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
85) Countries with ________ economies in which property rights are protected tend to achieve
greater economic growth rates than other economies where property rights are poorly protected.
A) mixed
B) market
C) free market
D) command
Answer: C
Explanation: A country's economic system and property rights regime are reasonably good
predictors of economic prospects. Countries with free market economies in which property rights
are protected tend to achieve greater economic growth rates than command economies or
economies where property rights are poorly protected.
Difficulty: 1 Easy
Topic: Property Rights and Intellectual Property Rights
Learning Objective: 03-04 Explain the implications for management practice of national
difference in political economy.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
40
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
86) It may be more costly to do business in relatively primitive or undeveloped economies because
of
A) international trade restrictions.
B) the lack of governmental support.
C) difficulty obtaining workers.
D) the lack of infrastructure and supporting businesses.
Answer: D
Explanation: It may be more costly to do business in relatively primitive or undeveloped
economies because of the lack of infrastructure and supporting businesses. At the extreme, an
international firm may have to provide its own infrastructure and supporting business, which
obviously raises costs.
Difficulty: 1 Easy
Topic: The Potential, Risks, and Challenges of Emerging Markets
Learning Objective: 03-04 Explain the implications for management practice of national
difference in political economy.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
87) One visible indicator of ________ tends to be a country's inflation rate.
A) economic mismanagement
B) high GNI
C) political risks
D) low HDI
Answer: A
Explanation: One visible indicator of economic mismanagement tends to be a country's inflation
rate. Another is the level of business and government debt in the country.
Difficulty: 2 Medium
Topic: The Potential, Risks, and Challenges of Emerging Markets
Learning Objective: 03-04 Explain the implications for management practice of national
difference in political economy.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
41
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
88) The overall attractiveness of a country as a potential market or investment site for an
international business depends on
A) if the country has a high gross national income.
B) balancing the benefits, costs, and risks associated with doing business in that country.
C) whether the company can be the first mover in the market.
D) whether the government can be greased.
Answer: B
Explanation: The overall attractiveness of a country as a potential market or investment site for
an international business depends on balancing the benefits, costs, and risks associated with doing
business in that country.
Difficulty: 2 Medium
Topic: The Potential, Risks, and Challenges of Emerging Markets
Learning Objective: 03-04 Explain the implications for management practice of national
difference in political economy.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
89) The likelihood that a trading partner will opportunistically break a contract or expropriate
property rights is called a(n)
A) economic risk.
B) legal risk.
C) cultural risk.
D) political risk.
Answer: B
Explanation: A legal risk can be defined as the likelihood that a trading partner will
opportunistically break a contract or expropriate property rights.
Difficulty: 1 Easy
Topic: Country Risk Produced by Legal Systems
Learning Objective: 03-04 Explain the implications for management practice of national
difference in political economy.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
42
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
90) A change in political regime in a country can result in laws that ________ to international
businesses.
A) are more favorable
B) are less favorable
C) provide less incentives
D) provide more incentives
Answer: B
Explanation: A change in political regime can result in the enactment of laws that are less
favorable to international business. For example, Venezuela's Hugo Chávez pledged to improve
the lot of the poor in the country by increasing the royalties foreign companies had to pay from 1 to
30 percent of sales.
Difficulty: 1 Easy
Topic: Country Risk Produced by Legal Systems
Learning Objective: 03-04 Explain the implications for management practice of national
difference in political economy.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
91) By identifying and investing early in a potential future economic star, international firms can
________ and gain experience in that country's business practices.
A) build brand loyalty
B) learn which government officials need to receive kickbacks
C) begin to stockpile that country's currency
D) build infrastructure
Answer: A
Explanation: By identifying and investing early in a potential future economic star, international
firms may build brand loyalty and gain experience in that country's business practices.
Difficulty: 1 Easy
Topic: The Potential, Risks, and Challenges of Emerging Markets
Learning Objective: 03-04 Explain the implications for management practice of national
difference in political economy.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
43
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
92) Economic growth appears to be a function of a country's capacity for growth and its
A) previous economic success.
B) political environment.
C) free market system.
D) mixed economy.
Answer: C
Explanation: Economic growth appears to be a function of a free market system and a country's
capacity for growth.
Difficulty: 1 Easy
Topic: Economic Development
Learning Objective: 03-04 Explain the implications for management practice of national
difference in political economy.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
93) ________ are the handicaps that late entrants to a market might suffer.
A) Government regulations
B) Late-mover disadvantages
C) Black economy
D) Purchasing power disparity
Answer: B
Explanation: Late-mover disadvantages are the handicaps that late entrants might suffer. Late
entrants may find that they lack the brand loyalty and experience necessary to achieve a significant
presence in the market.
Difficulty: 1 Easy
Topic: The Potential, Risks, and Challenges of Emerging Markets
Learning Objective: 03-04 Explain the implications for management practice of national
difference in political economy.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
44
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
94) Which of the following is a first-mover advantage?
A) International firms may gain experience in that country's business practices.
B) An international firm can reap the rewards of growth in a new market without incurring the
risks.
C) A firm may have the opportunity to be the first to introduce generic brands to a market.
D) A firm can gauge how well their product will do in the market without taking the risk of
investing there.
Answer: A
Explanation: First-mover advantages are the advantages that accrue to early entrants into a
market. By identifying and investing early in a country with high potential for future growth,
international firms may build brand loyalty and gain experience in that country's business
practices. These will pay back substantial dividends if that country achieves sustained high
economic growth rates. For example, eBay was the first company to take the auction process
online. Coca-Cola was the first cola producer, and began selling its product to the public in 1886;
this has given it considerable advantage over competitors.
Difficulty: 2 Medium
Topic: The Potential, Risks, and Challenges of Emerging Markets
Learning Objective: 03-04 Explain the implications for management practice of national
difference in political economy.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
95) What is the philosophy of Amartya Sen?
Answer: Amartya Sen is a Nobel Prize–winning economist who has argued that economic
development should be assessed less by material output measures such as GNI per capita and more
by the capabilities and opportunities that people enjoy. According to Sen, development should be
seen as a process of expanding the real freedoms that people experience.
Difficulty: 3 Hard
Topic: Economic Development
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
45
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
96) Why does education lead to economic development?
Answer: Nations that invest more in education will have higher growth rates because an educated
population is a more productive population. A survey of 14 statistical studies that looked at the
relationship between a country's investment in education and its subsequent growth rates
concluded investment in education did have a positive and statistically significant impact on a
country's rate of economic growth.
Difficulty: 3 Hard
Topic: Economic Development
Learning Objective: 03-01 Explain what determines the level of economic development of a
nation.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
97) Discuss Samuel Huntington's views on Islamic fundamentalism.
Answer: According to Samuel Huntington's thesis, global terrorism is a product of the tension
between civilizations and the clash of value systems and ideology. He maintains that while many
societies may be modernizing, they are not becoming more Western. Huntington theorizes that
modernization in non-Western societies can result in a retreat toward the traditional, such as the
resurgence of Islam in many traditionally Muslim societies. According to him, the rise of Islamic
fundamentalism is a response to the alienation produced by modernization.
Difficulty: 3 Hard
Topic: Economic and Business Implications of Cultural Change
Learning Objective: 03-02 Identify the macropolitical and macroeconomic changes occurring
worldwide.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
46
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
98) Since the 1980s, there has been a transformation from centrally planned command economies
to market-based economies. What is the rationale for this transformation?
Answer: The rationale for economic transformation has been the same the world over. In general,
command and mixed economies failed to deliver the kind of sustained economic performance that
was achieved by countries adopting market-based systems, such as the United States, Switzerland,
Hong Kong, and Taiwan. As a consequence, even more states have gravitated toward the
market-based model.
Difficulty: 3 Hard
Topic: Differences in Economic Systems
Learning Objective: 03-02 Identify the macropolitical and macroeconomic changes occurring
worldwide.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
99) Is privatization by itself enough to guarantee economic growth? Why? Explain using an
example.
Answer: As privatization has proceeded around the world, it has become clear that simply selling
state-owned assets to private investors is not enough to guarantee economic growth. If the newly
privatized firms continue to receive subsidies from the state and if they are protected from foreign
competition by barriers to international trade and foreign direct investment, they will have little
incentive to restructure their operations to become more efficient. For privatization to work, it
must also be accompanied by a more general deregulation and opening of the economy. For
example, when Brazil decided to privatize its state-owned telephone monopoly, Telebrás Brazil,
the government also split the company into four independent units that were to compete with each
other and removed barriers to foreign direct investment in telecommunications services. This
action ensured that the newly privatized entities would face significant competition and thus would
have to improve their operating efficiency to survive.
Note: Examples will vary.
Difficulty: 3 Hard
Topic: Nationalization and Privatization of Business
Learning Objective: 03-03 Describe how transition economies are moving toward market-based
systems.
Bloom's: Evaluate
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
47
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
100) What are the factors that determine the long-run monetary benefits of doing business in a
country?
Answer: The long-run monetary benefits of doing business in a country are a function of the size
of the market, the present wealth (purchasing power) of consumers in that market, and the likely
future wealth of consumers. While some markets are very large when measured by number of
consumers (e.g., China and India), low living standards may imply limited purchasing power and
therefore a relatively small market when measured in economic terms.
Difficulty: 3 Hard
Topic: The Potential, Risks, and Challenges of Emerging Markets
Learning Objective: 03-04 Explain the implications for management practice of national
difference in political economy.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
101) What are the factors that determine the costs of doing business in a country?
Answer: A number of political, economic, and legal factors determine the costs of doing business
in a country. With regard to political factors, a company may have to pay off politically powerful
entities in a country before the government allows it to do business there. With regard to economic
factors, one of the most important variables is the sophistication of a country's economy. As for
legal factors, it can be more costly to do business in a country where local laws and regulations set
strict standards with regard to product safety, safety in the workplace, environmental pollution,
and the like (since adhering to such regulations is costly).
Difficulty: 3 Hard
Topic: The Potential, Risks, and Challenges of Emerging Markets
Learning Objective: 03-04 Explain the implications for management practice of national
difference in political economy.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
48
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
102) Why does doing business in a country with a relatively unsophisticated economy result in
increased costs?
Answer: One of the most important economic variables is the sophistication of a country's
economy. It may be more costly to do business in relatively primitive or undeveloped economies
because of the lack of infrastructure and supporting businesses. At the extreme, an international
firm may have to provide its own infrastructure and supporting business, which obviously raises
costs. When McDonald's decided to open its first restaurant in Moscow, it found that to serve food
and drink indistinguishable from that served in McDonald's restaurants elsewhere, it had to
vertically integrate backward to supply its own needs. The quality of Russian-grown potatoes and
meat was too poor, so to protect the quality of its product, McDonald's set up its own dairy farms,
cattle ranches, vegetable plots, and food-processing plants within Russia. This raised the cost of
doing business in Russia, relative to the cost in more sophisticated economies.
Difficulty: 3 Hard
Topic: The Potential, Risks, and Challenges of Emerging Markets
Learning Objective: 03-04 Explain the implications for management practice of national
difference in political economy.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
103) What are the factors that contribute to the risks of doing business in a country?
Answer: The risks of doing business in a country are determined by a number of political,
economic, and legal factors. Political risk has been defined as the likelihood that political forces
will cause drastic changes in a country's business environment that adversely affect the profit and
other goals of a business enterprise. An economic risk can be defined as the likelihood that
economic mismanagement will cause drastic changes in a country's business environment that hurt
the profit and other goals of a particular business enterprise. A legal risk can be defined as the
likelihood that a trading partner will opportunistically break a contract or expropriate property
rights.
Difficulty: 3 Hard
Topic: The Potential, Risks, and Challenges of Emerging Markets
Learning Objective: 03-04 Explain the implications for management practice of national
difference in political economy.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
49
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
International Business, 12e (Hill)
Chapter 4
Differences in Culture
1) In today's world of global communications, rapid transportation, and global markets, cultural
differences have ceased to exist.
Answer: FALSE
Explanation: In these days of global communications, rapid transportation, worldwide markets,
and global brands, when the era of the global village seems just around the corner, it is easy to
forget just how different various cultures really are. Underneath the veneer of modernism, deep
cultural differences often remain.
Difficulty: 1 Easy
Topic: What Is Culture?
Learning Objective: 04-01 Explain what is meant by the culture of a society.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
2) Norms are abstract ideas about what a group believes to be good, right, and desirable.
Answer: FALSE
Explanation: Norms refer to the social rules and guidelines that prescribe appropriate behavior in
particular situations.
Difficulty: 1 Easy
Topic: What Is Culture?
Learning Objective: 04-01 Explain what is meant by the culture of a society.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
3) Folkways include rituals and symbolic behavior.
Answer: TRUE
Explanation: Folkways include rituals and symbolic behavior. Rituals and symbols are the most
visible manifestations of a culture and constitute the outward expression of deeper values.
Difficulty: 1 Easy
Topic: What Is Culture?
Learning Objective: 04-01 Explain what is meant by the culture of a society.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
1
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
4) Upon meeting a foreign business executive, a Japanese executive will hold his business card in
both hands and bow while presenting the card to the foreigner. This is an example of ritual
behavior.
Answer: TRUE
Explanation: Rituals and symbols are the most visible manifestations of a culture and constitute
the outward expression of deeper values. For example, upon meeting a foreign business executive,
a Japanese executive will hold his business card in both hands and bow while presenting the card
to the foreigner.
Difficulty: 2 Medium
Topic: What Is Culture?
Learning Objective: 04-01 Explain what is meant by the culture of a society.
Bloom's: Understand
AACSB: Diversity
Accessibility: Keyboard Navigation
5) The term social strata refers to the extent to which individuals can move out of the strata into
which they were born.
Answer: FALSE
Explanation: All societies are stratified on a hierarchical basis into social categories—that is, into
social strata. These strata are typically defined on the basis of characteristics such as family
background, occupation, and income.
Difficulty: 1 Easy
Topic: Social Culture
Learning Objective: 04-02 Identify the forces that lead to differences in social culture.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
6) Education plays an important role, from an international business perspective, as a determinant
of national competitive advantage.
Answer: TRUE
Explanation: From an international business perspective, one important aspect of education is its
role as a determinant of national competitive advantage. The availability of a pool of skilled and
educated workers seems to be a major determinant of the likely economic success of a country.
Difficulty: 1 Easy
Topic: Social Culture
Learning Objective: 04-02 Identify the forces that lead to differences in social culture.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
2
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
7) Both Hindus and Buddhists stress the afterlife and spiritual achievement rather than
involvement in this world.
Answer: TRUE
Explanation: Like Hindus, Buddhists stress the afterlife and spiritual achievement rather than
involvement in this world.
Difficulty: 1 Easy
Topic: Elements of Culture
Learning Objective: 04-02 Identify the forces that lead to differences in social culture.
Bloom's: Remember
AACSB: Diversity
Accessibility: Keyboard Navigation
8) Islam is a polytheistic religion, like Christianity and Judaism.
Answer: FALSE
Explanation: Like Christianity and Judaism, Islam is a monotheistic religion. The central
principle of Islam is that there is but the one true omnipotent God.
Difficulty: 1 Easy
Topic: Elements of Culture
Learning Objective: 04-02 Identify the forces that lead to differences in social culture.
Bloom's: Remember
AACSB: Diversity
Accessibility: Keyboard Navigation
9) A caste system is a closed system of stratification in which social position is determined by the
family into which the person is born.
Answer: TRUE
Explanation: A caste system is a closed system of stratification in which social position is
determined by the family into which a person is born, and change in that position is usually not
possible during an individual's lifetime.
Difficulty: 1 Easy
Topic: Social Culture
Learning Objective: 04-02 Identify the forces that lead to differences in social culture.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
3
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
10) A class system is a rigid form of social stratification in which the position a person has by birth
cannot be changed through his or her own achievements or luck.
Answer: FALSE
Explanation: A class system is a less rigid form of social stratification in which social mobility is
possible. It is a form of open stratification in which the position a person has by birth can be
changed through his or her own achievements or luck.
Difficulty: 1 Easy
Topic: Social Culture
Learning Objective: 04-02 Identify the forces that lead to differences in social culture.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
11) An antagonistic relationship between management and labor classes may result in lower costs
of production.
Answer: FALSE
Explanation: An antagonistic relationship between management and labor classes, and the
resulting lack of cooperation and high level of industrial disruption, tends to raise the costs of
production in countries characterized by significant class divisions.
Difficulty: 2 Medium
Topic: Social Culture
Learning Objective: 04-03 Identify the business and economic implications of differences in
culture.
Bloom's: Understand
AACSB: Communication
Accessibility: Keyboard Navigation
12) Max Weber believed that Protestantism encouraged capitalism's development by emphasizing
the importance of wealth creation and frugality.
Answer: TRUE
Explanation: Weber argued that Protestant ethics emphasize the importance of hard work and
wealth creation (for the glory of God) and frugality (abstinence from worldly pleasures).
According to Weber, this kind of value system was needed to facilitate the development of
capitalism.
Difficulty: 2 Medium
Topic: Economic and Business Implications of Cultural Change
Learning Objective: 04-03 Identify the business and economic implications of differences in
culture.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
4
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
13) Individualism has led to a high degree of managerial mobility between companies resulting in
managers who have good general skills but lack company-specific experience.
Answer: TRUE
Explanation: The lack of loyalty and commitment to an individual company, and the tendency to
move on for a better offer, can result in managers who have good general skills but lack the
knowledge, experience, and network of interpersonal contacts that come from years of working
within the same company.
Difficulty: 2 Medium
Topic: Social Culture
Learning Objective: 04-03 Identify the business and economic implications of differences in
culture.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
14) In countries where the value of group identification is considered to be primary, managers and
workers are discouraged from moving from company to company.
Answer: TRUE
Explanation: The primacy of the value of group identification discourages managers and workers
from moving from company to company.
Difficulty: 2 Medium
Topic: Social Culture
Learning Objective: 04-03 Identify the business and economic implications of differences in
culture.
Bloom's: Understand
AACSB: Diversity
Accessibility: Keyboard Navigation
15) The mudarabah contract is the most widely used Islamic banking method, because it is the
easiest to implement.
Answer: FALSE
Explanation: The murabaha contract is the most widely used among the world's Islamic banks
primarily because it is the easiest to implement.
Difficulty: 1 Easy
Topic: Elements of Culture
Learning Objective: 04-03 Identify the business and economic implications of differences in
culture.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
5
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
16) Max Weber believed that devout Hindus would be less likely to engage in entrepreneurial
activity than devout Protestants.
Answer: TRUE
Explanation: Max Weber argued that the ascetic principles embedded in Hinduism do not
encourage the kind of entrepreneurial activity in pursuit of wealth creation found in Protestantism.
Given the emphasis on an ascetic lifestyle, Weber thought that devout Hindus would be less likely
to engage in entrepreneurial activity than devout Protestants.
Difficulty: 1 Easy
Topic: Social Culture
Learning Objective: 04-03 Identify the business and economic implications of differences in
culture.
Bloom's: Remember
AACSB: Diversity
Accessibility: Keyboard Navigation
17) Guanxi is an important mechanism for building long-term business relationships and getting
business done in China.
Answer: TRUE
Explanation: In a society that lacks a rule-based legal tradition, and thus legal ways of redressing
wrongs such as violations of business agreements, guanxi is an important mechanism for building
long-term business relationships and getting business done in China.
Difficulty: 1 Easy
Topic: Ethical Issues in International Business
Learning Objective: 04-03 Identify the business and economic implications of differences in
culture.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
6
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
18) Hofstede's study found that in masculine cultures, sex roles were less sharply distinguished,
and little differentiation was made between men and women in the same job.
Answer: FALSE
Explanation: Hofstede's masculinity versus femininity dimension looked at the relationship
between gender and work roles. In masculine cultures, sex roles were sharply differentiated and
traditional "masculine values," such as achievement and the effective exercise of power,
determined cultural ideals.
Difficulty: 2 Medium
Topic: Hofstede's Framework
Learning Objective: 04-04 Recognize how differences in social culture influence values in
business.
Bloom's: Understand
AACSB: Diversity
Accessibility: Keyboard Navigation
19) Hofstede's research has been criticized because it was culturally bound.
Answer: TRUE
Explanation: Hofstede's research may have been culturally bound. The research team was
composed of Europeans and Americans. Hofstede's results confirm Western stereotypes, because
it was Westerners who undertook the research.
Difficulty: 1 Easy
Topic: Hofstede's Framework
Learning Objective: 04-04 Recognize how differences in social culture influence values in
business.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
20) Hofstede's concept of power distance focused on the extent to which different cultures
socialized their members into tolerating uncertainty.
Answer: FALSE
Explanation: Hofstede's power distance dimension focused on how a society deals with the fact
that people are unequal in physical and intellectual capabilities.
Difficulty: 1 Easy
Topic: Hofstede's Framework
Learning Objective: 04-04 Recognize how differences in social culture influence values in
business.
Bloom's: Remember
AACSB: Diversity
Accessibility: Keyboard Navigation
7
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
21) According to Hofstede, the concept of Confucian dynamism captures attitudes toward time,
persistence, protection of face, and respect for tradition.
Answer: TRUE
Explanation: According to Hofstede, Confucian dynamism captures attitudes toward time,
persistence, ordering by status, protection of face, respect for tradition, and reciprocation of gifts
and favors. The label refers to these "values" being derived from Confucian teachings.
Difficulty: 1 Easy
Topic: Hofstede's Framework
Learning Objective: 04-04 Recognize how differences in social culture influence values in
business.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
22) The convergence hypothesis states that there is a slow but steady merging occurring across
different cultures toward some universally accepted values and norms.
Answer: TRUE
Explanation: With regard to globalization, some have argued that advances in transportation and
communication technologies are helping to create conditions for the merging or convergence of
cultures. There may be, in other words, a slow but steady convergence occurring across different
cultures toward some universally accepted values and norms: This is known as the convergence
hypothesis.
Difficulty: 1 Easy
Topic: Economic and Business Implications of Cultural Change
Learning Objective: 04-05 Demonstrate an appreciation for the economic and business
implications of cultural change.
Bloom's: Remember
AACSB: Diversity
Accessibility: Keyboard Navigation
8
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
23) International businesses that are ill-informed about the practices of another culture are likely to
fail.
Answer: TRUE
Explanation: International businesses that are ill-informed about the practices of another culture
are likely to fail. Doing business in different cultures requires adaptation to conform to the value
systems and norms of that culture.
Difficulty: 1 Easy
Topic: The Nature of Cross-Cultural Risk
Learning Objective: 04-05 Demonstrate an appreciation for the economic and business
implications of cultural change.
Bloom's: Remember
AACSB: Diversity
Accessibility: Keyboard Navigation
24) The value systems and norms of a country are unrelated to the costs of doing business in that
country.
Answer: FALSE
Explanation: The value systems and norms of a country influence the costs of doing business in
that country. The costs of doing business in a country influence the ability of firms to establish a
competitive advantage in the global marketplace.
Difficulty: 1 Easy
Topic: The Nature of Cross-Cultural Risk
Learning Objective: 04-05 Demonstrate an appreciation for the economic and business
implications of cultural change.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
25) Because of its individualistic mind-set, Japanese culture is more supportive of entrepreneurial
activities than American culture.
Answer: FALSE
Explanation: It has been argued that the Japanese culture is less supportive of entrepreneurial
activities than, say, American culture. In many ways, entrepreneurial activity is a product of an
individualistic mind-set, which is not a classic characteristic of the Japanese.
Difficulty: 1 Easy
Topic: The Nature of Cross-Cultural Risk
Learning Objective: 04-05 Demonstrate an appreciation for the economic and business
implications of cultural change.
Bloom's: Remember
AACSB: Diversity
Accessibility: Keyboard Navigation
9
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
26) Culture is
A) static.
B) not static.
C) unchanging.
D) abstract.
Answer: B
Explanation: Culture is not static. It can and does evolve, although the rate at which culture can
change is the subject of some dispute.
Difficulty: 1 Easy
Topic: What Is Culture?
Learning Objective: 04-01 Explain what is meant by the culture of a society.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
27) The term ________ refers to a group of people sharing a common set of values and norms.
A) mores
B) society
C) culture
D) folkway
Answer: B
Explanation: The term society refers to a group of people sharing a common set of values and
norms. While a society may be equivalent to a country, some countries harbor several societies or
subcultures (i.e., they support multiple cultures), and some societies embrace more than one
country and are often viewed as culturally being a part of one society for the purpose of a
multinational corporation engaging in that marketplace.
Difficulty: 1 Easy
Topic: What Is Culture?
Learning Objective: 04-01 Explain what is meant by the culture of a society.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
10
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
28) Cross-cultural literacy refers to
A) an individual's self-concept derived from perceived membership in a relevant social group.
B) the phenomenon of merging and converging cultures.
C) abstract ideas about what a group believes to be good, right, and desirable.
D) an understanding of how cultural differences can affect business.
Answer: D
Explanation: Cross-cultural literacy refers to an understanding of how cultural differences across
and within nations can affect the way business is practiced.
Difficulty: 1 Easy
Topic: What Is Culture?
Learning Objective: 04-01 Explain what is meant by the culture of a society.
Bloom's: Remember
AACSB: Diversity
Accessibility: Keyboard Navigation
29) ________ include such factors as indictments against theft, adultery, incest, and cannibalism.
A) Norms
B) Folkways
C) Mores
D) Values
Answer: C
Explanation: Mores include such factors as indictments against theft, adultery, incest, and
cannibalism.
Difficulty: 1 Easy
Topic: What Is Culture?
Learning Objective: 04-01 Explain what is meant by the culture of a society.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
11
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
30) ________ is/are best defined as shared assumptions about how things ought to be.
A) Norms
B) Values
C) Society
D) Culture
Answer: B
Explanation: Values refer to abstract ideas about what a group believes to be good, right, and
desirable. Put differently, values are shared assumptions about how things ought to be.
Difficulty: 1 Easy
Topic: What Is Culture?
Learning Objective: 04-01 Explain what is meant by the culture of a society.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
31) The system of values and norms that are shared among a group of people and that when taken
together constitute a design for living best defines
A) society.
B) value systems.
C) principles.
D) culture.
Answer: D
Explanation: Culture is a system of values and norms that are shared among a group of people
and that when taken together constitute a design for living.
Difficulty: 1 Easy
Topic: What Is Culture?
Learning Objective: 04-01 Explain what is meant by the culture of a society.
Bloom's: Remember
AACSB: Diversity
Accessibility: Keyboard Navigation
12
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
32) Social rules and guidelines that prescribe appropriate behavior in particular situations are best
described as
A) norms.
B) values.
C) culture.
D) society.
Answer: A
Explanation: Norms refer to the social rules and guidelines that prescribe appropriate behavior in
particular situations.
Difficulty: 1 Easy
Topic: What Is Culture?
Learning Objective: 04-01 Explain what is meant by the culture of a society.
Bloom's: Remember
AACSB: Diversity
Accessibility: Keyboard Navigation
33) People who share a common set of values and norms form a
A) culture.
B) society.
C) country.
D) caste.
Answer: B
Explanation: Society refers to a group of people who share a common set of values and norms.
Difficulty: 1 Easy
Topic: What Is Culture?
Learning Objective: 04-01 Explain what is meant by the culture of a society.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
13
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
34) Even if a ________ can be characterized as having a single homogeneous culture, often that
national culture is a mosaic of subcultures.
A) culture.
B) country.
C) society.
D) norm.
Answer: B
Explanation: The relationship between culture and country is often ambiguous. Even if a country
can be characterized as having a single homogeneous culture, often that national culture is a
mosaic of subcultures. To abide by these cultural nuances, businesspeople should be aware of the
delicate issues pertaining to folkways.
Difficulty: 1 Easy
Topic: What Is Culture?
Learning Objective: 04-01 Explain what is meant by the culture of a society.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
35) ________ are the routine conventions of everyday life.
A) Folkways
B) Mores
C) Rites
D) Beliefs
Answer: A
Explanation: Folkways are the routine conventions of everyday life. They are social conventions
concerning things such as the appropriate dress code in a particular situation, good social manners,
eating with the correct utensils, neighborly behavior, and the like.
Difficulty: 1 Easy
Topic: What Is Culture?
Learning Objective: 04-01 Explain what is meant by the culture of a society.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
14
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
36) When Jana visits her mother, she takes great pains to watch her language and use good
manners because that is what her mother expects of her. This demonstrates the concept of
A) folkways.
B) mores.
C) rites.
D) beliefs.
Answer: A
Explanation: Folkways are the routine conventions of everyday life. They are social conventions
concerning things such as the appropriate dress code in a particular situation, good social manners,
eating with the correct utensils, neighborly behavior, and the like.
Difficulty: 1 Easy
Topic: What Is Culture?
Learning Objective: 04-01 Explain what is meant by the culture of a society.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
37) The term ________ also means culture.
A) folkway
B) society
C) country
D) norm
Answer: B
Explanation: The relationship between culture and country is often ambiguous. Even if a country
can be characterized as having a single homogeneous culture, often that national culture is a
mosaic of subcultures. To abide by these cultural nuances, businesspeople should be aware of the
delicate issues pertaining to folkways.
Difficulty: 1 Easy
Topic: What Is Culture?
Learning Objective: 04-01 Explain what is meant by the culture of a society.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
15
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
38) ________ are social conventions concerning things such as the appropriate dress code in a
particular situation, good social manners, eating with the correct utensils, neighborly behavior, and
the like.
A) Values
B) Beliefs
C) Mores
D) Folkways
Answer: D
Explanation: Folkways are the routine conventions of everyday life. They are social conventions
concerning things such as the appropriate dress code in a particular situation, good social manners,
eating with the correct utensils, neighborly behavior, and the like.
Difficulty: 1 Easy
Topic: What Is Culture?
Learning Objective: 04-01 Explain what is meant by the culture of a society.
Bloom's: Remember
AACSB: Diversity
Accessibility: Keyboard Navigation
39) An act as simple as shaking hands when meeting new people is an example of
A) values.
B) symbolic behavior.
C) mores.
D) social stratification.
Answer: B
Explanation: Folkways include rituals and symbolic behavior. Rituals and symbols are the most
visible manifestations of a culture and constitute the outward expression of deeper values.
Difficulty: 2 Medium
Topic: What Is Culture?
Learning Objective: 04-01 Explain what is meant by the culture of a society.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
16
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
40) A Japanese executive's ritual of presenting a business card to a foreign business executive is an
example of
A) mores.
B) a values.
C) an attitudes.
D) a folkways.
Answer: D
Explanation: Folkways are the routine conventions of everyday life. Folkways include rituals and
symbolic behavior. For example, upon meeting a foreign business executive, a Japanese executive
will hold his or her business card in both hands and bow while presenting the card to the foreigner.
Difficulty: 2 Medium
Topic: What Is Culture?
Learning Objective: 04-01 Explain what is meant by the culture of a society.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
41) Mores are
A) the norms that are seen as central to the functioning of a society and its social life.
B) the routine conventions of everyday life.
C) abstract ideas about what a group believes to be right, good, and desirable.
D) the social rules and guidelines that prescribe appropriate behavior in particular situations.
Answer: A
Explanation: Mores is a term that refers to norms that are more widely observed, have greater
moral significance than other norms, and are central to the functioning of a society and to its social
life. Accordingly, violating mores can bring serious retribution.
Difficulty: 1 Easy
Topic: What Is Culture?
Learning Objective: 04-01 Explain what is meant by the culture of a society.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
17
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
42) Brad has been in trouble his whole life. He stole from the local hardware store when he was 12,
and as an adult he didn't feel the need to be faithful to his wife. Brad is guilty of violating
A) mores.
B) folkways.
C) ethics.
D) values.
Answer: A
Explanation: Mores is a term that refers to norms that are more widely observed, have greater
moral significance than other norms, and are central to the functioning of a society and to its social
life. Accordingly, violating mores can bring serious retribution.
Difficulty: 1 Easy
Topic: What Is Culture?
Learning Objective: 04-01 Explain what is meant by the culture of a society.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
43) ________ are typically defined on the basis of characteristics such as family background,
occupation, and income.
A) Social strata
B) Norms
C) Social structure
D) Groups
Answer: A
Explanation: All societies are stratified on a hierarchical basis into social categories—that is,
into social strata. These strata are typically defined on the basis of socioeconomic characteristics
such as family background, occupation, and income.
Difficulty: 1 Easy
Topic: What Is Culture?
Learning Objective: 04-02 Identify the forces that lead to differences in social culture.
Bloom's: Remember
AACSB: Diversity
Accessibility: Keyboard Navigation
18
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
44) A major difference between Buddhism and Hinduism is that unlike Hinduism, Buddhism
A) does not support the caste system.
B) emphasizes wealth creation.
C) promotes blind loyalty to employers.
D) supports extreme ascetic behavior.
Answer: A
Explanation: Unlike Hinduism, Buddhism does not support the caste system. Nor does
Buddhism advocate the kind of extreme ascetic behavior that is encouraged by Hinduism.
Difficulty: 2 Medium
Topic: Elements of Culture
Learning Objective: 04-02 Identify the forces that lead to differences in social culture.
Bloom's: Understand
AACSB: Diversity
Accessibility: Keyboard Navigation
45) A ________ is an association of two or more individuals who have a shared sense of identity
and who interact with each other in structured ways on the basis of a common set of expectations
about each other's behavior.
A) society
B) collective
C) social strata
D) group
Answer: D
Explanation: A group is an association of two or more individuals who have a shared sense of
identity and who interact with each other in structured ways on the basis of a common set of
expectations about each other's behavior.
Difficulty: 2 Medium
Topic: Elements of Culture
Learning Objective: 04-02 Identify the forces that lead to differences in social culture.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
19
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
46) A society's social structure refers to its
A) system of values and norms.
B) basic social organization.
C) religious practices.
D) educational infrastructure.
Answer: B
Explanation: A society's social structure refers to its basic social organization.
Difficulty: 1 Easy
Topic: Social Culture
Learning Objective: 04-02 Identify the forces that lead to differences in social culture.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
47) The social organization of Western society tends to emphasize on
A) a group orientation.
B) collectivist values.
C) individual achievement.
D) work groups.
Answer: C
Explanation: In general, Western societies tend to emphasize the importance of the individual,
whereas groups tend to figure much larger in many other societies.
Difficulty: 1 Easy
Topic: Social Culture
Learning Objective: 04-02 Identify the forces that lead to differences in social culture.
Bloom's: Remember
AACSB: Diversity
Accessibility: Keyboard Navigation
20
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
48) Which of the following refers to the extent to which individuals can move out of the strata into
which they are born?
A) caste stratification
B) class system
C) social mobility
D) individual potential
Answer: C
Explanation: The term social mobility refers to the extent to which individuals can move out of
the strata into which they are born. Social mobility varies significantly from society to society. The
most rigid system of stratification is a caste system.
Difficulty: 1 Easy
Topic: Social Culture
Learning Objective: 04-02 Identify the forces that lead to differences in social culture.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
49) Hindus believe
A) that there is but the one true omnipotent God.
B) in reincarnation, or rebirth into a different body, after death.
C) in the importance of individual religious freedom.
D) that a material quest is more important than a spiritual quest.
Answer: B
Explanation: Hindus believe in reincarnation, or rebirth into a different body, after death. Hindus
also believe in karma, the spiritual progression of each person's soul.
Difficulty: 2 Medium
Topic: Elements of Culture
Learning Objective: 04-02 Identify the forces that lead to differences in social culture.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
21
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
50) Which of the following is a closed system of stratification in which social position is
determined by the family into which a person is born, and change in that position is usually not
possible during an individual's lifetime?
A) caste system
B) class system
C) social system
D) cultural system
Answer: A
Explanation: A caste system is a closed system of stratification in which social position is
determined by the family into which a person is born, and change in that position is usually not
possible during an individual's lifetime.
Difficulty: 1 Easy
Topic: Social Culture
Learning Objective: 04-02 Identify the forces that lead to differences in social culture.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
51) A ________ is a less rigid form of social stratification in which social mobility is possible.
A) caste system
B) normative system
C) religious system
D) class system
Answer: D
Explanation: A class system is a less rigid form of social stratification in which social mobility is
possible.
Difficulty: 1 Easy
Topic: Social Culture
Learning Objective: 04-02 Identify the forces that lead to differences in social culture.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
22
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
52) Which of the following statements is true about a class system?
A) A class system is a more rigid form of social stratification, compared to a caste system.
B) A class system is a closed form of stratification.
C) Social mobility within a class system varies from society to society.
D) In a class system, social position is determined at birth and cannot be changed during an
individual's lifetime.
Answer: C
Explanation: A class system is a less rigid form of social stratification in which social mobility is
possible. While many societies have class systems, social mobility within a class system varies
from society to society.
Difficulty: 2 Medium
Topic: Social Culture
Learning Objective: 04-02 Identify the forces that lead to differences in social culture.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
53) According to ________, suffering originates in people's desires for pleasure.
A) Hinduism
B) Protestantism
C) Buddhism
D) Judaism
Answer: C
Explanation: According to Buddhism, suffering originates in people's desires for pleasure.
Cessation of suffering can be achieved by following a path for transformation.
Difficulty: 2 Medium
Topic: Elements of Culture
Learning Objective: 04-02 Identify the forces that lead to differences in social culture.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
23
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
54) A caste system differs from a class system because
A) a caste system is an open system of stratification, while a class system is a closed system of
stratification.
B) it is not possible for an individual to change his or her caste, while a class system allows people
to change their class through individual achievement.
C) the social mobility in caste systems varies from society to society, while in a class system there
is no social mobility.
D) a caste system is a less rigid form of social stratification, while a class system is a
comparatively more rigid form of social stratification.
Answer: B
Explanation: A caste system is a closed system of stratification in which social position is
determined by the family into which a person is born, and change in that position is usually not
possible during an individual's lifetime. A class system is a form of open stratification in which the
position a person has by birth can be changed through his or her own achievements or luck.
Difficulty: 2 Medium
Topic: Social Culture
Learning Objective: 04-02 Identify the forces that lead to differences in social culture.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
55) Ethical systems are
A) a set of moral principles, or values, that are used to guide and shape behavior.
B) shared beliefs and rituals that are concerned with the realm of the sacred.
C) routine conventions of everyday life.
D) social rules that govern people's actions toward each other.
Answer: A
Explanation: Ethical systems refer to a set of moral principles, or values, that are used to guide
and shape behavior.
Difficulty: 1 Easy
Topic: Elements of Culture
Learning Objective: 04-02 Identify the forces that lead to differences in social culture.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
24
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
56) Religion may be defined as
A) routine conventions of everyday life.
B) social rules that govern people's actions toward each other.
C) shared beliefs and rituals that are concerned with the realm of the sacred.
D) a set of moral principles, or values, that are used to guide and shape behavior.
Answer: C
Explanation: Religion may be defined as a system of shared beliefs and rituals that are concerned
with the realm of the sacred.
Difficulty: 1 Easy
Topic: Elements of Culture
Learning Objective: 04-02 Identify the forces that lead to differences in social culture.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
57) Hinduism and Buddhism both stress the importance of
A) the caste system.
B) the afterlife.
C) Confucian ethics.
D) life on earth.
Answer: B
Explanation: Hinduism and Buddhism both stress the importance of the afterlife.
Difficulty: 1 Easy
Topic: Social Culture
Learning Objective: 04-02 Identify the forces that lead to differences in social culture.
Bloom's: Remember
AACSB: Diversity
Accessibility: Keyboard Navigation
25
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
58) Max Weber theorized that there was a relationship between Protestantism and the emergence
of modern capitalism because
A) Protestant ethics emphasize the importance of hard work and wealth creation and frugality.
B) Protestantism promotes the hierarchical domination of religious and social life.
C) Protestantism states that spiritual growth is more important than material wealth.
D) Protestantism promotes blind loyalty to employers.
Answer: A
Explanation: Weber argued that Protestant ethics emphasize the importance of hard work and
wealth creation (for the glory of God) and frugality (abstinence from worldly pleasures).
According to Weber, this kind of value system was needed to facilitate the development of
capitalism.
Difficulty: 2 Medium
Topic: Philosophical Approaches to Ethics
Learning Objective: 04-03 Identify the business and economic implications of differences in
culture.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
59) The concept of mobility between castes within an individual's lifetime
A) is an opportunity to adopt positions of responsibility and influence in society.
B) makes no sense to traditional Hindus.
C) shows a figurative "reincarnation" of a person.
D) is a sign of spiritual progression to traditional Hindus.
Answer: B
Explanation: Historically, Hinduism supported India's caste system. The concept of mobility
between castes within an individual's lifetime makes no sense to traditional Hindus. Hindus see
mobility between castes as something that is achieved through spiritual progression and
reincarnation. An individual can be reborn into a higher caste in his or her next life if he or she
achieves spiritual development in this life.
Difficulty: 1 Easy
Topic: Economic and Business Implications of Cultural Change
Learning Objective: 04-03 Identify the business and economic implications of differences in
culture.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
26
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
60) Max Weber was a German sociologist who, in 1904, made the connection between ________
and "the spirit of capitalism."
A) Protestant ethics
B) ethnocentrism
C) cross-cultural literacy
D) collectivism
Answer: A
Explanation: Max Weber was a German sociologist who, in 1904, made the connection between
Protestant ethics and "the spirit of capitalism."
Difficulty: 1 Easy
Topic: Ethical Issues in International Business
Learning Objective: 04-03 Identify the business and economic implications of differences in
culture.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
61) Which of the following statements about the use of spoken language is true?
A) The nature of a language has no effect on the way we perceive the world.
B) The language of a society does not direct the attention of its members to certain features of the
world rather than others.
C) Countries with more than one language often only have one culture.
D) Most people prefer to converse in their own language rather than English.
Answer: D
Explanation: Most people prefer to converse in their own language, and being able to speak the
local language can build rapport, which may be very important for a business deal.
Difficulty: 1 Easy
Topic: How Language Affects Culture?
Learning Objective: 04-03 Identify the business and economic implications of differences in
culture.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
27
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
62) A condition where people tend to perceive themselves in terms of their class background and
this shapes their relationships with members of other classes is known as
A) class stratification.
B) social mobility.
C) class mobility.
D) class consciousness.
Answer: D
Explanation: Class consciousness refers to a condition where people tend to perceive themselves
in terms of their class background, and this shapes their relationships with members of other
classes.
Difficulty: 1 Easy
Topic: Social Culture
Learning Objective: 04-03 Identify the business and economic implications of differences in
culture.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
63) An upper-middle-class manager tends to have hostile relationships with the working-class
employees in the firm because of his tendency to perceive himself as superior to them based on his
class background. In this example, the manager exhibits
A) class consciousness.
B) cultural awareness.
C) social mobility.
D) group orientation.
Answer: A
Explanation: Class consciousness refers to a condition where people tend to perceive themselves
in terms of their class background, and this shapes their relationships with members of other
classes.
Difficulty: 2 Medium
Topic: Social Culture
Learning Objective: 04-03 Identify the business and economic implications of differences in
culture.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
28
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
64) There are three values central to the Confucian system of ethics that have very important
economic implications. Which of the following is one of these values?
A) filial piety
B) rule-based law
C) humaneness
D) honesty in dealings with others
Answer: D
Explanation: The influence of Confucian ethics on the culture of China, Japan, South Korea, and
Taiwan, by lowering the costs of doing business in those countries, may help explain their
economic success. In this regard, three values central to the Confucian system of ethics are of
particular interest: loyalty, reciprocal obligations, and honesty in dealings with others.
Difficulty: 1 Easy
Topic: Elements of Culture
Learning Objective: 04-03 Identify the business and economic implications of differences in
culture.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
65) Which of the following sociologists made a connection between Protestant ethics and "the
spirit of capitalism"?
A) Karl Marx
B) Max Weber
C) Amartya Sen
D) Adam Smith
Answer: B
Explanation: In 1904, a German sociologist, Max Weber, made a connection between Protestant
ethics and "the spirit of capitalism" that has since become famous. Weber theorized that there was
a relationship between Protestantism and the emergence of modern capitalism.
Difficulty: 1 Easy
Topic: Philosophical Approaches to Ethics
Learning Objective: 04-03 Identify the business and economic implications of differences in
culture.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
29
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
66) According to Islam, those who hold property are regarded as
A) trustees.
B) owners.
C) tenants.
D) speculators.
Answer: A
Explanation: The protection of the right to private property is also embedded within Islam,
although Islam asserts that all property is a favor from Allah (God), who created and so owns
everything. Those who hold property are regarded as trustees rather than owners in the Western
sense of the word.
Difficulty: 1 Easy
Topic: Ethics and Social Responsibility
Learning Objective: 04-03 Identify the business and economic implications of differences in
culture.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
67) The emphasis on individualism in the United States results in which of the following
advantages?
A) Managers tend to develop good general skills as well as company-specific experience.
B) Teams are built within an organization to perform collective tasks.
C) Executives are exposed to different ways of doing business.
D) It is easy to achieve cooperation—both within a company and between companies.
Answer: C
Explanation: One positive aspect of high managerial mobility is that executives are exposed to
different ways of doing business.
Difficulty: 2 Medium
Topic: Social Culture
Learning Objective: 04-03 Identify the business and economic implications of differences in
culture.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
30
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
68) Which of the following observations is correct?
A) The economic principles established in the Koran are against free enterprise.
B) The economic principles of Islam prohibit the payment or receipt of interest.
C) The Koran speaks disapprovingly of earning legitimate profit through trade and commerce.
D) Protection of the right to private property is not acceptable within Islam.
Answer: B
Explanation: One economic principle of Islam prohibits the payment or receipt of interest, which
is considered usury. This is not just a matter of theology; in several Islamic states, it is also a matter
of law.
Difficulty: 2 Medium
Topic: Economic and Business Implications of Cultural Change
Learning Objective: 04-03 Identify the business and economic implications of differences in
culture.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
69) Under the mudarabah banking system, when an Islamic bank lends money to a business
A) it charges that business interest on the loan.
B) the business needs to pay back the loan with an additional markup.
C) it has to donate the interest received on the loan to a charitable trust.
D) it takes a share in the profits that are derived from the investment.
Answer: D
Explanation: A mudarabah contract is similar to a profit-sharing scheme. Under mudarabah,
when an Islamic bank lends money to a business, rather than charging that business interest on the
loan, it takes a share in the profits that are derived from the investment.
Difficulty: 1 Easy
Topic: Economic and Business Implications of Cultural Change
Learning Objective: 04-03 Identify the business and economic implications of differences in
culture.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
31
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
70) Which of the following statements is true about the murabaha contract?
A) Under the murabaha contract, when an Islamic bank lends money to a business it takes a share
in the profits that are derived from the investment.
B) Under the murabaha contract, money deposited in a savings account is treated as an equity
investment in whatever activity the bank uses the capital for.
C) The murabaha contract is widely used among the world's Islamic banks because it is the easiest
to implement.
D) The murabaha contract is a more efficient system than the Western banking system since it
encourages both long-term savings and long-term investment.
Answer: C
Explanation: The murabaha contract is the most widely used among the world's Islamic banks,
primarily because it is the easiest to implement.
Difficulty: 2 Medium
Topic: Elements of Culture
Learning Objective: 04-03 Identify the business and economic implications of differences in
culture.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
71) In countries where the value of ________ identification is considered to be primary, managers
and workers are discouraged from moving from company to company.
A) individual
B) group
C) cultural
D) primary
Answer: B
Explanation: The primacy of the value of group identification discourages managers and workers
from moving from company to company.
Difficulty: 2 Medium
Topic: Social Culture
Learning Objective: 04-03 Identify the business and economic implications of differences in
culture.
Bloom's: Understand
AACSB: Diversity
Accessibility: Keyboard Navigation
32
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
72) The ________ dimension of Hofstede's study explores how a society deals with the fact that
people are unequal in physical and intellectual capabilities.
A) power distance
B) individualism versus collectivism
C) uncertainty avoidance
D) masculinity versus femininity
Answer: A
Explanation: Hofstede's power distance dimension focused on how a society deals with the fact
that people are unequal in physical and intellectual capabilities.
Difficulty: 1 Easy
Topic: Hofstede's Framework
Learning Objective: 04-04 Recognize how differences in social culture influence values in
business.
Bloom's: Remember
AACSB: Diversity
Accessibility: Keyboard Navigation
73) Martin worried a lot about his job, which he chose specifically because it was very structured
with clear rules and regulations. He carefully planned his career to maximize job security and
retirement benefits. Martin would rate high on which of Hofstede's four dimensions?
A) power distance
B) individualism versus collectivism
C) uncertainty avoidance
D) masculinity versus femininity
Answer: C
Explanation: Hofstede's uncertainty avoidance dimension measured the extent to which different
cultures socialized their members into accepting ambiguous situations and tolerating uncertainty.
Members of high uncertainty avoidance cultures placed a premium on job security, career patterns,
retirement benefits, and so on. They also had a strong need for rules and regulations; the manager
was expected to issue clear instructions, and subordinates' initiatives were tightly controlled.
Difficulty: 3 Hard
Topic: Hofstede's Framework
Learning Objective: 04-04 Recognize how differences in social culture influence values in
business.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
33
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
74) The individualism versus collectivism dimension of Hofstede's study explored
A) the extent to which different cultures socialized their members into accepting ambiguous
situations and tolerating uncertainty.
B) the relationship between gender and work roles.
C) how a society deals with the fact that people are unequal in physical and intellectual
capabilities.
D) the relationship between the individual and his or her fellows.
Answer: D
Explanation: The individualism versus collectivism dimension focused on the relationship
between the individual and his or her fellows.
Difficulty: 1 Easy
Topic: Hofstede's Framework
Learning Objective: 04-04 Recognize how differences in social culture influence values in
business.
Bloom's: Remember
AACSB: Diversity
Accessibility: Keyboard Navigation
75) Hofstede's uncertainty avoidance dimension considered
A) the extent to which different cultures socialized their members into accepting ambiguous
situations and tolerating uncertainty.
B) the relationship between gender and work roles.
C) how a society deals with the fact that people are unequal in physical and intellectual
capabilities.
D) the relationship between the individual and his or her fellows.
Answer: A
Explanation: Hofstede's uncertainty avoidance dimension measured the extent to which different
cultures socialized their members into accepting ambiguous situations and tolerating uncertainty.
Difficulty: 1 Easy
Topic: Hofstede's Framework
Learning Objective: 04-04 Recognize how differences in social culture influence values in
business.
Bloom's: Remember
AACSB: Diversity
Accessibility: Keyboard Navigation
34
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
76) The ________ is a research project spanning more than 100 countries that explores people's
values and norms, how they change over time, and what impact they have in society and business.
A) World Values Survey
B) Global Leadership and Organization Behavior Effectiveness Instrument
C) Indulgence Versus Restraints Survey
D) Chinese Value Survey
Answer: A
Explanation: The World Values Survey (WVS) includes dimensions for support for democracy;
tolerance of foreigners and ethnic minorities; support for gender equality; the role of religion and
changing levels of religiosity; the impact of globalization; attitudes toward the environment, work,
family, politics, national identity, culture, diversity, and insecurity; and subjective well-being.
Difficulty: 2 Medium
Topic: Hofstede's Framework
Learning Objective: 04-04 Recognize how differences in social culture influence values in
business.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
77) According to Geert Hofstede's study, which of the following cultural dimensions would be
characterized by a greater readiness to take risks and less emotional resistance to change?
A) high power distance cultures
B) low uncertainty avoidance
C) high collectivism
D) low power distance cultures
Answer: B
Explanation: Hofstede's uncertainty avoidance dimension measured the extent to which different
cultures socialized their members into accepting ambiguous situations and tolerating uncertainty.
Lower uncertainty avoidance cultures were characterized by a greater readiness to take risks and
less emotional resistance to change.
Difficulty: 2 Medium
Topic: Hofstede's Framework
Learning Objective: 04-04 Recognize how differences in social culture influence values in
business.
Bloom's: Apply
AACSB: Diversity
Accessibility: Keyboard Navigation
35
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
78) The ________ instrument is designed to address the notion that a leader's effectiveness is
contextual. It is embedded in the societal and organizational norms, values, and beliefs of the
people being led.
A) GLOBE
B) WVS
C) IND
D) CVS
Answer: B
Explanation: The GLOBE research established nine cultural dimensions: power distance,
uncertainty avoidance, humane orientation, institutional collectivism, in-group collectivism,
assertiveness, gender egalitarianism, future orientation, and performance orientation.
Difficulty: 2 Medium
Topic: Hofstede's Framework
Learning Objective: 04-04 Recognize how differences in social culture influence values in
business.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
79) The ________ refers to the extent to which a culture programs its citizens to accept delayed
gratification of their material, social, and emotional needs.
A) long-term versus short-term orientation dimension
B) indulgence versus restraint dimension
C) uncertainty avoidance
D) power distance dimension
Answer: A
Explanation: The long-term versus short-term orientation dimension captures attitudes toward
time, persistence, ordering by status, protection of face, respect for tradition, and reciprocation of
gifts and favors. The label refers to these "values" being derived from Confucian teachings.
Difficulty: 2 Medium
Topic: Hofstede's Framework
Learning Objective: 04-04 Recognize how differences in social culture influence values in
business.
Bloom's: Apply
AACSB: Ethics
Accessibility: Keyboard Navigation
36
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
80) ________ refers to a society that allows relatively free gratification of basic and natural human
drives related to enjoying life and having fun.
A) Persistence
B) Indulgence
C) Reciprocation
D) Restraint
Answer: B
Explanation: Indulgence refers to a society that allows relatively free gratification of basic and
natural human drives related to enjoying life and having fun. Restraint refers to a society that
suppresses gratification of needs and regulates it by means of strict social norms.
Difficulty: 1 Easy
Topic: Social Culture
Learning Objective: 04-04 Recognize how differences in social culture influence values in
business.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
81) Hofstede's ________ dimension measured the extent to which different cultures socialized
their members into accepting and tolerating ambiguity.
A) power distance
B) long-term versus short-term orientation
C) uncertainty avoidance
D) indulgence versus restraint
Answer: C
Explanation: Hofstede's uncertainty avoidance dimension measured the extent to which different
cultures socialized their members into accepting ambiguous situations and tolerating uncertainty.
Difficulty: 1 Easy
Topic: Hofstede's Framework
Learning Objective: 04-04 Recognize how differences in social culture influence values in
business.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
37
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
82) Hofstede's results, as might be expected, showed that nations such as ________ scored low on
long-term orientation.
A) the United States and Canada
B) Denmark and Sweden
C) Japan and Thailand
D) Great Britain and Mexico
Answer: A
Explanation: Hofstede's results, as might be expected, showed that nations such as the United
States and Canada scored low on long-term orientation.
Difficulty: 2 Medium
Topic: Hofstede's Framework
Learning Objective: 04-04 Recognize how differences in social culture influence values in
business.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
83) Hofstede's masculinity versus femininity dimension looked at the relationship between gender
and work roles and found that in
A) feminine cultures, sex roles were sharply differentiated, and traditional "feminine values"
determined cultural ideals.
B) feminine cultures, sex roles were less sharply distinguished; however, there was a great deal of
differentiation between men and women in the same job.
C) masculine cultures, sex roles were less sharply distinguished, and little differentiation was
made between men and women in the same job.
D) masculine cultures, sex roles were sharply differentiated, and traditional "masculine values"
determined cultural ideals.
Answer: D
Explanation: Hofstede's masculinity versus femininity dimension looked at the relationship
between gender and work roles and found that in masculine cultures, sex roles were sharply
differentiated, and traditional "masculine values," such as achievement and the effective exercise
of power, determined cultural ideals. In feminine cultures, sex roles were less sharply
distinguished, and little differentiation was made between men and women in the same job.
Difficulty: 2 Medium
Topic: Hofstede's Framework
Learning Objective: 04-04 Recognize how differences in social culture influence values in
business.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
38
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
84) Hofstede's dimension of Confucian work dynamism
A) captures attitudes toward time, persistence, ordering by status, protection of face, respect for
tradition, and reciprocation of gifts and favors.
B) focuses on how a society deals with the fact that people are unequal in physical and intellectual
capabilities.
C) explores the relationship between the individual and his or her fellows.
D) looks at the relationship between gender and the ability to accept ambiguous situations.
Answer: A
Explanation: According to Hofstede, Confucian dynamism captures attitudes toward time,
persistence, ordering by status, protection of face, respect for tradition, and reciprocation of gifts
and favors.
Difficulty: 1 Easy
Topic: Hofstede's Framework
Learning Objective: 04-04 Recognize how differences in social culture influence values in
business.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
85) Which of the following is an example of ethnocentrism?
A) A manager in India looks down upon his subordinates because they are from a lower caste,
compared to him.
B) An upper-middle-class woman talks rudely to a salesperson, because she looks down upon
individuals belonging to the working class.
C) An American manager criticizes the cultural practices of Saudi Arabia, when he is sent there on
business, because it differs from his own cultural norms.
D) A French business owner, who plans to expand his market to China, conducts a detailed cultural
study of China to customize his marketing campaign.
Answer: C
Explanation: Ethnocentrism is a belief in the superiority of one's own ethnic group or culture.
Hand in hand with ethnocentrism goes a disregard or contempt for the culture of other countries.
Difficulty: 2 Medium
Topic: The Nature of Cross-Cultural Risk
Learning Objective: 04-05 Demonstrate an appreciation for the economic and business
implications of cultural change.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
39
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
86) For international businesses, the connection between culture and competitive advantage is
important because
A) a weak connection is likely to encourage isolationism.
B) a weak connection is likely to encourage competition.
C) a strong connection is likely to produce the most viable competitors.
D) a strong connection is likely to hamper innovation.
Answer: C
Explanation: For the international business, the connection between culture and competitive
advantage is important for two reasons. First, the connection suggests which countries are likely to
produce the most viable competitors. Second, the connection between culture and competitive
advantage has important implications for the choice of countries in which to locate production
facilities and do business.
Difficulty: 2 Medium
Topic: The Nature of Cross-Cultural Risk
Learning Objective: 04-05 Demonstrate an appreciation for the economic and business
implications of cultural change.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
87) What is ethnocentrism?
A) a belief in the superiority of one's business or organization over another
B) a belief in the superiority of another group or culture over one's own group or culture
C) a belief in the superiority of one's own ethnic group or culture
D) a belief in the superiority of one's self over another person
Answer: C
Explanation: Ethnocentrism is a belief in the superiority of one's own ethnic group or culture.
Hand in hand with ethnocentrism goes a disregard or contempt for the culture of other countries.
Difficulty: 1 Easy
Topic: The Nature of Cross-Cultural Risk
Learning Objective: 04-05 Demonstrate an appreciation for the economic and business
implications of cultural change.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
40
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
88) Class-based conflict between workers and management in class-conscious societies can lead to
A) increased costs of doing business.
B) decreased costs of doing business.
C) companies going out of business.
D) workers looking for new jobs in other businesses.
Answer: A
Explanation: It can be argued that the class-based conflict between workers and management in
class-conscious societies, when it leads to industrial disruption, raises the costs of doing business
in that society.
Difficulty: 2 Medium
Topic: The Nature of Cross-Cultural Risk
Learning Objective: 04-05 Demonstrate an appreciation for the economic and business
implications of cultural change.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
89) Several studies have shown that economic advancement and ________ are important factors in
societal change.
A) individualism
B) collectivism
C) improved technology
D) globalization
Answer: D
Explanation: Several studies have suggested that economic advancement and globalization may
be important factors in societal change. There is evidence that economic progress is accompanied
by a shift in values away from collectivism and toward individualism.
Difficulty: 1 Easy
Topic: Economic and Business Implications of Cultural Change
Learning Objective: 04-05 Demonstrate an appreciation for the economic and business
implications of cultural change.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
41
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
90) One reason for Japan's shift in values away from collectivism and toward individualism may
be that
A) richer societies exhibit less need for social and material support structures built on collectives.
B) individualism is a more important trait in a global society.
C) richer societies exhibit more need for social and material support structures built on collectives.
D) increased urbanization and improvements in the quality and availability of education are both a
function of economic progress.
Answer: A
Explanation: As Japan has become richer, the cultural emphasis on collectivism has declined and
greater individualism is being witnessed. One reason for the shift in values away from collectivism
and toward individualism may be that richer societies exhibit less need for social and material
support structures built on collectives, whether the collective is the extended family or the
paternalistic company.
Difficulty: 2 Medium
Topic: Economic and Business Implications of Cultural Change
Learning Objective: 04-05 Demonstrate an appreciation for the economic and business
implications of cultural change.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
91) The connection between ________ and ________ has important implications for the choice of
countries in which to locate production facilities and do business.
A) culture; competitive advantage
B) moral principles; values
C) class system; society
D) values; norms
Answer: A
Explanation: The connection between culture and competitive advantage has important
implications for the choice of countries in which to locate production facilities and do business.
Difficulty: 1 Easy
Topic: The Nature of Cross-Cultural Risk
Learning Objective: 04-05 Demonstrate an appreciation for the economic and business
implications of cultural change.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
42
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
92) Compare and contrast folkways and mores.
Answer: Folkways are the routine conventions of everyday life. Generally, folkways are actions
of little moral significance. Folkways include rituals and symbolic behavior. In contrast, mores are
norms that are seen as central to the functioning of a society and to its social life. Mores have much
greater significance than folkways. Accordingly, violating mores can bring serious retribution.
Difficulty: 3 Hard
Topic: What Is Culture?
Learning Objective: 04-01 Explain what is meant by the culture of a society.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
93) Discuss the relationship between society and the nation-state.
Answer: A society is a group of people who share a common set of values and norms, that is,
people who are bound together by a common culture. There is not a strict one-to-one
correspondence between a society and a nation-state. Nation-states are political creations that may
contain a single culture or several cultures. While it is possible to talk about cultures at different
levels, for example, an "American society," and "American culture," it is important to recognize
there are several societies within America, each with its own culture. The relationship between
culture and country is often ambiguous. Even if a country can be characterized as having a single
homogenous culture, often that national culture is a mosaic of subcultures.
Difficulty: 3 Hard
Topic: What Is Culture?
Learning Objective: 04-01 Explain what is meant by the culture of a society.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
94) What are the determinants of culture?
Answer: The values and norms of a culture do not emerge fully formed. They are the
evolutionary product of political philosophy, economic philosophy, education, language, social
structure, and religion. The chain of causation runs both ways. While factors such as social
structure and religion clearly influence the values and norms of a society, the values and norms of
a society can influence social structure and religion.
Difficulty: 3 Hard
Topic: What Is Culture?
Learning Objective: 04-02 Identify the forces that lead to differences in social culture.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
43
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
95) Explain the concept of social stratification.
Answer: All societies are stratified on a hierarchical basis into social categories or social strata.
Social strata are typically defined on the basis of characteristics such as family background,
occupation, and income. Individuals born into the top of a social hierarchy tend to have better life
chances than individuals born into a stratum toward the bottom of the hierarchy. While all societies
are stratified to some degree they differ from each other with regard to the degree of mobility
between social strata and with regard to the significance attached to social strata in business
contexts.
Difficulty: 3 Hard
Topic: Social Culture
Learning Objective: 04-02 Identify the forces that lead to differences in social culture.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
96) Why is the role of education in a culture important to international companies?
Answer: A key aspect of education in a culture is its role as a determinant of national competitive
advantage. The availability of a pool of skilled and educated workers seems to be a major
determinant of the likely economic success of a country. Porter, for example, has argued that
Japan's excellent education system is an important factor explaining the country's postwar
economic success. In addition, a good education system is an important factor guiding the location
choices of international businesses. The general education level of a country is also a good index of
the kind of products that might sell in a country and of the type of promotional material that should
be used.
Difficulty: 3 Hard
Topic: Social Culture
Learning Objective: 04-02 Identify the forces that lead to differences in social culture.
Bloom's: Understand
AACSB: Diversity
Accessibility: Keyboard Navigation
44
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
97) What is the connection between religion and ethical systems? Do they have any implications
for business?
Answer: Ethical systems are a set of moral principles, or values, that are used to guide and shape
behavior. Most of the world's ethical systems are the product of religions. Therefore, there are
Christian ethics and Islamic ethics. There are four dominant religions in the world: Christianity,
Islam, Hinduism, and Buddhism. The relationship among religion, ethics, and society is subtle and
complex. Some scholars have argued that the most important business implications of religion
center on the extent to which different religions shape attitudes toward work and entrepreneurship
and the degree to which the religious ethics affect the costs of doing business in a country. The
authors point out that it is hazardous to make sweeping generalizations about the nature of the
relationship between religion and ethical systems and business practice. The proposed
relationships may exist, but their impact may be small compared to the impact of economic policy.
Difficulty: 3 Hard
Topic: Ethical Issues in International Business
Learning Objective: 04-02 Identify the forces that lead to differences in social culture.
Bloom's: Apply
AACSB: Ethics; Analytical Thinking
Accessibility: Keyboard Navigation
98) Consider the importance of unspoken language. Why is it important to be familiar with the
unspoken language of another culture?
Answer: Unspoken language refers to nonverbal communication. We all communicate with each
other by a host of nonverbal cues. The raising of eyebrows, for example, is a sign of recognition in
most cultures, while a smile is a sign of joy. Many nonverbal cues, however, are culturally bound.
A failure to understand the nonverbal cues of another culture can lead to a failure to communicate.
For example, making a circle with the thumb and forefinger is a friendly gesture in the United
States, but it is a vulgar gesture in Greece and Turkey. Personal space is another part of unspoken
language.
Difficulty: 3 Hard
Topic: How Language Affects Culture?
Learning Objective: 04-02 Identify the forces that lead to differences in social culture.
Bloom's: Understand
AACSB: Diversity; Communication
Accessibility: Keyboard Navigation
45
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
99) Discuss why the stratification of a society is important to business.
Answer: The stratification of a society is significant if it affects the operation of business
organizations. In a country like Great Britain, for example, the relative lack of class mobility and
the differences between classes has resulted in hostility between middle-class managers and their
working-class employees. An antagonistic relationship between management and labor classes,
and the resulting lack of cooperation and high level of industrial disruption, tends to raise the costs
of production in countries characterized by significant class divisions. In turn, this can make it
more difficult for companies based in such countries to establish a competitive advantage in the
global economy.
Difficulty: 3 Hard
Topic: Social Culture
Learning Objective: 04-03 Identify the business and economic implications of differences in
culture.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
100) Explain how the Koran views business.
Answer: The Koran establishes some explicit economic principles, many of which are pro-free
enterprise. The Koran supports free enterprise and earning a legitimate profit through trade and
commerce, as well as the protection of the right to private property. However, Islam is critical of
those who earn profit through the exploitation of others. Islam stresses the importance of living up
to contractual obligations, of keeping one's word, and of abstaining from deception. One economic
principle of Islam prohibits the payment or receipt of interest, which is considered usury. This is
not just a matter of theology; in several Islamic states, it is also a matter of law.
Difficulty: 3 Hard
Topic: Ethical Issues in International Business
Learning Objective: 04-03 Identify the business and economic implications of differences in
culture.
Bloom's: Understand
AACSB: Knowledge Application; Ethics
Accessibility: Keyboard Navigation
46
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
101) Consider the influence of Confucian ethics on the economies of China, Japan, South Korea,
and Taiwan.
Answer: It has been suggested that the economic success of China, Japan, South Korea, and
Taiwan may be due, in part, to the influence of Confucian ethics on the culture in those countries.
Three values that are central to the Confucian system of ethics are of particular note: loyalty,
reciprocal obligations, and honesty in dealing with others. The concept of reciprocal obligations is
important. Confucian ethics stress that superiors are obliged to reward the loyalty of their
subordinates by bestowing blessings on them. The notion of guanxi, or business relationships,
which permeates business dealings in the region, revolves around the three values. For example, it
has been suggested that the close ties between the automobile companies and their suppliers in
Japan are facilitated by a combination of trust and reciprocal obligations.
Difficulty: 3 Hard
Topic: Economic and Business Implications of Cultural Change
Learning Objective: 04-03 Identify the business and economic implications of differences in
culture.
Bloom's: Apply
AACSB: Reflective Thinking; Ethics
Accessibility: Keyboard Navigation
102) Describe the four dimensions of culture as identified by Geert Hofstede.
Answer: Geert Hofstede identified four dimensions that he claimed summarized the differences
between different cultures. According to Hofstede, the power distance dimension focused on how
a society deals with the fact that people are unequal in physical and intellectual capabilities. The
second dimension identified by Hofstede, individualism versus collectivism, focused on the
relationship between the individual and his or her fellows. Hofstede's third dimension, uncertainty
avoidance, measured the extent to which different cultures socialize their members into accepting
ambiguous situations and tolerating uncertainty. Finally, Hofstede's fourth dimension, masculinity
versus femininity, examined the relationship between gender and work roles.
Difficulty: 3 Hard
Topic: Hofstede's Framework
Learning Objective: 04-04 Recognize how differences in social culture influence values in
business.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
47
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
103) Discuss the limitations of Hofstede's research.
Answer: Hofstede's research has been criticized on a number of points. First, Hofstede assumes
there is a one-to-one correspondence between culture and the nation-state, but many nation-states
have more than one culture. Second, the research may have been culturally bound. The research
team was composed of Europeans and Americans. The questions they asked of IBM
employees—and their analysis of the answers—may have been shaped by their own cultural biases
and concerns. Third, Hofstede's informants worked not only within a single industry, the computer
industry, but also within one company. At the time, IBM was renowned for its own strong
corporate culture and employee selection procedures, making it possible that the employees'
values were different in important respects from the values of the cultures from which those
employees came.
Difficulty: 3 Hard
Topic: Hofstede's Framework
Learning Objective: 04-04 Recognize how differences in social culture influence values in
business.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
104) What are the implications of cultural differences for international businesses?
Answer: International business is different from national business because countries and
societies are different. Societies differ because their cultures vary. Three important implications
for international business flow from these differences. The first is the need to develop
cross-cultural literacy. There is a need not only to appreciate that cultural differences exist but also
to appreciate what such differences mean for international business. A second implication centers
on the connection between culture and national competitive advantage. A third implication looks
at the connection between culture and ethics in decision making.
Difficulty: 3 Hard
Topic: The Nature of Cross-Cultural Risk
Learning Objective: 04-05 Demonstrate an appreciation for the economic and business
implications of cultural change.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
48
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
105) Discuss the relationship between culture and national competitive advantage?
Answer: The value systems and norms of a country influence the costs of doing business in that
country. The costs of doing business in a country influence the ability of firms to establish a
competitive advantage in the global marketplace. It can be argued that the class-based conflict
between workers and management in class-conscious societies, when it leads to industrial
disruption, raises the costs of doing business in that society. Some sociologists have argued that
the ascetic "self-denial" lifestyle ethics of Hinduism (devoting life to a spiritual rather than
material quest) may not be as supportive of capitalism as the ethics embedded in Protestantism and
Confucianism. Japan's emphasis on group affiliation, loyalty, reciprocal obligations, honesty, and
education all boost the competitiveness of Japanese companies. But as important as culture is to
people, companies, and society, it is probably less important than economic, political, and legal
systems in explaining differential economic growth between nations.
Difficulty: 3 Hard
Topic: The Nature of Cross-Cultural Risk
Learning Objective: 04-05 Demonstrate an appreciation for the economic and business
implications of cultural change.
Bloom's: Apply
AACSB: Reflective Thinking; Ethics
Accessibility: Keyboard Navigation
49
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
International Business, 12e (Hill)
Chapter 5
Ethics, Corporate Social Responsibility, and Sustainability
1) Ethical strategies are the accepted principles of right or wrong governing the conduct of
businesspeople.
Answer: FALSE
Explanation: An ethical strategy is a strategy, or course of action, that does not violate the
accepted principles of right or wrong governing the conduct of businesspeople.
Difficulty: 1 Easy
Topic: Ethical Issues in International Business
Learning Objective: 05-01 Understand the ethical issues faced by international businesses.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
2) What is considered normal business practice in one country may be considered unethical in
other countries.
Answer: TRUE
Explanation: Many of the ethical issues in international business are rooted in the fact that
political systems, law, economic development, and culture vary significantly from nation to
nation. What is considered normal practice in one nation may be considered unethical in another.
Difficulty: 1 Easy
Topic: Ethical Issues in International Business
Learning Objective: 05-01 Understand the ethical issues faced by international businesses.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
3) The Sullivan principles mandated that GM could operate in South Africa as long as the
company did not comply with and promoted the abolition of apartheid laws.
Answer: TRUE
Explanation: GM adopted the Sullivan principles. Sullivan argued that it was ethically justified
for GM to operate in South Africa so long as two conditions were fulfilled. First, the company
should not obey the apartheid laws in its own South African operations. Second, the company
should do everything within its power to promote the abolition of apartheid laws.
Difficulty: 1 Easy
Topic: Ethical Issues in International Business
Learning Objective: 05-01 Understand the ethical issues faced by international businesses.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
1
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
4) Corporations can contribute to the global tragedy of the commons by not pumping pollutants
into the atmosphere or dumping them in oceans or rivers.
Answer: FALSE
Explanation: In the modern world, corporations can contribute to the global tragedy of the
commons by moving production to locations where they are free to pump pollutants into the
atmosphere or dump them in oceans or rivers, thereby harming these valuable global commons.
Difficulty: 2 Medium
Topic: Ethical Issues in International Business
Learning Objective: 05-01 Understand the ethical issues faced by international businesses.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
5) International businesses cannot gain economic advantages by making payments to corrupt
government officials.
Answer: FALSE
Explanation: There always have been and always will be corrupt government officials.
International businesses can and have gained economic advantages by making payments to those
officials.
Difficulty: 2 Medium
Topic: Ethical Issues in International Business
Learning Objective: 05-01 Understand the ethical issues faced by international businesses.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
6) The Foreign Corrupt Practices Act was amended to allow "facilitating payments" to secure
contracts that would not otherwise be secured.
Answer: TRUE
Explanation: The Foreign Corrupt Practices Act was later amended to allow for "facilitating
payments." Sometimes known as speed money or grease payments, facilitating payments are not
payments to secure contracts that would not otherwise be secured, nor are they payments to obtain
exclusive preferential treatment.
Difficulty: 2 Medium
Topic: Key Regulations Governing Ethics and Social Responsibility
Learning Objective: 05-01 Understand the ethical issues faced by international businesses.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
2
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
7) The ethical obligations of a multinational corporation toward employment conditions, human
rights, environmental pollution, and the use of power are always clear-cut.
Answer: FALSE
Explanation: The ethical obligations of a multinational corporation toward employment
conditions, human rights, corruption, environmental pollution, and the use of power are not always
clear-cut.
Difficulty: 1 Easy
Topic: Ethical Decision Making
Learning Objective: 05-02 Recognize an ethical dilemma.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
8) Ethical dilemmas are situations in which none of the available alternatives seems ethically
acceptable.
Answer: TRUE
Explanation: Ethical dilemmas are situations in which none of the available alternatives seems
ethically acceptable.
Difficulty: 1 Easy
Topic: Ethical Decision Making
Learning Objective: 05-02 Recognize an ethical dilemma.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
9) Societal business ethics are divorced from personal ethics.
Answer: FALSE
Explanation: Societal business ethics are not divorced from personal ethics, which are the
generally accepted principles of right and wrong governing the conduct of individuals.
Difficulty: 1 Easy
Topic: Causes of Unethical Behavior
Learning Objective: 05-03 Identify the causes of unethical behavior by managers.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
3
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
10) An individual with a strong sense of personal ethics is less likely to behave in an unethical
manner in a business setting.
Answer: TRUE
Explanation: Our personal ethical code exerts a profound influence on the way we behave as
businesspeople. An individual with a strong sense of personal ethics is less likely to behave in an
unethical manner in a business setting.
Difficulty: 1 Easy
Topic: Causes of Unethical Behavior
Learning Objective: 05-03 Identify the causes of unethical behavior by managers.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
11) A firm's organizational culture refers to the values and norms that are shared among employees
of an organization and those outside the organization.
Answer: FALSE
Explanation: The term organizational culture refers to the values and norms that are shared
among employees of an organization.
Difficulty: 1 Easy
Topic: Causes of Unethical Behavior
Learning Objective: 05-03 Identify the causes of unethical behavior by managers.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
12) The utilitarian approach to ethics is a straw man approach to business ethics that has some
inherent value, but is unsatisfactory in important ways.
Answer: FALSE
Explanation: Straw man approaches to business ethics can be characterized as the Friedman
doctrine, cultural relativism, the righteous moralist, and the naive immoralist.
Difficulty: 2 Medium
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
4
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
13) Milton Friedman's basic position is that the only social responsibility of business is to increase
profits, so long as the company stays within the rules of law.
Answer: TRUE
Explanation: The Nobel Prize–winning economist Milton Friedman wrote an article in 1970 that
has since become a classic straw man that business ethics scholars outline only to then tear down.
Friedman's basic position is that the only social responsibility of business is to increase profits, so
long as the company stays within the rules of law.
Difficulty: 1 Easy
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
14) The Friedman doctrine is the belief that ethics are nothing more than a reflection of culture and
therefore, a firm should adopt the ethics of the culture in which it is operating.
Answer: FALSE
Explanation: Friedman's basic position is that the only social responsibility of business is to
increase profits, so long as the company stays within the rules of law. He explicitly rejects the idea
that businesses should undertake social expenditures beyond those mandated by the law and
required for the efficient running of a business.
Difficulty: 1 Easy
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
15) Cultural relativism suggests that even if slavery is culturally acceptable in a country, a foreign
firm operating in that country should avoid using slave labor.
Answer: FALSE
Explanation: At its extreme, cultural relativism suggests that if a culture supports slavery, it is
okay to use slave labor in a country.
Difficulty: 2 Medium
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Analyze
AACSB: Ethics
Accessibility: Keyboard Navigation
5
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
16) A manager from the United States is sent to Nigeria to supervise the construction of a road. As
a righteous moralist, he is likely to learn the ethics and values of Nigeria and follow them, even if
they don't concur with his own.
Answer: FALSE
Explanation: A righteous moralist claims that a multinational's home-country standards of ethics
are the appropriate ones for companies to follow in foreign countries. This approach is typically
associated with managers from developed nations.
Difficulty: 1 Easy
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
17) Most moral philosophers see value in utilitarian and Kantian approaches to business ethics.
Answer: TRUE
Explanation: In contrast to the straw man approaches to ethics, most moral philosophers see
value in utilitarian and Kantian approaches to business ethics.
Difficulty: 1 Easy
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
18) Utilitarian philosophy takes into consideration the principle of justice.
Answer: FALSE
Explanation: The problem with utilitarianism is that the philosophy omits the consideration of
justice. The action that produces the greatest good for the greatest number of people may result in
the unjustified treatment of a minority.
Difficulty: 2 Medium
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
6
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
19) According to Rawls, inequalities are unjust even if the system that produces inequalities is to
the advantage of everyone.
Answer: FALSE
Explanation: Rawls accepts that inequalities can be just if the system that produces inequalities is
to the advantage of everyone. More precisely, he formulates what he calls the difference principle,
which is that inequalities are justified if they benefit the position of the least-advantaged person.
Difficulty: 1 Easy
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
20) Building an organization culture that places a high value on ethical behavior requires incentive
and reward systems.
Answer: TRUE
Explanation: Building an organization culture that places a high value on ethical behavior
requires incentive and reward systems, including promotions that reward people who engage in
ethical behavior and sanction those who do not.
Difficulty: 2 Medium
Topic: Ethical Issues in International Business
Learning Objective: 05-05 Explain how managers can incorporate ethical considerations into
their decision making.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
21) Social responsibility refers to the idea that businesspeople should favor decisions that have
both good economic and social consequences.
Answer: TRUE
Explanation: The concept of social responsibility refers to the idea that businesspeople should
consider the social consequences of economic actions when making business decisions, and that
there should be a presumption in favor of decisions that have both good economic and social
consequences.
Difficulty: 1 Easy
Topic: Ethical Issues in International Business
Learning Objective: 05-01 Understand the ethical issues faced by international businesses.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
7
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
22) To establish moral intent, managers need to stand in the shoes of a stakeholder and ask how a
proposed decision might impact that stakeholder.
Answer: FALSE
Explanation: Managers need to establish moral intent, to be able to think through ethical
problems. This means the business must resolve to place moral concerns ahead of other concerns
in cases where either the fundamental rights of stakeholders or key moral principles have been
violated.
Difficulty: 1 Easy
Topic: Ethical Decision Making
Learning Objective: 05-05 Explain how managers can incorporate ethical considerations into
their decision making.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
23) To foster ethical behavior, many businesses draft a code of ethics, which is an informal
statement of the ethical priorities the company follows.
Answer: FALSE
Explanation: To foster ethical behavior, businesses need to build an organization that values
ethical behavior. To do this, many companies now draft a code of ethics, which is a formal
statement of the ethical priorities a business adheres to.
Difficulty: 1 Easy
Topic: Ethical Issues in International Business
Learning Objective: 05-05 Explain how managers can incorporate ethical considerations into
their decision making.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
24) In a business setting, noblesse oblige is taken to mean benevolent behavior that is the
responsibility of successful enterprises.
Answer: TRUE
Explanation: Noblesse oblige is a French term that refers to honorable and benevolent behavior
considered the responsibility of people of high (noble) birth. In a business setting, it is taken to
mean benevolent behavior that is the responsibility of successful enterprises.
Difficulty: 1 Easy
Topic: Ethical Issues in International Business
Learning Objective: 05-05 Explain how managers can incorporate ethical considerations into
their decision making.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
8
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
25) Ethics officers are hired by many businesses to make sure that all employees are trained to be
ethically aware and that ethical considerations enter the business decision-making process at all
levels of the organization.
Answer: TRUE
Explanation: To make sure that a business behaves in an ethical manner, a number of firms now
have ethics officers. These individuals are responsible for making sure that all employees are
trained to be ethically aware, that ethical considerations enter the business decision-making
process, and that the company's code of ethics is followed.
Difficulty: 1 Easy
Topic: Ethical Issues in International Business
Learning Objective: 05-05 Explain how managers can incorporate ethical considerations into
their decision making.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
26) The ________ occurs when a resource held in common by all, but owned by no one, is
overused by individuals, resulting in its degradation.
A) tragedy of the commons
B) moral ignorance
C) noblesse oblige
D) veil of ignorance
Answer: A
Explanation: The tragedy of the commons occurs when a resource held in common by all, but
owned by no one, is overused by individuals, resulting in its degradation. The phenomenon was
first named by Garrett Hardin when describing a particular problem in sixteenth-century England.
Difficulty: 1 Easy
Topic: Ethical Issues in International Business
Learning Objective: 05-01 Understand the ethical issues faced by international businesses.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
9
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
27) The ________ outlawed the paying of bribes to foreign government officials to gain business.
A) Convention on Combating Bribery of Foreign Public Officials
B) Foreign Corrupt Practices Act
C) Convention on International Business Transactions
D) Universal Declaration of Human Rights
Answer: B
Explanation: The Lockheed case was the impetus for the 1977 passage of the Foreign Corrupt
Practices Act in the United States. The act outlawed the paying of bribes to foreign government
officials to gain business.
Difficulty: 1 Easy
Topic: Key Regulations Governing Ethics and Social Responsibility
Learning Objective: 05-01 Understand the ethical issues faced by international businesses.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
28) Facilitating payments are also known as
A) grease monkeying.
B) pocket lining.
C) speed money.
D) sliding.
Answer: C
Explanation: Sometimes known as speed money or grease payments, facilitating payments are
not payments to secure contracts that would not otherwise be secured and nor are they payments to
obtain exclusive preferential treatment.
Difficulty: 1 Easy
Topic: Ethical Issues in International Business
Learning Objective: 05-01 Understand the ethical issues faced by international businesses.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
10
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
29) Which of the following was designed to allow GM to operate ethically in South Africa as long
as the company did not obey the apartheid laws in its own South African operations?
A) Sullivan principles
B) the righteous moral system
C) noblesse oblige
D) cultural relativism
Answer: A
Explanation: GM adopted what came to be called the Sullivan principles, named after Leon
Sullivan, a black Baptist minister and a member of GM's board of directors. Sullivan argued that it
was ethically justified for GM to operate in South Africa so long as certain conditions were
fulfilled.
Difficulty: 2 Medium
Topic: Ethical Issues in International Business
Learning Objective: 05-01 Understand the ethical issues faced by international businesses.
Bloom's: Apply
AACSB: Ethics
Accessibility: Keyboard Navigation
30) The ________ obliges member states to make the bribery of foreign public officials a criminal
offense and excludes facilitating payments made to expedite routine government action from the
convention.
A) Convention on Combating Bribery of Foreign Public Officials
B) Foreign Corrupt Practices Act
C) Convention on International Business Transactions
D) Universal Declaration of Human Rights
Answer: C
Explanation: In 1997, the OECD adopted the Convention on Combating Bribery of Foreign
Public Officials in International Business Transactions. The convention obliges member states to
make the bribery of foreign public officials a criminal offense. The convention excludes
facilitating payments made to expedite routine government action from the convention.
Difficulty: 2 Medium
Topic: Key Regulations Governing Ethics and Social Responsibility
Learning Objective: 05-01 Understand the ethical issues faced by international businesses.
Bloom's: Apply
AACSB: Ethics
Accessibility: Keyboard Navigation
11
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
31) Identify the incorrect statement about environmental regulations.
A) Environmental regulations are often lacking in developing nations.
B) Environmental regulations are similar across developed and developing nations.
C) Developed nations have substantial regulations governing the emission of pollutants, the
dumping of toxic chemicals, and so on.
D) Inferior environmental regulations in host nations, as compared to the home nation, can lead to
ethical issues.
Answer: B
Explanation: Many developed nations have substantial regulations governing the emission of
pollutants, the dumping of toxic chemicals, the use of toxic materials in the workplace, and so on.
Those regulations are often lacking in developing nations, and according to critics, the result can
be higher levels of pollution from the operations of multinationals than would be allowed at home.
Difficulty: 2 Medium
Topic: Ethical Issues in International Business
Learning Objective: 05-01 Understand the ethical issues faced by international businesses.
Bloom's: Analyze
AACSB: Ethics
Accessibility: Keyboard Navigation
32) The ________ occurs when a resource that is shared by all, but owned by no one, is overused
by individuals, resulting in its degradation.
A) Friedman effect
B) noblesse oblige
C) inequity aversion
D) tragedy of the commons
Answer: D
Explanation: The tragedy of the commons occurs when a resource held in common by all, but
owned by no one, is overused by individuals, resulting in its degradation.
Difficulty: 1 Easy
Topic: Ethical Issues in International Business
Learning Objective: 05-01 Understand the ethical issues faced by international businesses.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
12
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
33) An international U.S.-based company sets up a production unit in a developing country with
poor environmental regulations. This contributes to the
A) noblesse oblige situation.
B) inequity aversion.
C) global tragedy of the commons.
D) Friedman effect.
Answer: C
Explanation: In the modern world, corporations can contribute to the global tragedy of the
commons by moving production to locations where they are free to pump pollutants into the
atmosphere or dump them in oceans or rivers, thereby harming these valuable global commons.
Difficulty: 2 Medium
Topic: Ethical Issues in International Business
Learning Objective: 05-01 Understand the ethical issues faced by international businesses.
Bloom's: Apply
AACSB: Ethics
Accessibility: Keyboard Navigation
34) Which of the following observations about the Foreign Corrupt Practices Act is true?
A) The act outlawed the paying of bribes to foreign government officials to gain business.
B) There is enough evidence that it put U.S. firms at a competitive disadvantage.
C) The act originally allowed for "facilitating payments."
D) The Nike case was the impetus for the 1977 passage of this act.
Answer: A
Explanation: The Lockheed case was the impetus for the 1977 passage of the Foreign Corrupt
Practices Act in the United States. The act outlawed the paying of bribes to foreign government
officials to gain business.
Difficulty: 2 Medium
Topic: Key Regulations Governing Ethics and Social Responsibility
Learning Objective: 05-01 Understand the ethical issues faced by international businesses.
Bloom's: Apply
AACSB: Ethics
Accessibility: Keyboard Navigation
13
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
35) Facilitating payments are
A) a direct violation of the Foreign Corrupt Practices Act.
B) permitted so long as they are designed only to gain exclusive preferential treatment.
C) used to secure contracts that would otherwise not be secured.
D) permitted under the amended Foreign Corrupt Practices Act.
Answer: D
Explanation: Sometimes known as speed money or grease payments, facilitating payments are
payments to ensure receiving the standard treatment that a business ought to receive from a foreign
government, but might not due to the obstruction of a foreign official.
Difficulty: 1 Easy
Topic: Key Regulations Governing Ethics and Social Responsibility
Learning Objective: 05-01 Understand the ethical issues faced by international businesses.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
36) The Convention on Combating Bribery of Foreign Public Officials in International Business
Transactions excludes
A) bribes made to secure contracts that would otherwise not be secured.
B) grease payments to gain exclusive preferential treatment.
C) facilitating payments made to expedite routine government action.
D) payments to government officials for special privileges.
Answer: C
Explanation: The Convention on Combating Bribery of Foreign Public Officials in International
Business Transactions excludes facilitating payments made to expedite routine government action
from the convention.
Difficulty: 1 Easy
Topic: Key Regulations Governing Ethics and Social Responsibility
Learning Objective: 05-01 Understand the ethical issues faced by international businesses.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
14
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
37) The idea that businesspeople should consider the social consequences of economic actions
when making business decisions and that there should be a presumption in favor of decisions that
have both good economic and social consequences is known as
A) moral relativism.
B) noblesse oblige.
C) ethical dilemma.
D) social responsibility.
Answer: D
Explanation: The concept of social responsibility refers to the idea that businesspeople should
consider the social consequences of economic actions when making business decisions, and that
there should be a presumption in favor of decisions that have both good economic and social
consequences.
Difficulty: 1 Easy
Topic: Ethics and Social Responsibility
Learning Objective: 05-01 Understand the ethical issues faced by international businesses.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
38) Which of the following, in a business setting, is taken to mean benevolent behavior that is the
responsibility of successful enterprises?
A) Sullivan's principles
B) ethical dilemma
C) tragedy of the commons
D) noblesse oblige
Answer: D
Explanation: Noblesse oblige is a French term that refers to honorable and benevolent behavior
considered the responsibility of people of high (noble) birth. In a business setting, it is taken to
mean benevolent behavior that is the responsibility of successful enterprises.
Difficulty: 1 Easy
Topic: Ethics and Social Responsibility
Learning Objective: 05-01 Understand the ethical issues faced by international businesses.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
15
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
39) BP, one of the world's largest oil companies, has made it part of the company policy to
undertake "social investments" in the countries where it does business. There was no economic
reason for BP to make this social investment, but the company believes it is morally obligated to
give something back to the societies that have made its success possible. BP's actions are an
example of
A) cultural relativism.
B) the Friedman doctrine.
C) noblesse oblige.
D) the tragedy of the commons.
Answer: C
Explanation: Noblesse oblige is a French term that refers to honorable and benevolent behavior
considered the responsibility of people of high (noble) birth. In a business setting, it is taken to
mean benevolent behavior that is the responsibility of successful enterprises.
Difficulty: 2 Medium
Topic: Ethics and Social Responsibility
Learning Objective: 05-01 Understand the ethical issues faced by international businesses.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
40) ________ are the accepted principles of right or wrong governing the conduct of
businesspeople.
A) Sustainable strategies
B) Business ethics
C) Moral worth of actions
D) Ethical strategies
Answer: B
Explanation: Business ethics are the accepted principles of right or wrong governing the conduct
of businesspeople.
Difficulty: 1 Easy
Topic: Ethical Issues in International Business
Learning Objective: 05-01 Understand the ethical issues faced by international businesses.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
16
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
41) In the international business setting, one of the most common ethical issues involves
A) hiring practices.
B) government deregulation.
C) the moral obligation of multinational corporations.
D) facilitating payments.
Answer: C
Explanation: Many of the ethical issues and dilemmas in international business are rooted in the
fact that political systems, law, economic development, and culture vary significantly from nation
to nation. Therefore, what might be considered a normal business practice in one country may
constitute unethical behavior in another country. Managers in a multinational company need to be
sensitive to these differences. In the international business setting, the most common ethical issues
involve employment practices, human rights, environmental regulations, corruption, and the moral
obligation of multinational corporations.
Difficulty: 2 Medium
Topic: Ethical Issues in International Business
Learning Objective: 05-01 Understand the ethical issues faced by international businesses.
Bloom's: Apply
AACSB: Ethics
Accessibility: Keyboard Navigation
42) Ethical dilemmas exist because many real-world decisions involve
A) first-, second-, and third-order consequences that are hard to quantify.
B) people from different cultures.
C) employers and employees.
D) people from different multinational firms.
Answer: A
Explanation: Ethical dilemmas exist because many real-world decisions are complex, difficult to
frame, and involve first-, second-, and third-order consequences that are hard to quantify. Doing
the right thing, or even knowing what the right thing might be, is often far from easy.
Difficulty: 2 Medium
Topic: Ethical Decision Making
Learning Objective: 05-02 Recognize an ethical dilemma.
Bloom's: Apply
AACSB: Ethics
Accessibility: Keyboard Navigation
17
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
43) Josiah was managing a factory in India, and had a decision to make. The factory used child
labor, which he disapproved of, but he knew the families of these children might starve without
their income. This situation, in which none of the available alternatives seems morally acceptable,
is called
A) an ethical dilemma.
B) noblesse oblige.
C) the tragedy of the commons.
D) the free rider problem.
Answer: A
Explanation: Ethical dilemmas are situations in which none of the available alternatives seems
ethically acceptable.
Difficulty: 1 Easy
Topic: Ethical Decision Making
Learning Objective: 05-02 Recognize an ethical dilemma.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
44) Which of the following is a reason managers working abroad in multinational firms may
behave in a manner that is unethical?
A) psychological and geographical distances of a foreign subsidiary from the home office
B) pressure from an ethical leader
C) confusion between personal ethics and business ethics
D) incorporating ethical issues into strategic and operational decision making
Answer: A
Explanation: The causes that contribute to unethical behavior in businesses are very complex.
However, a few generalizations can be made. Unethical behavior is rooted in poor personal ethics,
societal culture, the psychological and geographical distances of a foreign subsidiary from the
home office, a failure to incorporate ethical issues into strategic and operational decision making, a
dysfunctional culture, and failure of leaders to act in an ethical manner.
Difficulty: 2 Medium
Topic: Causes of Unethical Behavior
Learning Objective: 05-03 Identify the causes of unethical behavior by managers.
Bloom's: Apply
AACSB: Ethics
Accessibility: Keyboard Navigation
18
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
45) Expatriate managers may experience more than the usual degree of pressure to violate their
personal ethics because of which of the following?
A) They are surrounded by their ordinary social context and supporting culture.
B) They are psychologically and geographically closer to the parent company.
C) They may be based in a culture that does not place the same value on ethical norms important in
the manager's home country.
D) They may be surrounded by local employees who have more rigorous ethical standards.
Answer: C
Explanation: Home-country managers working abroad in multinational firms (expatriate
managers) may experience more than the usual degree of pressure to violate their personal ethics.
They are away from their ordinary social context and supporting culture, and they are
psychologically and geographically distant from the parent company.
Difficulty: 2 Medium
Topic: Causes of Unethical Behavior
Learning Objective: 05-03 Identify the causes of unethical behavior by managers.
Bloom's: Apply
AACSB: Ethics
Accessibility: Keyboard Navigation
46) Which of the following refers to the values and norms that the employees of an organization
share?
A) vision statement
B) cultural relativism
C) organization culture
D) power orientation
Answer: C
Explanation: The term organization culture refers to the values and norms that are shared among
employees of an organization.
Difficulty: 1 Easy
Topic: Causes of Unethical Behavior
Learning Objective: 05-03 Identify the causes of unethical behavior by managers.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
19
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
47) Grady works at a fast food restaurant. One day he noticed a co-worker giving free food to a
friend. He was unsure about what to do. Grady most likely decided to follow the example of
A) other employees.
B) his supervisor.
C) his family.
D) government leaders.
Answer: B
Explanation: Leaders help to establish the culture of an organization, and they set the example
that others follow. Other employees in a business often take their cue from business leaders, and if
those leaders do not behave in an ethical manner, they might not either.
Difficulty: 1 Easy
Topic: Causes of Unethical Behavior
Learning Objective: 05-03 Identify the causes of unethical behavior by managers.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
48) ________ approaches to business ethics are raised by business ethics scholars primarily to
demonstrate that they offer inappropriate ethical decision making in a multinational enterprise.
A) Cultural relativism
B) The righteous moralist
C) Straw man
D) The naive immoralist
Answer: C
Explanation: Straw man approaches to business ethics are raised by business ethics scholars
primarily to demonstrate that they offer inappropriate guidelines for ethical decision making in a
multinational enterprise.
Difficulty: 2 Medium
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Apply
AACSB: Ethics
Accessibility: Keyboard Navigation
20
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
49) ________ arguments suggest that improving working conditions beyond the level required by
the law and necessary to maximize employee productivity will reduce profits and are therefore not
appropriate.
A) Rawls'
B) Kantian
C) Sullivan's
D) Friedman's
Answer: D
Explanation: Friedman explicitly rejects the idea that businesses should undertake social
expenditures beyond those mandated by the law and required for the efficient running of a
business.
Difficulty: 2 Medium
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
50) According to the ________ point of view, a firm should adopt the ethics of the culture in which
it is operating.
A) cultural relativism
B) righteous moralist
C) naive immoralist
D) utilitarian approach
Answer: A
Explanation: Cultural relativism is the belief that ethics are nothing more than the reflection of a
culture—all ethics are culturally determined—and that accordingly, a firm should adopt the ethics
of the culture in which it is operating.
Difficulty: 2 Medium
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Apply
AACSB: Ethics
Accessibility: Keyboard Navigation
21
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
51) According to the ________, even if a manager of a multinational sees that firms from other
nations are not following ethical norms in a host nation, that manager should maintain the
standards of the company's home country.
A) cultural relativist
B) righteous moralist
C) utilitarian
D) naive immoralist
Answer: B
Explanation: A righteous moralist claims that a multinational's home-country standards of ethics
are the appropriate ones for companies to follow in foreign countries.
Difficulty: 2 Medium
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Apply
AACSB: Ethics
Accessibility: Keyboard Navigation
52) A British firm that sets up production units in China is accused of releasing untreated chemical
waste into water bodies. The manager of the firm defends the firm stating that, factories in China
set up by French and American firms also release untreated chemical waste into water bodies.
What approach to business ethics is the manager using?
A) righteous moralist
B) utilitarian
C) naive immoralist
D) cultural relativist
Answer: C
Explanation: A naive immoralist asserts that if a manager of a multinational sees that firms from
other nations are not following ethical norms in a host nation, that manager should not either.
Difficulty: 2 Medium
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Apply
AACSB: Ethics; Reflective Thinking
Accessibility: Keyboard Navigation
22
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
53) Business ethics that either deny the value of business ethics or apply the concept in a very
unsatisfactory way are termed
A) straw man.
B) the Sullivan principles.
C) just distribution.
D) rights theories.
Answer: A
Explanation: Straw man approaches to business ethics are raised by business ethics scholars
primarily to demonstrate that they offer inappropriate guidelines for ethical decision making in a
multinational enterprise.
Difficulty: 1 Easy
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
54) The ________ approaches to ethics hold that the moral worth of actions or practices is
determined by their consequences.
A) naive immoralist
B) cultural relativist
C) righteous moralist
D) utilitarian
Answer: D
Explanation: Utilitarian approaches to ethics hold that the moral worth of actions or practices is
determined by their consequences. An action is judged desirable if it leads to the best possible
balance of good consequences over bad consequences.
Difficulty: 1 Easy
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
23
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
55) ________ recognize that human beings have fundamental rights and privileges that transcend
national boundaries and cultures.
A) Rights theories
B) Utilitarians
C) Cultural relativists
D) Kantian ethics
Answer: A
Explanation: Developed in the twentieth century, rights theories recognize that human beings
have fundamental rights and privileges that transcend national boundaries and cultures. Rights
establish a minimum level of morally acceptable behavior.
Difficulty: 1 Easy
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
56) According to ________, the social responsibility of business is to increase profits, so long as
the company stays within the rules of law.
A) the naive immoralist
B) the righteous moralist
C) cultural relativism
D) the Friedman doctrine
Answer: D
Explanation: Friedman's basic position is that the only social responsibility of business is to
increase profits, so long as the company stays within the rules of law. He explicitly rejects the idea
that businesses should undertake social expenditures beyond those mandated by the law and
required for the efficient running of a business.
Difficulty: 1 Easy
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
24
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
57) According to the Friedman doctrine,
A) ethics are nothing more than the reflection of culture.
B) a multinational's home-country standards of ethics are inappropriate to follow in foreign
countries.
C) businesses should not undertake social expenditures beyond those mandated by the law and
required for the efficient running of a business.
D) if a manager of a multinational sees that firms from other nations are not following
environmental legislation in a host nation, that manager should not either.
Answer: C
Explanation: Friedman explicitly rejects the idea that businesses should undertake social
expenditures beyond those mandated by the law and required for the efficient running of a
business.
Difficulty: 2 Medium
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
58) Miranda is a cultural relativist, which means she likely believes
A) a firm should adopt the ethics of the culture in which it is operating.
B) the only social responsibility of a firm is to increase profits.
C) a firm's ethical policies should remain the same in all cultures.
D) a multinational should follow its home-country cultural practices in all the host countries where
it has operations.
Answer: A
Explanation: Cultural relativism is the belief that ethics are nothing more than the reflection of a
culture—all ethics are culturally determined—and that accordingly, a firm should adopt the ethics
of the culture in which it is operating.
Difficulty: 2 Medium
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Apply
AACSB: Ethics
Accessibility: Keyboard Navigation
25
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
59) Child labor is permitted and widely employed in Country X. A multinational company
entering Country X decides to employ minors in its subsidiary, even though it is against the
multinational's home-country ethics. Which of the following approaches to business ethics would
justify the actions of the multinational company?
A) righteous moralist
B) cultural relativism
C) the justice theory
D) the rights theory
Answer: B
Explanation: Cultural relativism is the belief that ethics are nothing more than the reflection of a
culture—all ethics are culturally determined—and that accordingly, a firm should adopt the ethics
of the culture in which it is operating.
Difficulty: 3 Hard
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Apply
AACSB: Ethics; Reflective Thinking
Accessibility: Keyboard Navigation
60) A multinational company is accused of paying bribes to the government of a host country to
obtain permission to build a production factory. The public relations manager of the company
defends the company's actions as being ethically sound; he states that in the host country, paying
bribes to government officials is the accepted norm and is in keeping with the social practices in
the host country. The public relations manager is using which of the following philosophical
doctrines to defend the actions of the company?
A) the Friedman doctrine
B) righteous moralist
C) noblesse oblige
D) cultural relativism
Answer: D
Explanation: Cultural relativism is the belief that ethics are nothing more than the reflection of a
culture—all ethics are culturally determined—and that accordingly, a firm should adopt the ethics
of the culture in which it is operating.
Difficulty: 3 Hard
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Apply
AACSB: Ethics; Reflective Thinking
Accessibility: Keyboard Navigation
26
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
61) In its extreme viewpoint, ________ suggests that if a culture supports slavery, it is all right to
use slave labor in the country.
A) the Friedman doctrine
B) noblesse oblige
C) righteous moralist
D) cultural relativism
Answer: D
Explanation: Cultural relativism does not stand up to a closer look. At its extreme, cultural
relativism suggests that if a culture supports slavery, it is okay to use slave labor in a country.
Difficulty: 2 Medium
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
62) The righteous moralist suggests that
A) ethics are nothing more than the reflection of culture.
B) a multinational's home-country standards of ethics are the appropriate ones for companies to
follow in foreign countries.
C) the social responsibility of business is to increase profits, so long as the company stays within
the rules of law.
D) if a manager of a multinational sees that firms from other nations are not following ethical
norms in a host nation, that manager should not either.
Answer: B
Explanation: A righteous moralist claims that a multinational's home-country standards of ethics
are the appropriate ones for companies to follow in foreign countries. This approach is typically
associated with managers from developed nations.
Difficulty: 1 Easy
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
27
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
63) According to the naive immoralist,
A) a multinational's home-country standards of ethics are the appropriate ones for companies to
follow in foreign countries.
B) the social responsibility of business is to increase profits, so long as the company stays within
the rules of law.
C) ethics are nothing more than the reflection of a culture.
D) if firms in a host nation do not follow ethical norms then the manager of a multinational should
not follow ethical norms there either.
Answer: D
Explanation: A naive immoralist asserts that if a manager of a multinational sees that firms from
other nations are not following ethical norms in a host nation, that manager should not either.
Difficulty: 2 Medium
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
64) An American manager in Colombia routinely pays off the local drug lord to guarantee that his
plant will not be bombed and that none of his employees will be kidnapped. The manager argues
that such payments are ethically defensible because everyone is doing it. The manager's argument
exemplifies which of the following ethical approaches?
A) naive immoralist
B) Kantian ethics
C) righteous moralist
D) noblesse oblige
Answer: A
Explanation: A naive immoralist asserts that if a manager of a multinational sees that firms from
other nations are not following ethical norms in a host nation, that manager should not either. The
classic example to illustrate the approach is known as the drug lord problem.
Difficulty: 2 Medium
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Apply
AACSB: Ethics
Accessibility: Keyboard Navigation
28
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
65) The utilitarian approach to business ethics suggests that
A) people should be treated as ends and never purely as means to the ends of others.
B) the moral worth of actions or practices is determined by their consequences.
C) people have dignity and need to be treated as such.
D) human beings have fundamental rights and privileges that transcend national cultures.
Answer: B
Explanation: Utilitarian approaches to ethics hold that the moral worth of actions or practices is
determined by their consequences. An action is judged desirable if it leads to the best possible
balance of good consequences over bad consequences.
Difficulty: 1 Easy
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
66) Mahatma Gandhi felt the best decisions are those that produce the greatest good for the
greatest number of people. This demonstrates the ________ perspective.
A) naive immoralist
B) Friedman doctrine
C) Kantian ethics
D) utilitarian
Answer: D
Explanation: The best decisions, from a utilitarian perspective, are those that produce the greatest
good for the greatest number of people.
Difficulty: 1 Easy
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
29
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
67) The products of Carmen Stores, an international sports apparel chain, are manufactured in
sweatshop factories in China. According to the company president, using sweatshop labor offers a
means of livelihood to children and young adults, as well as supplies good quality apparel to
customers at a lower cost. She asserts that the actions of the company are justified because it
results in the benefit of the maximum number of people. The company president's argument is
based on which of the following ethical viewpoints?
A) the righteous moralist
B) the Friedman doctrine
C) Kantian approach to business ethics
D) utilitarian approach to business ethics
Answer: D
Explanation: As a philosophy for business ethics, utilitarianism focuses attention on the need to
weigh carefully all of the social benefits and costs of a business action and to pursue only those
actions where the benefits outweigh the costs. The best decisions, from a utilitarian perspective,
are those that produce the greatest good for the greatest number of people.
Difficulty: 3 Hard
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Apply
AACSB: Ethics; Reflective Thinking
Accessibility: Keyboard Navigation
68) The Kantian approach to ethics suggests that
A) human beings have fundamental rights and privileges that transcend national boundaries.
B) the moral worth of actions or practices is determined by their consequences.
C) people should be treated as ends and never purely as means to the ends of others.
D) ethics are nothing more than the reflection of culture.
Answer: C
Explanation: Kantian ethics hold that people should be treated as ends and never purely as means
to the ends of others.
Difficulty: 1 Easy
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
30
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
69) Identify the correct statement about the rights theories.
A) Human beings have fundamental rights and privileges that transcend national boundaries.
B) The moral worth of actions or practices is determined by their consequences.
C) People should be treated as ends never purely as means to the ends of others.
D) The only social responsibility of business is to increase profits, so long as the company stays
within the rules of law.
Answer: A
Explanation: Developed in the twentieth century, rights theories recognize that human beings
have fundamental rights and privileges that transcend national boundaries and cultures.
Difficulty: 1 Easy
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
70) Which of the following persons believed that people should be treated as ends and never purely
as means to the ends of others?
A) John Stuart Mill
B) Immanuel Kant
C) Milton Friedman
D) David Hume
Answer: B
Explanation: Kantian ethics are based on the philosophy of Immanuel Kant (1724–1804).
Kantian ethics hold that people should be treated as ends and never purely as means to the ends of
others. People are not instruments, like a machine. People have dignity and need to be respected as
such.
Difficulty: 1 Easy
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
31
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
71) The United Nations Universal Declaration of Human Rights, related to employment, upholds
which of the following?
A) the requirement for the formation of trade unions
B) a sliding pay scale based upon need
C) prohibition of trade unions
D) protection against unemployment
Answer: D
Explanation: Article 23 of the United Nations Universal Declaration of Human Rights states:
Everyone has the right to work, to free choice of employment, to just and favorable conditions of
work, and to protection against unemployment.
Difficulty: 2 Medium
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Analyze
AACSB: Ethics
Accessibility: Keyboard Navigation
72) Article 1 of the United Nations Universal Declaration of Human Rights states: All human
beings are born free and equal in dignity and rights. This best echoes
A) cultural relativism.
B) the Friedman doctrine.
C) the righteous moralist approach.
D) Kantian ethics.
Answer: D
Explanation: Echoing Kantian ethics, Article 1 of the United Nations Universal Declaration of
Human Rights states: All human beings are born free and equal in dignity and rights. They are
endowed with reason and conscience and should act toward one another in a spirit of brotherhood.
Difficulty: 2 Medium
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Apply
AACSB: Ethics
Accessibility: Keyboard Navigation
32
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
73) Which of the following statements is true about the United Nations Universal Declaration of
Human Rights?
A) It transcends national borders.
B) It states that human rights are culturally determined.
C) It states that an action is judged desirable if it leads to the best possible balance of good
consequences over bad consequences.
D) It states that the only social responsibility of business is to increase profits, so long as the
company stays within the rules of law.
Answer: A
Explanation: The notion that there are fundamental rights that transcend national borders and
cultures was the underlying motivation for the United Nations Universal Declaration of Human
Rights, which has been ratified by almost every country on the planet and lays down basic
principles that should always be adhered to irrespective of the culture in which one is doing
business.
Difficulty: 2 Medium
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
74) Justice theories of business ethics focus on
A) the moral worth of actions or practices.
B) minimum levels of morally acceptable behavior.
C) fundamental rights and privileges that transcend national boundaries.
D) the attainment of an equitable distribution of goods and services.
Answer: D
Explanation: A just distribution is one that is considered fair and equitable. Rawls argues that all
economic goods and services should be distributed equally except when an unequal distribution
would work to everyone's advantage.
Difficulty: 1 Easy
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
33
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
75) According to John Rawls,
A) each person should be permitted the maximum amount of basic liberty compatible with a
similar liberty for others.
B) freedom of speech and assembly is the single most important component in a justice system.
C) equal basic liberty is impossible in a pure market economy.
D) ethics is culturally determined.
Answer: A
Explanation: According to Rawls, valid principles of justice are those with which all persons
would agree if they could freely and impartially consider the situation. One such principle is that
each person be permitted the maximum amount of basic liberty compatible with a similar liberty
for others.
Difficulty: 1 Easy
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
76) Rawls' philosophy that inequalities are justified if they benefit the position of the
least-advantaged person is known as the
A) inequality principle.
B) equity principle.
C) difference principle.
D) ignorance veil principle.
Answer: C
Explanation: John Rawls formulated what he called the difference principle, which is that
inequalities are justified if they benefit the position of the least-advantaged person.
Difficulty: 1 Easy
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
34
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
77) According to John Rawls's difference principle,
A) certain people or institutions are obligated to provide benefits or services that secure the rights
of others.
B) fundamental human rights should transcend national borders and cultures.
C) the best decisions are those that produce the greatest good for the greatest number of people.
D) inequalities are justified if they benefit the position of the least-advantaged person.
Answer: D
Explanation: John Rawls formulated what he called the difference principle, which is that
inequalities are justified if they benefit the position of the least-advantaged person.
Difficulty: 1 Easy
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
78) A ________ asserts that if a manager of a multinational sees that firms from other nations are
not following ethical norms in a host nation, that manager should not either.
A) Kantian ethicist
B) righteous moralist
C) naive immoralist
D) utilitarian ethicist
Answer: C
Explanation: A naive immoralist asserts that if a manager of a multinational sees that firms from
other nations are not following ethical norms in a host nation, that manager should not either.
Difficulty: 1 Easy
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
35
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
79) Any person or institution that is capable of moral action such as a government or corporation is
a
A) moral agent.
B) utilitarian.
C) righteous moralist.
D) naive immoralist.
Answer: A
Explanation: A moral agent is any person or institution that is capable of moral action such as a
government or corporation.
Difficulty: 1 Easy
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
80) Under the veil of ignorance, everyone is imagined to be ignorant of
A) all of his or her particular characteristics.
B) fundamental rights and privileges.
C) the moral worth of actions or practices.
D) the minimum levels of morally acceptable behavior.
Answer: A
Explanation: Under the veil of ignorance, everyone is imagined to be ignorant of all of his or her
particular characteristics, for example, race, sex, intelligence, nationality, family background, and
special talents.
Difficulty: 1 Easy
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
36
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
81) The veil of ignorance was developed by ________ as part of his approach to justice theories.
A) Milton Friedman
B) John Rawls
C) Kantian
D) Leon Sullivan
Answer: B
Explanation: The veil of ignorance was developed by John Rawls as part of his approach to
justice theories. According to Rawls, valid principles of justice are those with which all persons
would agree if they could freely and impartially consider the situation. Impartiality is guaranteed
by the veil of ignorance. Under the veil of ignorance, everyone is imagined to be ignorant of all of
his or her particular characteristics. Under these conditions everyone would agree that (1) each
person be permitted the maximum amount of basic liberty compatible with a similar liberty for
others, and (2) once basic liberty is assured, inequality in basic social goods is to be allowed only if
such inequalities benefit everyone.
Difficulty: 1 Easy
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
82) ________ enables managers to walk away from a decision that is profitable but unethical.
A) Utilitarianism
B) Righteousness
C) Just distribution
D) Moral courage
Answer: D
Explanation: It is important to recognize that employees in an international business may need
significant moral courage. Moral courage enables managers to walk away from a decision that is
profitable but unethical.
Difficulty: 1 Easy
Topic: Ethical Decision Making
Learning Objective: 05-05 Explain how managers can incorporate ethical considerations into
their decision making.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
37
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
83) A firm's ________ include customers, suppliers, and lenders.
A) internal stakeholders
B) clients
C) external stakeholders
D) community
Answer: C
Explanation: Internal stakeholders are individuals or groups who work for or own the business.
External stakeholders are all other individuals and groups that have some claim on the firm.
Typically, this group is composed of customers, suppliers, lenders, governments, unions, local
communities, and the general public.
Difficulty: 2 Medium
Topic: Ethical Decision Making
Learning Objective: 05-05 Explain how managers can incorporate ethical considerations into
their decision making.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
84) External stakeholders
A) are individuals or groups who own the business.
B) include all employees, the board of directors, and stockholders.
C) are typically customers, suppliers, lenders, etc.
D) are individuals or groups who work for the business.
Answer: C
Explanation: External stakeholders are all other individuals and groups, other than internal
stakeholders, that have some claim on the firm. Typically, this group is composed of customers,
suppliers, lenders, governments, unions, local communities, and the general public.
Difficulty: 1 Easy
Topic: Ethics and Social Responsibility
Learning Objective: 05-05 Explain how managers can incorporate ethical considerations into
their decision making.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
38
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
85) Which of the following is an example of an external stakeholder?
A) employees
B) customers
C) stockholders
D) the board of directors
Answer: B
Explanation: Internal stakeholders include all employees, the board of directors, and
stockholders. External stakeholders are all other individuals and groups that have some claim on
the firm. Typically, this group is composed of customers, suppliers, lenders, governments, unions,
local communities, and the general public.
Difficulty: 1 Easy
Topic: Ethics and Social Responsibility
Learning Objective: 05-05 Explain how managers can incorporate ethical considerations into
their decision making.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
86) ________ is a French term that refers to honorable and benevolent behavior, considered the
responsibility of people of high (noble) birth.
A) Bienveillante
B) Honourable
C) Aristocratic
D) Noblesse oblige
Answer: D
Explanation: Noblesse oblige is a French term that refers to honorable and benevolent behavior
considered the responsibility of people of high (noble) birth.
Difficulty: 1 Easy
Topic: Ethical Issues in International Business
Learning Objective: 05-05 Explain how managers can incorporate ethical considerations into
their decision making.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
39
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
87) ________ means standing in the shoes of a stakeholder and asking how a proposed decision
might impact that stakeholder.
A) Veil of ignorance
B) Difference principle
C) Moral imagination
D) Noblesse oblige
Answer: C
Explanation: Stakeholder analysis involves a certain amount of what has been called moral
imagination. This means standing in the shoes of a stakeholder and asking how a proposed
decision might impact that stakeholder.
Difficulty: 1 Easy
Topic: Ethics and Social Responsibility
Learning Objective: 05-05 Explain how managers can incorporate ethical considerations into
their decision making.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
88) Which of the following enables managers to walk away from a decision that is profitable, but
unethical?
A) noblesse oblige
B) moral courage
C) the difference principle
D) the Friedman doctrine
Answer: B
Explanation: It is important to recognize that employees in an international business may need
significant moral courage. Moral courage enables managers to walk away from a decision that is
profitable but unethical.
Difficulty: 1 Easy
Topic: Ethical Decision Making
Learning Objective: 05-05 Explain how managers can incorporate ethical considerations into
their decision making.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
40
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
89) Companies can strengthen the ________ of employees by committing themselves to not
retaliate against employees who complain about unethical actions.
A) moral courage
B) code of ethics
C) ethical strategies
D) organizational culture
Answer: A
Explanation: Companies can strengthen the moral courage of employees by committing
themselves to not retaliate against employees who exercise moral courage, say no to superiors, or
otherwise complain about unethical actions.
Difficulty: 1 Easy
Topic: Ethical Decision Making
Learning Objective: 05-05 Explain how managers can incorporate ethical considerations into
their decision making.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
90) Establishing ________ involves a business resolving to place moral concerns ahead of other
concerns in cases where either the fundamental rights of stakeholders or key moral principles have
been violated.
A) a veil of ignorance
B) a difference principle
C) moral imagination
D) moral intent
Answer: D
Explanation: Moral intent implies that a business must resolve to place moral concerns ahead of
other concerns in cases where either the fundamental rights of stakeholders or key moral principles
have been violated.
Difficulty: 1 Easy
Topic: Ethics and Social Responsibility
Learning Objective: 05-05 Explain how managers can incorporate ethical considerations into
their decision making.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
41
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
91) What is the term for a company's formal statement of the ethical priorities it expects all of its
employees to follow?
A) code of ethics
B) stakeholders pledge
C) moral courage
D) difference principle
Answer: A
Explanation: Many companies explicitly articulate values that emphasize ethical behavior by
drafting a code of ethics, which is a formal statement of the ethical priorities a business adheres to.
Difficulty: 1 Easy
Topic: Ethics and Social Responsibility
Learning Objective: 05-05 Explain how managers can incorporate ethical considerations into
their decision making.
Bloom's: Remember
AACSB: Ethics
Accessibility: Keyboard Navigation
92) It is in the best interest of prospective employees to find out all they can about the
A) external stakeholders of an organization.
B) ethical climate in an organization.
C) internal stakeholders of an organization.
D) corporate social responsibility actions of an organization.
Answer: B
Explanation: Not only should businesses strive to identify and hire people with a strong sense of
personal ethics, but it also is in the best interest of prospective employees to find out as much as
they can about the ethical climate in an organization.
Difficulty: 1 Easy
Topic: Ethics and Social Responsibility
Learning Objective: 05-05 Explain how managers can incorporate ethical considerations into
their decision making.
Bloom's: Understand
AACSB: Ethics
Accessibility: Keyboard Navigation
42
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
93) Often, the code of ethics draws heavily upon documents such as the ________, which itself is
grounded in Kantian and rights-based theories of moral philosophy.
A) Convention on Combating Bribery of Foreign Public Officials
B) UN Universal Declaration of Human Rights
C) Convention on International Business Transactions
D) Foreign Corrupt Practices Act
Answer: B
Explanation: A code of ethics is a formal statement of the ethical priorities a business adheres to.
Often, the code of ethics draws heavily upon documents such as the UN Universal Declaration of
Human Rights, which itself is grounded in Kantian and rights-based theories of moral philosophy.
Difficulty: 2 Medium
Topic: Ethics and Social Responsibility
Learning Objective: 05-05 Explain how managers can incorporate ethical considerations into
their decision making.
Bloom's: Apply
AACSB: Ethics
Accessibility: Keyboard Navigation
94) Discuss how companies such as Exxon, Kodak, and IBM helped improve human rights in
South Africa.
Answer: During the 1980s, many American companies doing business in South Africa realized
that following the Sullivan principles of not obeying apartheid laws and trying to promote their
abolition was not a sufficiently ethical strategy. Consequently, many companies divested their
holdings in the nation. At the same time, the U.S. government and other nations imposed economic
sanctions on the country. Together, these actions helped bring about democratic elections in the
nation in 1994, and an end to white minority rule.
Difficulty: 3 Hard
Topic: Ethical Issues in International Business
Learning Objective: 05-01 Understand the ethical issues faced by international businesses.
Bloom's: Analyze
AACSB: Ethics
Accessibility: Keyboard Navigation
43
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
95) Should a multinational feel free to pollute in a developing nation?
Answer: This question is designed to stimulate classroom discussion or the personal opinion of
the student. Issues that might emerge include whether there is any danger that a moral management
might move production to a developing nation precisely because costly pollution controls are not
required; the notion that the environment is a public good that no one owns, but that anyone can
despoil; human-induced global warming; and legality of various actions.
Difficulty: 3 Hard
Topic: Ethical Issues in International Business
Learning Objective: 05-01 Understand the ethical issues faced by international businesses.
Bloom's: Evaluate
AACSB: Ethics
Accessibility: Keyboard Navigation
96) In your opinion, are bribes ever acceptable? Why or why not?
Answer: This question is designed to allow students to explore the idea of bribery as possibly
resulting in a positive rather than a negative outcome. Some economists have suggested that
corruption might in fact improve efficiency and help growth. Others, however, argue that
corruption simply reduces the returns on business investment and leads to low economic growth.
Difficulty: 3 Hard
Topic: Ethical Issues in International Business
Learning Objective: 05-01 Understand the ethical issues faced by international businesses.
Bloom's: Evaluate
AACSB: Ethics
Accessibility: Keyboard Navigation
97) Discuss the notion of social responsibility. What does it mean for corporations?
Answer: The concept of social responsibility refers to the idea that businesspeople should
consider the social consequences of economic actions when making business decisions, and that
there should be a presumption in favor of decisions that have both good economic and social
consequences. In a business setting, social responsibility means that benevolent behavior is the
responsibility of successful enterprises.
Difficulty: 3 Hard
Topic: Ethics and Social Responsibility
Learning Objective: 05-01 Understand the ethical issues faced by international businesses.
Bloom's: Analyze
AACSB: Ethics
Accessibility: Keyboard Navigation
44
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
98) What are ethical dilemmas? Why do they exist?
Answer: Ethical dilemmas are situations in which none of the available alternatives seems
ethically acceptable. Ethical dilemmas exist because many real-world decisions are complex,
difficult to frame, and involve first-, second-, and third-order consequences that are hard to
quantify. To deal with these situations, managers need a moral compass to guide them through the
dilemma to find an acceptable solution.
Difficulty: 3 Hard
Topic: Ethical Decision Making
Learning Objective: 05-02 Recognize an ethical dilemma.
Bloom's: Evaluate
AACSB: Ethics
Accessibility: Keyboard Navigation
99) Why are expatriate managers at a greater risk of violating their personal code of ethics?
Answer: Expatriate managers may experience more than the usual degree of pressure to violate
their personal ethics. They are away from their ordinary social context and supporting culture, and
they are psychologically and geographically distant from the parent company. They may be based
in a culture that does not place the same value on ethical norms important in the manager's home
country, and they may be surrounded by local employees who have less rigorous ethical standards.
The parent company may pressure expatriate managers to meet unrealistic goals that can only be
fulfilled by acting unethically. For example, to meet centrally mandated performance goals,
expatriate managers might give bribes to win contracts. Local managers might encourage the
expatriate to adopt such behavior. Due to its geographical distance, the parent company may be
unable to see how expatriate managers are meeting goals, or may choose not to see how they are
doing so, allowing such behavior to flourish and persist.
Difficulty: 3 Hard
Topic: Causes of Unethical Behavior
Learning Objective: 05-03 Identify the causes of unethical behavior by managers.
Bloom's: Evaluate
AACSB: Ethics
Accessibility: Keyboard Navigation
45
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
100) Explain the Friedman doctrine. Who developed the philosophy? How well does this approach
hold up ethically?
Answer: In 1970, Milton Friedman suggested that the only social responsibility of business is to
increase profits, so long as the company stays within the rules of law. He explicitly rejects the idea
that business should undertake social expenditures beyond those mandated by the law and required
for the efficient running of a business. Friedman does state that businesses should behave in an
ethical manner and not engage in deception and fraud; however, most economists believe that his
approach to ethics does not hold up well. For example, even though child labor may not be against
the law in a particular country, it is still unethical to use child labor.
Difficulty: 2 Medium
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Analyze
AACSB: Ethics
Accessibility: Keyboard Navigation
101) Discuss the cultural relativism approach to business ethics. What is the connection between
this approach and the phrase "When in Rome do as the Romans do"? How well does this approach
hold up ethically?
Answer: The cultural relativism approach is the belief that ethics are nothing more than the
reflection of a culture and accordingly, a firm should adopt the ethics of the culture in which it is
operating. This approach is often summarized by the maxim "When in Rome do as the Romans
do." Cultural relativism does not stand up well to business ethics because it suggests that if a
culture allows slavery, then it is acceptable for a firm to use slaves as well. Cultural relativism
implicitly rejects the idea that universal notions of morality transcend different cultures; however,
some universal notions of morality are found across cultures.
Difficulty: 3 Hard
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Evaluate
AACSB: Ethics
Accessibility: Keyboard Navigation
46
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
102) Discuss the naive immoralist's approach to business ethics. What are the criticisms of this
approach?
Answer: The naive immoralist asserts that if a manager of a multinational sees that firms from
other nations are not following ethical norms in a host nation, that manager should not either. This
approach has been criticized with the argument that simply accepting an action as being ethically
justified just because everyone is doing it is not sufficient. Moreover, the multinational company
does have the ability to change the prevailing practice in the country.
Difficulty: 3 Hard
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Analyze
AACSB: Ethics
Accessibility: Keyboard Navigation
103) Discuss the utilitarian approach to business ethics. When was this approach developed? What
are its drawbacks?
Answer: The utilitarian approach to business ethics was developed in the eighteenth and
nineteenth centuries by philosophers such as David Hume, Jeremy Bentham, and John Stuart Mill.
The utilitarian approach to ethics holds that the moral worth of actions or practices is determined
by their consequences. An action is judged to be desirable if it leads to the best possible balance of
good consequences over bad consequences. The best decisions are those that produce the greatest
good for the greatest number of people
This approach has certain limitations. One serious drawback of the utilitarian approach is that it is
difficult to measure the benefits, costs, and risks of a course of action. A second problem is that the
philosophy omits the consideration of justice.
Difficulty: 3 Hard
Topic: Philosophical Approaches to Ethics
Learning Objective: 05-04 Describe the different philosophical approaches to ethics.
Bloom's: Analyze
AACSB: Ethics
Accessibility: Keyboard Navigation
47
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
104) What are the ways in which international business and its managers can ensure that ethical
issues are considered in business decisions?
Answer: An international business and its managers can take several steps to make sure ethical
issues are considered in business decisions. Some of these are: (1) favor hiring and promoting
people with a well-grounded sense of personal ethics; (2) build an organizational culture that
places a high value on ethical behavior; (3) put decision-making processes in place that require
people to consider the ethical dimension of business decisions; (4) institute ethical officers in the
organization; (5) develop moral courage; (6) make corporate social responsibility a cornerstone of
enterprise policy; and (7) pursue strategies that are sustainable.
Difficulty: 2 Medium
Topic: Ethical Decision Making
Learning Objective: 05-05 Explain how managers can incorporate ethical considerations into
their decision making.
Bloom's: Apply
AACSB: Ethics
Accessibility: Keyboard Navigation
105) Describe the five-step process that businesses can use to think through ethical problems.
Answer: Some experts on ethics have recommended a five-step process to think through ethical
problems. In step 1, businesspeople should identify which stakeholders a decision would affect
and in what ways. Stakeholder analysis involves a certain amount of moral imagination. Step 2
involves judging the ethics of the proposed strategic decision, given the information gained in step
1. Managers need to determine whether a proposed decision would violate the fundamental rights
of any stakeholders. Step 3 requires managers to establish moral intent. This means the business
must resolve to place moral concerns ahead of other concerns in cases where either the
fundamental rights of stakeholders or key moral principles have been violated. Step 4 requires the
company to engage in ethical behavior. Step 5 requires the business to audit its decisions,
reviewing them to make sure they were consistent with ethical principles, such as those stated in
the company's code of ethics.
Difficulty: 2 Medium
Topic: Ethical Decision Making
Learning Objective: 05-05 Explain how managers can incorporate ethical considerations into
their decision making.
Bloom's: Apply
AACSB: Ethics
Accessibility: Keyboard Navigation
48
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
106) Why do organizations appoint an ethics officer?
Answer: To make sure that a business behaves in an ethical manner, a number of firms now have
ethics officers. These individuals are responsible for making sure that all employees are trained to
be ethically aware, that ethical considerations enter the business decision-making process, and that
the company's code of ethics is followed. Ethics officers may also be responsible for auditing
decisions to make sure they are consistent with this code. In many businesses, ethics officers act as
an internal ombudsperson with responsibility for handling confidential inquiries from employees,
investigating complaints from employees or others, reporting findings, and making
recommendations for change.
Difficulty: 2 Medium
Topic: Ethics and Social Responsibility
Learning Objective: 05-05 Explain how managers can incorporate ethical considerations into
their decision making.
Bloom's: Evaluate
AACSB: Ethics
Accessibility: Keyboard Navigation
107) How can companies strengthen the moral courage of employees?
Answer: Companies can strengthen the moral courage of employees by committing themselves
to not retaliate against employees who exercise moral courage, say no to superiors, or otherwise
complain about unethical actions. Companies can also set up ethics hotlines, which allow
employees to anonymously register a complaint with a corporate ethics officer.
Difficulty: 2 Medium
Topic: Ethical Decision Making
Learning Objective: 05-05 Explain how managers can incorporate ethical considerations into
their decision making.
Bloom's: Apply
AACSB: Ethics
Accessibility: Keyboard Navigation
49
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
108) Explain the concept of moral imagination as it relates to a company's stakeholders.
Answer: All stakeholders are in an exchange relationship with the company. Each stakeholder
group supplies the organization with important resources (or contributions), and in exchange each
expects its interests to be satisfied by inducements. Stakeholder analysis involves a certain amount
of what has been called moral imagination. This means standing in the shoes of a stakeholder and
asking how a proposed decision might impact that stakeholder.
Difficulty: 2 Medium
Topic: Ethical Decision Making
Learning Objective: 05-05 Explain how managers can incorporate ethical considerations into
their decision making.
Bloom's: Apply
AACSB: Ethics
Accessibility: Keyboard Navigation
50
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
International Business, 12e (Hill)
Chapter 6
International Trade Theory
1) The theories of Smith and Ricardo show that a country should engage in international trade,
even for products that it is able to produce for itself.
Answer: TRUE
Explanation: The theories of Smith, Ricardo, and Heckscher-Ohlin show why it is beneficial for
a country to engage in international trade even for products it is able to produce for itself.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-01 Understand why nations trade with each other.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
2) Porter's theory of national competitive advantage recommends unrestricted free trade between
countries.
Answer: FALSE
Explanation: Porter's theory of national competitive advantage can be interpreted as justifying
some limited government intervention to support the development of certain export-oriented
industries.
Difficulty: 1 Easy
Topic: Porters Diamond Model
Learning Objective: 06-01 Understand why nations trade with each other.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
3) Heckscher-Ohlin theory supports the case for unrestricted free trade between nations.
Answer: TRUE
Explanation: The theories of Smith, Ricardo, and Heckscher-Ohlin support the case for
unrestricted free trade.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-01 Understand why nations trade with each other.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
1
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
4) Mercantilist doctrine advocates unrestricted free trade between countries.
Answer: FALSE
Explanation: Mercantilist doctrine advocates government intervention to achieve a surplus in the
balance of trade.
Difficulty: 1 Easy
Topic: Mercantilism
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
5) A country has an absolute advantage in the production of a product when it is more efficient
than any other country in producing it.
Answer: TRUE
Explanation: A country has an absolute advantage in the production of a product when it is more
efficient than any other country in producing it.
Difficulty: 1 Easy
Topic: Mercantilism
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
6) Factor endowments refer to the extent to which a country is gifted with such resources as land,
labor, and capital.
Answer: TRUE
Explanation: Factor endowments refer to the extent to which a country is endowed with such
resources as land, labor, and capital.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
2
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
7) Heckscher-Ohlin theory stresses that comparative advantage arises from differences in
productivity.
Answer: FALSE
Explanation: Unlike Ricardo's theory, the Heckscher-Ohlin theory argues that the pattern of
international trade is determined by differences in factor endowments, rather than differences in
productivity.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
8) Ricardo's theory makes fewer simplifying assumptions compared to Heckscher-Ohlin theory.
Answer: FALSE
Explanation: Most economists prefer the Heckscher-Ohlin theory to Ricardo's theory because it
makes fewer simplifying assumptions.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
9) A key assumption in the Heckscher-Ohlin theory is that technologies are the same across
countries.
Answer: TRUE
Explanation: A key assumption in the Heckscher-Ohlin theory is that technologies are the same
across countries.
Difficulty: 2 Medium
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
3
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
10) Some of the arguments made by the product life-cycle theory seem ethnocentric and
increasingly dated when viewed from an Asian or European perspective.
Answer: TRUE
Explanation: Viewed from an Asian or European perspective, the theory's argument that most
new products are developed and introduced in the United States seems ethnocentric and
increasingly dated.
Difficulty: 1 Easy
Topic: Factor Proportions and International Product Life Cycle Theories
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
11) XYZ Toys manufactures and sells small quantities of each of its products, but it can still
benefit from economies of scale.
Answer: FALSE
Explanation: Economies of scale are unit cost reductions associated with a large scale of output.
This means that companies that trade in large volumes benefit from the economies of scale.
Difficulty: 2 Medium
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
12) The simple model of free trade assumed away transportation costs between countries.
Answer: TRUE
Explanation: The simple model of free trade assumed away transportation costs between
countries.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade
between nations will raise the economic welfare of countries that participate in a free trade system.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
4
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
13) Resources always move easily from one economic activity to another.
Answer: FALSE
Explanation: Resources do not always move easily from one economic activity to another.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade
between nations will raise the economic welfare of countries that participate in a free trade system.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
14) Diminishing returns show that it is feasible for a country to specialize to the degree suggested
by the simple Ricardian model.
Answer: FALSE
Explanation: Diminishing returns show that it is not feasible for a country to specialize to the
degree suggested by the simple Ricardian model.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade
between nations will raise the economic welfare of countries that participate in a free trade system.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
15) According to Paul Samuelson's critique, a poor country will rapidly improve its productivity if
a rich country enters into a free trade agreement with it.
Answer: TRUE
Explanation: Paul Samuelson's critique argues that when a rich country enters into a free trade
agreement with a poor country, there will be a dynamic gain in the efficiency with which resources
are used in the poor country. The poor country's productivity will improve rapidly.
Difficulty: 2 Medium
Topic: Trade Theories and Their Implications
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade
between nations will raise the economic welfare of countries that participate in a free trade system.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
5
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
16) Apple's iPhone was unique when it first came out, with many features that no other phones
had. As such, it enjoyed great success and dominated the cell phone market. This demonstrates the
first-mover advantage.
Answer: TRUE
Explanation: First-mover advantages are the economic and strategic advantages that accrue to
early entrants into an industry.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade
between nations will raise the economic welfare of countries that participate in a free trade system.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
17) New trade theorists stress the role of luck in giving a firm first-mover advantages.
Answer: TRUE
Explanation: New trade theorists stress the role of luck, entrepreneurship, and innovation in
giving a firm first-mover advantages.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-04 Explain the arguments of those who maintain that government can
play a proactive role in promoting national competitive advantage in certain industries.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
18) According to the new trade theory, firms that establish a first-mover advantage with regard to
the production of a particular new product may subsequently dominate global trade in that product.
Answer: TRUE
Explanation: According to the new trade theory, firms that establish a first-mover advantage with
regard to the production of a particular new product may subsequently dominate global trade in
that product.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-05 Understand the important implications that international trade theory
holds for business practice.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
6
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
19) From a profit perspective, it makes sense for firms to disperse their productive activities to
those countries where they can be performed most efficiently.
Answer: TRUE
Explanation: Underlying most trade theories is the notion that different countries have particular
advantages in different productive activities. Thus, from a profit perspective, it makes sense for a
firm to disperse its productive activities to those countries where, according to the theory of
international trade, they can be performed most efficiently.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-05 Understand the important implications that international trade theory
holds for business practice.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
20) ________ refers to a situation where a government does not attempt to influence through
quotas or duties what its citizens can buy from another country.
A) Fair trade
B) Trade theory
C) Free trade
D) Mercantilism
Answer: C
Explanation: Free trade refers to a situation where a government does not attempt to influence
through quotas or duties what its citizens can buy from another country, or what they can produce
and sell to another country.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-01 Understand why nations trade with each other.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
7
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
21) Identify the theory that supports the view that, in some cases, countries export for the reason
that the world market can support only a limited number of firms.
A) Heckscher-Ohlin theory
B) Smith's theory
C) Ricardo's theory
D) new trade theory
Answer: D
Explanation: New trade theory stresses that in some cases countries specialize in the production
and export of particular products not because of underlying differences in factor endowments, but
because in certain industries the world market can support only a limited number of firms.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-01 Understand why nations trade with each other.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
22) Country A exports electronic goods from Country B although there are no underlying
differences in factor endowments between the two countries. Which of the following theories
explains this anomaly?
A) comparative advantage theory
B) new trade theory
C) Ricardo's theory
D) Smith's theory
Answer: B
Explanation: New trade theory stresses that in some cases countries specialize in the production
and export of particular products not because of underlying differences in factor endowments, but
because in certain industries the world market can support only a limited number of firms.
Difficulty: 2 Medium
Topic: Trade Theories and Their Implications
Learning Objective: 06-01 Understand why nations trade with each other.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
8
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
23) Which of the following observations is consistent with Michael Porter's theory of national
competitive advantage?
A) Factors such as domestic demand and domestic rivalry explain nations' dominance in
production.
B) Countries should produce only those goods for which they have a comparative advantage.
C) Interplay between the factors of production cause international marketing decisions.
D) International differences in labor productivity determine nations' supremacy in production.
Answer: A
Explanation: Michael Porter's theory of national competitive advantage attempts to explain why
particular nations achieve international success in particular industries. In addition to factor
endowments, Porter points out the importance of country factors such as domestic demand and
domestic rivalry in explaining a nation's dominance in the production and export of particular
products.
Difficulty: 2 Medium
Topic: Trade Theories and Their Implications
Learning Objective: 06-01 Understand why nations trade with each other.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
24) Which of the following is a theory that can be used to justify limited government intervention
to support the development of certain export-oriented industries?
A) comparative advantage theory
B) Ricardo's theory
C) new trade theory
D) Heckscher-Ohlin theory
Answer: C
Explanation: Both the new trade theory and Porter's theory of national competitive advantage can
be interpreted as justifying some limited government intervention to support the development of
certain export-oriented industries.
Difficulty: 2 Medium
Topic: Trade Theories and Their Implications
Learning Objective: 06-01 Understand why nations trade with each other.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
9
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
25) Which of the following refers to a situation where a government does not attempt to influence
through quotas or duties what its citizens can buy from another country?
A) economic patriotism
B) protectionism
C) free trade
D) offshoring
Answer: C
Explanation: Free trade refers to a situation where a government does not attempt to influence
through quotas or duties what its citizens can buy from another country, or what they can produce
and sell to another country.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-01 Understand why nations trade with each other.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
26) Which of the following is a major benefit of engaging in free trade?
A) It helps to reduce the financial volatility in global markets.
B) It helps countries protect the jobs that are available to their citizens.
C) It gives countries access to products that they cannot produce.
D) It allows governments to exert more control on businesses.
Answer: C
Explanation: Countries can benefit from exchanging goods that they can produce efficiently to
obtain products that they cannot produce.
Difficulty: 2 Medium
Topic: Trade Theories and Their Implications
Learning Objective: 06-01 Understand why nations trade with each other.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
10
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
27) David Ricardo's theory of comparative advantage explains global trade in terms of the
A) first-mover advantage that certain countries and firms enjoy.
B) geographical differences between various countries.
C) international differences in labor productivity.
D) late-mover advantage that certain countries and firms possess.
Answer: C
Explanation: David Ricardo's theory of comparative advantage offers an explanation in terms of
international differences in labor productivity.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-01 Understand why nations trade with each other.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
28) Which of the following theories emphasizes the interplay between the proportions in which the
factors of production are available in different countries and the proportions in which they are
needed for producing particular goods?
A) Porter's theory
B) Smith's theory
C) Ricardo's theory
D) Heckscher-Ohlin theory
Answer: D
Explanation: The Heckscher-Ohlin theory emphasizes the interplay between the proportions in
which the factors of production (such as land, labor, and capital) are available in different countries
and the proportions in which they are needed for producing particular goods.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-01 Understand why nations trade with each other.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
11
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
29) ________ stresses that in some cases countries specialize in the production and export of
particular products because the world market can support only a limited number of firms.
A) New trade theory
B) Absolute advantage
C) The world market theory
D) Mercantilism
Answer: A
Explanation: New trade theory stresses that in some cases countries specialize in the production
and export of particular products not because of underlying differences in factor endowments, but
because in certain industries the world market can support only a limited number of firms.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-01 Understand why nations trade with each other.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
30) ________ supports the idea that countries should export more than they import.
A) Absolute advantage
B) Mercantilism
C) The world market theory
D) New trade theory
Answer: B
Explanation: The main tenet of mercantilism was that it is in a country's best interests to maintain
a trade surplus, to export more than it imported.
Difficulty: 1 Easy
Topic: Mercantilism
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
12
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
31) The principle of mercantilism views trade as a(n) ________ game.
A) advantage
B) positive-sum
C) zero-sum
D) negative-sum
Answer: C
Explanation: The flaw with mercantilism was that it viewed trade as a zero-sum game, in which a
gain by one country results in a loss by another.
Difficulty: 1 Easy
Topic: Mercantilism
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
32) ________ argued that countries should specialize in the production of goods for which they
have an absolute advantage.
A) Paul Krugman
B) David Hume
C) David Ricardo
D) Adam Smith
Answer: D
Explanation: According to Smith, countries should specialize in the production of goods for
which they have an absolute advantage and then trade these for goods produced by other countries.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
13
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
33) According to Ricardo's theory of comparative advantage, countries should
A) specialize in the production of those goods that it produces most efficiently.
B) specialize in the production of those goods that their competitors in the world market currently
have monopolies on.
C) produce all the products for which they have an absolute advantage.
D) produce only the products for which they have an absolute advantage.
Answer: A
Explanation: According to Ricardo's theory of comparative advantage, it makes sense for a
country to specialize in the production of those goods that it produces most efficiently and to buy
the goods that it produces less efficiently from other countries.
Difficulty: 2 Medium
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
34) The theory of comparative advantage suggests that trade is a ________ game in which all
countries that participate realize economic gains.
A) net-sum
B) positive-sum
C) zero-sum
D) negative-sum
Answer: B
Explanation: The theory of comparative advantage suggests that trade is a positive-sum game in
which all countries that participate realize economic gains.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
14
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
35) The Heckscher-Ohlin theory predicts that countries will
A) export those goods that make intensive use of factors that are locally scarce.
B) export those goods that make intensive use of factors that are locally abundant.
C) import those goods that make intensive use of factors that are locally abundant.
D) import those goods that make intensive use of factors that are available worldwide.
Answer: B
Explanation: The Heckscher-Ohlin theory predicts that countries will export those goods that
make intensive use of factors that are locally abundant, while importing goods that make intensive
use of factors that are locally scarce.
Difficulty: 2 Medium
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
36) The ________ theory argues that the pattern of international trade is determined by differences
in factor endowments.
A) comparative advantage
B) Leontief Paradox
C) Heckscher-Ohlin
D) absolute advantage
Answer: C
Explanation: The Heckscher-Ohlin theory argues that the pattern of international trade is
determined by differences in factor endowments.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
15
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
37) A capital-intensive country exports products that are capital intensive. Which theory is this an
example of?
A) new trade
B) Leontief paradox
C) Porter's diamond
D) Heckscher-Ohlin
Answer: D
Explanation: The given situation follows the Heckscher-Ohlin theory.
Difficulty: 2 Medium
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
38) The ________ argues that a large proportion of the world's new products had been developed
by U.S. firms.
A) product life-cycle theory
B) Porter's diamond
C) new trade theory
D) Leontief paradox
Answer: A
Explanation: The product life-cycle theory argues that a large proportion of the world's new
products had been developed by U.S. firms.
Difficulty: 1 Easy
Topic: Factor Proportions and International Product Life Cycle Theories
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
16
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
39) ________ are unit cost reductions associated with a large scale of output.
A) Current account deficits
B) Economies of scale
C) Current account surpluses
D) Factor endowments
Answer: B
Explanation: Economies of scale are unit cost reductions associated with a large scale of output.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
40) Which of the following is the main principle of mercantilism?
A) Protection of domestic industries is not essential for a nation's welfare.
B) Government intervention is not required in global trade.
C) Countries should encourage absolute free trade.
D) It is in a country's best interests to maintain a trade surplus.
Answer: D
Explanation: The main tenet of mercantilism is that it is in a country's best interests to maintain a
trade surplus, to export more than it imported. By doing so, a country would accumulate gold and
silver and, consequently, increase its national wealth, prestige, and power.
Difficulty: 1 Easy
Topic: Mercantilism
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
17
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
41) Which of the following is a flaw associated with mercantilism?
A) Mercantilists do not support government intervention in trade.
B) Mercantilists view trade as a zero-sum game.
C) Mercantilists recommend policies to maximize imports.
D) Mercantilists recommend countries maintain a negative trade balance.
Answer: B
Explanation: The flaw with mercantilism is that it views trade as a zero-sum game. A zero-sum
game is one in which a gain by one country results in a loss by another.
Difficulty: 2 Medium
Topic: Mercantilism
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
42) A country has an absolute advantage in the production of a product when it
A) has the capability to produce the product within its boundaries.
B) is more efficient than any other country in producing it.
C) has the largest domestic demand for the product.
D) has access to the raw materials needed to produce the product.
Answer: B
Explanation: A country has an absolute advantage in the production of a product when it is more
efficient than any other country in producing it.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
18
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
43) According to Adam Smith, a country should specialize in the production of a good when it has
A) an absolute advantage in the production of the good.
B) a strong domestic demand for the good.
C) the ability to help country increase its national output.
D) the necessary raw materials for production.
Answer: A
Explanation: According to Smith, countries should specialize in the production of goods for
which they have an absolute advantage and then trade these for goods produced by other countries.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
44) Country A can produce product X, but it can also buy it at a cheap rate from Country B. Which
of the following courses of action is suitable in this situation according to Adam Smith's theory of
absolute advantage?
A) Country A should import product X from Country B and it should not attempt to produce it at
home.
B) Country A should partly import the product and produce it domestically.
C) Country A should produce more of product X and should attempt to obtain an absolute
advantage for the product.
D) Country A should subsidize the production of product X to obtain an absolute advantage over
Country B.
Answer: A
Explanation: Smith's basic argument is that a country should never produce goods at home that it
can buy at a lower cost from other countries.
Difficulty: 2 Medium
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
19
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
45) According to Ricardo's theory of comparative advantage, a country should produce goods
A) for which it has access to raw materials.
B) that it produces most efficiently.
C) that have the highest domestic demand.
D) for which it has an absolute advantage.
Answer: B
Explanation: According to Ricardo's theory of comparative advantage, it makes sense for a
country to specialize in the production of those goods that it produces most efficiently and to buy
the goods that it produces less efficiently from other countries, even if this means buying goods
from other countries that it could produce more efficiently itself.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
46) Which of the following is a statement that supports the theory of comparative advantage?
A) International trade is a zero-sum gain where one nation's gain is another's loss.
B) Domestic industries are at risk when a country engages in free trade.
C) A country should maintain a trade surplus to succeed in global trade.
D) Global production is greater with free trade than it is with restricted trade.
Answer: D
Explanation: The basic message of the theory of comparative advantage is that potential world
production is greater with unrestricted free trade than it is with restricted trade.
Difficulty: 2 Medium
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
20
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
47) The theory of comparative advantage provides strong rationale for supporting the idea of
A) business nationalism.
B) free trade.
C) protectionist trade policies.
D) governmental intervention in trade.
Answer: B
Explanation: The theory of comparative advantage suggests that trade is a positive-sum game in
which all countries that participate realize economic gains. As such, this theory provides a strong
rationale for encouraging free trade.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
48) Which of the following terms refers to a nation's position in factors of production, such as
skilled labor or the infrastructure necessary to compete in a given industry?
A) current accounts
B) factor endowments
C) national balance
D) national accounts
Answer: B
Explanation: Factor endowments refer to a nation's position in factors of production, such as
skilled labor or the infrastructure necessary to compete in a given industry.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
21
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
49) Identify the theory that predicts that countries will export those goods that make intensive use
of factors that are locally abundant.
A) theory of comparative advantage
B) Ricardo theory
C) new trade theory
D) Heckscher-Ohlin theory
Answer: D
Explanation: The Heckscher-Ohlin theory predicts that countries will export those goods that
make intensive use of factors that are locally abundant, while importing goods that make intensive
use of factors that are locally scarce.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
50) Which of the following is the reason most economists prefer Heckscher-Ohlin theory to
Ricardo's theory?
A) Heckscher-Ohlin stresses the differences in productivity between nations.
B) Ricardo's theory considers factor endowments to describe national competitiveness.
C) Heckscher-Ohlin theory makes fewer simplifying assumptions.
D) Ricardo's theory considers the law of marginal returns.
Answer: C
Explanation: Most economists prefer the Heckscher-Ohlin theory to Ricardo's theory because it
makes fewer simplifying assumptions.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
22
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
51) Which of the following statements is true of the Leontief paradox?
A) It shows an anomaly that occurs when a nation has high domestic demand for a product.
B) It explains the relationship between domestic demand and comparative advantage.
C) It disproved Ricardo's theory of comparative advantage.
D) It raised questions about the validity of the Heckscher-Ohlin theory.
Answer: D
Explanation: The Leontief paradox raised questions about the validity of the Heckscher-Ohlin
theory.
Difficulty: 2 Medium
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
52) Identify the theory that argues that advanced nations have an incentive to develop new
consumer products and hence such nations always tend to create a good or service for the first
time.
A) absolute advantage
B) Ricardo
C) product life-cycle
D) Heckscher-Ohlin
Answer: C
Explanation: The theory argues that the wealth of advanced countries such as the United States
gives them an incentive to develop new consumer goods. Such nations always develop new
products.
Difficulty: 1 Easy
Topic: Factor Proportions and International Product Life Cycle Theories
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
23
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
53) Country X, a poor country, invents a revolutionary electronic product. The country markets
this new product in other poor countries to garner large profits. This occurrence is against the idea
of
A) product life-cycle theory.
B) Ricardo's theory.
C) theory of absolute advantage.
D) theory of comparative advantage.
Answer: A
Explanation: The theory argues that the wealth of such advanced countries as the United States
gives them an incentive to develop new consumer goods. The theory also argues that new products
are always introduced in developed nations.
Difficulty: 3 Hard
Topic: Factor Proportions and International Product Life Cycle Theories
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
54) Professor Baldwin believes that early in the life cycle of a U.S. product, demand in other
advanced countries is limited to high-income groups. Consequently, it is seldom worthwhile for
firms in those countries to start producing the product. This view conforms to
A) the product life-cycle theory.
B) Ricardo's theory.
C) the theory of absolute advantage.
D) the theory of comparative advantage.
Answer: A
Explanation: In his product life-cycle theory, Raymond Vernon argued that early in the life cycle
of a typical new product, while demand is starting to grow rapidly in the United States, demand in
other advanced countries is limited to high-income groups. The limited initial demand in other
advanced countries does not make it worthwhile for firms in those countries to start producing the
new product, but it does necessitate some exports from the United States to those countries.
Difficulty: 3 Hard
Topic: Factor Proportions and International Product Life Cycle Theories
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
24
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
55) Which of the following is a major disadvantage of the product life-cycle theory introduced by
Vernon?
A) The theory's arguments seem ethnocentric and increasingly dated.
B) The theory failed to explain the dominance of developed nations.
C) The theory applies only when a poor nation invents a new product.
D) The theory cannot be used to explain the production of luxury products.
Answer: A
Explanation: Vernon's argument that most new products are developed and introduced in the
United States seems ethnocentric and increasingly dated.
Difficulty: 1 Easy
Topic: Factor Proportions and International Product Life Cycle Theories
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
56) Which of the following terms refers to the unit cost reductions associated with large sized
outputs?
A) absolute advantage of production
B) economies of scale
C) constant marginal returns
D) diminishing marginal returns
Answer: B
Explanation: Economies of scale are unit cost reductions associated with a large scale of output.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
25
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
57) Walmart makes bulk purchases from its vendors and hence it is able to get better deals than its
competitors. This allows Walmart to offer greater discounts to its customers. In this case, Walmart
benefits from
A) first-mover advantage.
B) constant marginal returns.
C) economies of scale.
D) absolute advantage of production.
Answer: C
Explanation: Economies of scale are unit cost reductions associated with a large scale of output.
Here, WalMart is benefiting from the economies of scale.
Difficulty: 2 Medium
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
58) Which of the following is one of the four attributes present in Porter's diamond?
A) economies of scale
B) factor endowments
C) structural innovation
D) procedural innovation
Answer: B
Explanation: Porter theorizes four broad attributes of a nation shape the environment in which
local firms compete. These four factors are factor endowments, demand conditions, relating and
supporting industries, and firm strategy, structure, and rivalry.
Difficulty: 1 Easy
Topic: Porters Diamond Model
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
26
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
59) Which of the following is an example of a basic factor that a nation will possess as proposed by
Porter?
A) communication infrastructure
B) skilled labor
C) natural resources
D) technological knowledge
Answer: C
Explanation: Such factors as natural resources, climate, location, and demographics are basic
factors. Factors such as communication infrastructure, sophisticated and skilled labor, research
facilities, and technological know-how are examples of advanced factors.
Difficulty: 1 Easy
Topic: Porters Diamond Model
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
60) Which of the following factors, according to Porter, is most likely to give a country
competitive advantage over another country?
A) natural resources
B) climate
C) skilled labor
D) demographics
Answer: C
Explanation: Factors such as communication infrastructure, sophisticated and skilled labor,
research facilities, and technological know-how are examples of advanced factors. Porter argues
that advanced factors are the most significant for competitive advantage.
Difficulty: 1 Easy
Topic: Porters Diamond Model
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
27
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
61) Porter argues that a nation's firms gain competitive advantage if
A) their domestic consumers lack technical awareness.
B) they function in a labor-intensive market.
C) the country has an abundant supply of unskilled workers.
D) their domestic consumers are demanding.
Answer: D
Explanation: Porter argues that a nation's firms gain competitive advantage if their domestic
consumers are sophisticated and demanding.
Difficulty: 1 Easy
Topic: Porters Diamond Model
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
62) If, for example, the textile industry in a nation is characterized by vigorous domestic rivalry,
which of the following observations of this nation's international competency is most likely to be
true?
A) The nation will have access to such basic factors of the textile industry as natural resources.
B) The nation's textile firms will have a competitive advantage in international trade.
C) The domestic customers of the textile firms will be less demanding.
D) The nation's textile industry will lack the advanced factors that are necessary to be
internationally competent.
Answer: B
Explanation: Porter's second point is that there is a strong association between vigorous domestic
rivalry and the creation and persistence of competitive advantage in an industry. Vigorous
domestic rivalry induces firms to look for ways to improve efficiency, which makes them better
international competitors.
Difficulty: 2 Medium
Topic: Porters Diamond Model
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
28
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
63) A country's balance-of-payments accounts keep track of the
A) basic factor endowments and advanced factor endowments that the nation possesses.
B) payments to and receipts from other countries for a particular time period.
C) income taxes paid by domestic firms and the spending on the firms.
D) total value of taxes paid by domestic firms and the spending on the firms.
Answer: B
Explanation: A country's balance-of-payments accounts keep track of the payments to and
receipts from other countries for a particular time period.
Difficulty: 1 Easy
Topic: Balance of Payments
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
64) Which of the following balance-of-payment accounts records onetime changes in the stock of
assets?
A) capital account
B) current account
C) financial account
D) monetary account
Answer: A
Explanation: The capital account records onetime changes in the stock of assets.
Difficulty: 1 Easy
Topic: Balance of Payments
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
29
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
65) If foreigners suddenly reduced their investments in the United States, what would happen?
A) The value of the dollar on foreign exchange markets would increase.
B) The action would have no impact on the U.S. economy.
C) The foreigners would sell U.S. dollars for another currency.
D) The price of U.S. exports would increase.
Answer: C
Explanation: Instead of reinvesting the dollars they earn from exports and investment in the
United States back into the country, they would sell those dollars for another currency. This would
lead to a fall in the value of the dollar on foreign exchange markets, and that in turn would increase
the price of imports, and lower the price of U.S. exports.
Difficulty: 2 Medium
Topic: Balance of Payments
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
66) The main tenet of mercantilism is that it is in a country's best interests to
A) maintain a trade deficit.
B) maintain a trade surplus.
C) import goods made from products that it does not have in abundance.
D) import more than it exports.
Answer: B
Explanation: The main tenet of mercantilism is that it is in a country's best interests to maintain a
trade surplus, to export more than it imported. By doing so, a country would accumulate gold and
silver and, consequently, increase its national wealth, prestige, and power.
Difficulty: 2 Medium
Topic: Mercantilism
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
30
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
67) Factor endowments refer to the extent to which a country
A) supports education, research, and development.
B) develops the infrastructure to support industrialism.
C) supports free trade.
D) has such resources as land, labor, and capital.
Answer: D
Explanation: Factor endowments refer to the extent to which a country is endowed with such
resources as land, labor, and capital. Nations have varying factor endowments, and different factor
endowments explain differences in factor costs.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
68) China has the infrastructure and the skilled labor that has enabled it to become a world
manufacturing leader. This relates to which of Porter's attributes of a nation?
A) firm strategy, structure, and rivalry
B) related and supporting industries
C) demand conditions
D) factor endowments
Answer: D
Explanation: Factor endowments refer to a nation's position in factors of production, such as
skilled labor or the infrastructure necessary to compete in a given industry.
Difficulty: 2 Medium
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
31
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
69) The ________ theory was based on the observation that for most of the twentieth century a
very large proportion of the world's new products had been developed by U.S. firms and sold first
in the U.S. market.
A) product life-cycle
B) Heckscher-Ohlin
C) new trade
D) Ricardo
Answer: A
Explanation: Vernon's theory was based on the observation that for most of the twentieth century
a very large proportion of the world's new products had been developed by U.S. firms and sold first
in the U.S. market. To explain this, Vernon argued that the wealth and size of the U.S. market gave
U.S. firms a strong incentive to develop new consumer products.
Difficulty: 2 Medium
Topic: Factor Proportions and International Product Life Cycle Theories
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
70) Economies of scale have a number of sources, including the ability
A) to average out the variable costs of production.
B) of large-volume producers to utilize specialized employees and equipment.
C) to adjust the scale of production based upon product saturation in the marketplace.
D) to utilize nonspecialized employees interchangeably.
Answer: B
Explanation: Economies of scale are unit cost reductions associated with a large scale of output.
Economies of scale have a number of sources, including the ability to spread fixed costs over a
large volume, and the ability of large-volume producers to utilize specialized employees and
equipment that are more productive than less specialized employees and equipment.
Difficulty: 2 Medium
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
32
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
71) One of the advantages of being the first mover in a market is
A) there is little risk involved.
B) to benefit from a higher cost structure.
C) the ability to capture scale economies ahead of later entrants.
D) local governments are more favorable to the first movers.
Answer: C
Explanation: First-mover advantages are the economic and strategic advantages that accrue to
early entrants into an industry. The ability to capture scale economies ahead of later entrants, and
thus benefit from a lower cost structure, is an important first-mover advantage.
Difficulty: 2 Medium
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
72) The variety of goods that a country can produce is limited by the size of the market in
industries where ________ are important.
A) factor endowments
B) current account deficits
C) economies of scale
D) current account surpluses
Answer: C
Explanation: In industries where economies of scale are important, both the variety of goods that
a country can produce and the scale of production are limited by the size of the market.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade
between nations will raise the economic welfare of countries that participate in a free trade system.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
33
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
73) Diminishing returns to specialization occur when
A) each additional unit is produced with lesser number of laborers.
B) a nation's gross domestic product declines for a few years.
C) production possibility frontier appears as a rectangle.
D) more units of resources are required to produce each additional unit.
Answer: D
Explanation: Diminishing returns to specialization occur when more units of resources are
required to produce each additional unit.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade
between nations will raise the economic welfare of countries that participate in a free trade system.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
74) What will happen, according to Paul Samuelson's critique, if a rich country enters into a free
trade agreement with a poor country?
A) Both the countries will incur losses due to the exchanges between them.
B) The productivity of the poor country will decline rapidly.
C) The poor country will rapidly improve its productivity.
D) Both the countries will garner benefits from the exchanges between them.
Answer: C
Explanation: Paul Samuelson's critique argues that when a rich country enters into a free trade
agreement with a poor country, there will be a dynamic gain in the efficiency with which resources
are used in the poor country. The poor country's productivity will improve rapidly.
Difficulty: 2 Medium
Topic: Trade Theories and Their Implications
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade
between nations will raise the economic welfare of countries that participate in a free trade system.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
34
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
75) The simple comparative advantage model assumed that trade
A) changes efficiency with which a country utilizes resources.
B) changes a country's stock of resources.
C) allows for dynamic changes in the marketplace.
D) does not change a country's stock of resources.
Answer: D
Explanation: The simple comparative advantage model assumed that trade does not change a
country's stock of resources or the efficiency with which it utilizes those resources.
Difficulty: 2 Medium
Topic: Trade Theories and Their Implications
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade
between nations will raise the economic welfare of countries that participate in a free trade system.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
76) Company A entered the production of office software before its competitors. Because of this,
the company's products are more familiar among and favored by customers. This situation
exemplifies the
A) first-mover advantage.
B) diminishing marginal returns.
C) economies of scale.
D) constant marginal returns.
Answer: A
Explanation: First mover advantages are the economic and strategic advantages that accrue to
early entrants into an industry.
Difficulty: 2 Medium
Topic: Trade Theories and Their Implications
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade
between nations will raise the economic welfare of countries that participate in a free trade system.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
35
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
77) Which of the following theories suggests that first-mover advantage is significant in the export
of a good?
A) product life-cycle theory
B) Ricardo's theory
C) new trade theory
D) theory of comparative advantage
Answer: C
Explanation: New trade theory suggests that a country may predominate in the export of a good
simply because it was lucky enough to have one or more firms among the first to produce that
good. Because they are able to gain economies of scale, the first movers in an industry may get a
lock on the world market that discourages subsequent entry.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade
between nations will raise the economic welfare of countries that participate in a free trade system.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
78) New trade theory suggests that nations
A) increase their commitment to research and development.
B) adopt policies that promote strong competition within domestic markets.
C) cannot benefit from trade when they do not differ in resource endowments or technology.
D) may benefit from trade even when they do not differ in resource endowments or technology.
Answer: D
Explanation: New trade theory suggests that nations may benefit from trade even when they do
not differ in resource endowments or technology.
Difficulty: 2 Medium
Topic: Trade Theories and Their Implications
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade
between nations will raise the economic welfare of countries that participate in a free trade system.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
36
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
79) The commercial aircraft industry can support only a limited number of firms, largely because
the existence of established firms would make it difficult to be competitive. This is a basic tenet of
A) mercantilism.
B) the theory of absolute advantage.
C) Heckscher-Ohlin theory.
D) new trade theory.
Answer: D
Explanation: New trade theory suggests that in certain industries the world market can support
only a limited number of firms. This is argued to be the case for the commercial aircraft industry.
In such industries, firms that enter the market first are able to build a competitive advantage that is
subsequently difficult to challenge.
Difficulty: 2 Medium
Topic: Trade Theories and Their Implications
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade
between nations will raise the economic welfare of countries that participate in a free trade system.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
80) Which of the following theories stress the role of luck, entrepreneurship, and innovation in the
production and export of a good or service by the firms in a country?
A) product life-cycle theory
B) Ricardo's theory
C) theory of comparative advantage
D) new trade theory
Answer: D
Explanation: New trade theory suggests that a country may predominate in the export of a good
simply because it was lucky enough to have one or more firms among the first to produce that
good. New trade theorists stress the role of luck, entrepreneurship, and innovation in giving a firm
first-mover advantages.
Difficulty: 1 Easy
Topic: Trade Theories and Their Implications
Learning Objective: 06-04 Explain the arguments of those who maintain that government can
play a proactive role in promoting national competitive advantage in certain industries.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
37
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
81) Porter contends that government
A) can influence the domestic demand conditions and the domestic rivalry components of the
diamond, but not the other two components.
B) can influence each of the four components of the diamond either positively or negatively.
C) can influence the factor endowments and the related and supporting industries components of
the diamond, but not the other two components.
D) has little or no effect on the four components that shape the environment in which firms
compete.
Answer: B
Explanation: Porter contends that government can influence each of the four components of the
diamond—factor endowments, domestic demand conditions, related and supporting industries,
and domestic rivalry—either positively or negatively.
Difficulty: 2 Medium
Topic: Porters Diamond Model
Learning Objective: 06-04 Explain the arguments of those who maintain that government can
play a proactive role in promoting national competitive advantage in certain industries.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
82) Which of the following is true regarding Porter's diamond theory?
A) It predicts that countries should be importing products from those industries where all four
components of the diamond are favorable.
B) Porter's theory has been proven to be an accurate predictor of the importing and exporting
patterns of countries.
C) It predicts that countries should be exporting products from those industries where all four
components of the diamond are those areas where the components are not favorable.
D) Porter's theory has not been subjected to detailed empirical testing, so we do not know if it is
correct.
Answer: D
Difficulty: 2 Medium
Topic: Porters Diamond Model
Learning Objective: 06-04 Explain the arguments of those who maintain that government can
play a proactive role in promoting national competitive advantage in certain industries.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
38
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
83) The theories of international trade claim that promoting free trade is generally in the best
interests of
A) a country, although it may not always be in the best interest of an individual firm.
B) all multinational corporations.
C) an individual firm, although it may not always be in the best interest of a country.
D) the World Trade Organization.
Answer: A
Explanation: The theories of international trade claim that promoting free trade is generally in the
best interests of a country, although it may not always be in the best interest of an individual firm.
Difficulty: 2 Medium
Topic: Trade Theories and Their Implications
Learning Objective: 06-05 Understand the important implications that international trade theory
holds for business practice.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
84) Explain the concept of free trade.
Answer: Free trade refers to a situation where a government does not attempt to influence
through quotas or duties what its citizens can buy from another country, or what they can produce
and sell to another country. Smith, who proposed free trade, argued that the invisible hand of the
market mechanism, rather than government policy, should determine what a country imports and
what it exports.
Difficulty: 3 Hard
Topic: Trade Theories and Their Implications
Learning Objective: 06-01 Understand why nations trade with each other.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
39
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
85) How does the Heckscher-Ohlin theory explain international trade?
Answer: The Heckscher-Ohlin theory emphasizes the interplay between the proportions in which
the factors of production (such as land, labor, and capital) are available in different countries and
the proportions in which they are needed for producing particular goods. This explanation rests on
the assumption that countries have varying endowments of the various factors of production.
Difficulty: 3 Hard
Topic: Trade Theories and Their Implications
Learning Objective: 06-01 Understand why nations trade with each other.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
86) Explain how the theories of trade differ in terms of their support to governmental intervention.
Answer: The theories of Smith, Ricardo, and Heckscher-Ohlin form part of the case for
unrestricted free trade. The argument for unrestricted free trade is that both import controls and
export incentives (such as subsidies) are self-defeating and result in wasted resources. Both the
new trade theory and Porter's theory of national competitive advantage can be interpreted as
justifying some limited government intervention to support the development of certain
export-oriented industries.
Difficulty: 3 Hard
Topic: Trade Theories and Their Implications
Learning Objective: 06-01 Understand why nations trade with each other.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
87) Explain Smith's theory of absolute advantage.
Answer: A country has an absolute advantage in the production of a product when it is more
efficient than any other country in producing it. According to Smith, countries should specialize in
the production of goods for which they have an absolute advantage and then trade these for goods
produced by other countries.
Difficulty: 3 Hard
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
40
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
88) Explain Ricardo's theory of comparative advantage.
Answer: According to Ricardo's theory of comparative advantage, it makes sense for a country to
specialize in the production of those goods that it produces most efficiently and to buy the goods
that it produces less efficiently from other countries, even if this means buying goods from other
countries that it could produce more efficiently itself.
Difficulty: 3 Hard
Topic: Trade Theories and Their Implications
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
89) Identify a major disadvantage of the product life-cycle theory.
Answer: Viewed from an Asian or European perspective, Vernon's argument that most new
products are developed and introduced in the United States seems ethnocentric and increasingly
dated. This is a major disadvantage of the product life-cycle theory.
Difficulty: 3 Hard
Topic: Factor Proportions and International Product Life Cycle Theories
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
90) Explain how the rivalry within an industry affects international competence.
Answer: Porter's second point is that there is a strong association between vigorous domestic
rivalry and the creation and persistence of competitive advantage in an industry. Vigorous
domestic rivalry induces firms to look for ways to improve efficiency, which makes them better
international competitors. Domestic rivalry creates pressures to innovate, to improve quality, to
reduce costs, and to invest in upgrading advanced factors. All this helps to create world-class
competitors.
Difficulty: 3 Hard
Topic: Porters Diamond Model
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
41
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
91) What are the four attributes that are discussed in Porter's diamond?
Answer: The four factors are:
(1) Factor endowments—a nation's position in factors of production such as skilled labor or the
infrastructure necessary to compete in a given industry.
(2) Demand conditions—the nature of home demand for the industry's product or service.
(3) Relating and supporting industries—the presence or absence of supplier industries and related
industries that are internationally competitive.
(4) Firm strategy, structure, and rivalry—the conditions governing how companies are created,
organized, and managed and the nature of domestic rivalry.
Difficulty: 3 Hard
Topic: Porters Diamond Model
Learning Objective: 06-02 Summarize the different theories explaining trade flows between
nations.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
92) What are the assumptions that we make when we discuss a simple Ricardian model to support
free trade?
Answer:
1. We have assumed a simple world in which there are only two countries and two goods.
2. We have assumed away transportation costs between countries.
3. We have assumed away differences in the prices of resources in different countries.
4. We have assumed that resources can move freely from the production of one good to another
within a country.
5. We have assumed constant returns to scale.
6. We have assumed that each country has a fixed stock of resources and that free trade does not
change the efficiency with which a country uses its resources.
7. We have assumed away the effects of trade on income distribution within a country.
Difficulty: 3 Hard
Topic: Trade Theories and Their Implications
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade
between nations will raise the economic welfare of countries that participate in a free trade system.
Bloom's: Evaluate
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
42
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
93) Briefly differentiate between constant returns to specialization and diminishing returns to
specialization.
Answer: By constant returns to specialization, we mean the units of resources required to
produce a good (cocoa or rice) are assumed to remain constant no matter where one is on a
country's production possibility frontier (PPF). Diminishing returns to specialization occur when
more units of resources are required to produce each additional unit.
Difficulty: 3 Hard
Topic: Trade Theories and Their Implications
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade
between nations will raise the economic welfare of countries that participate in a free trade system.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
94) Explain how the principle of diminishing returns weakens the Ricardian model.
Answer: Diminishing returns show that it is not feasible for a country to specialize to the degree
suggested by the simple Ricardian model outlined earlier. Diminishing returns to specialization
suggest that the gains from specialization are likely to be exhausted before specialization is
complete.
Difficulty: 3 Hard
Topic: Trade Theories and Their Implications
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade
between nations will raise the economic welfare of countries that participate in a free trade system.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
95) Explain the dynamic gains that are generated by opening an economy to trade.
Answer: First, free trade might increase a country's stock of resources as increased supplies of
labor and capital from abroad become available for use within the country.
Second, free trade might also increase the efficiency with which a country uses its resources.
Difficulty: 3 Hard
Topic: Trade Theories and Their Implications
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade
between nations will raise the economic welfare of countries that participate in a free trade system.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
43
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
96) Explain Paul Samuelson's critique.
Answer: Paul Samuelson's critique looks at what happens when a rich country enters into a free
trade agreement with a poor country that rapidly improves its productivity after the introduction of
a free trade regime. Samuelson's model suggests that in such cases, the lower prices that the rich
country's consumers pay for goods imported from the poor country following the introduction of a
free trade regime may not be enough to produce a net gain for the rich country's economy if the
dynamic effect of free trade is to lower real wage rates in the rich country.
Difficulty: 3 Hard
Topic: Trade Theories and Their Implications
Learning Objective: 06-03 Recognize why many economists believe that unrestricted free trade
between nations will raise the economic welfare of countries that participate in a free trade system.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
97) Do you think a new trade theorist would stress the role of luck and entrepreneurship? Explain.
Answer: Perhaps the most contentious implication of the new trade theory is the argument that it
generates for government intervention and strategic trade policy. New trade theorists stress the
role of luck, entrepreneurship, and innovation in giving firms first-mover advantages.
Difficulty: 3 Hard
Topic: Trade Theories and Their Implications
Learning Objective: 06-04 Explain the arguments of those who maintain that government can
play a proactive role in promoting national competitive advantage in certain industries.
Bloom's: Evaluate
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
44
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
International Business, 12e (Hill)
Chapter 7
Government Policy and International Trade
1) Tariffs are generally pro-consumer and anti-producer.
Answer: FALSE
Explanation: Tariffs are generally pro-producer and anti-consumer. While they protect producers
from foreign competitors, this restriction of supply also raises domestic prices.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
2) Export tariffs are far less common than import tariffs.
Answer: TRUE
Explanation: Export tariffs are far less common than import tariffs.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
3) Under a tariff rate quota, a higher tariff rate is applied to imports within the quota than those
over the quota.
Answer: FALSE
Explanation: Under a tariff rate quota, a lower tariff rate is applied to imports within the quota
than those over the quota.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
1
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
4) Unlike other trade policies, local content regulations tend to benefit consumers and not
producers.
Answer: FALSE
Explanation: Local content regulations provide protection for a domestic producer of parts in the
same way an import quota does: by limiting foreign competition. As with all trade policies, local
content regulations tend to benefit producers and not consumers.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
5) Local content regulations provide protection for a domestic producer of parts by limiting
foreign competition.
Answer: TRUE
Explanation: Local content regulations provide protection for a domestic producer of parts in the
same way an import quota does: by limiting foreign competition. The aggregate economic effects
are also the same; domestic producers benefit, but the restrictions on imports raise the prices of
imported components.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
6) Antidumping policies are designed to punish foreign firms that are engaged in dumping.
Answer: TRUE
Explanation: Antidumping policies are designed to punish foreign firms that engage in dumping.
The ultimate objective is to protect domestic producers from unfair foreign competition.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
2
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
7) Antidumping policies vary drastically from country to country.
Answer: FALSE
Explanation: Although antidumping policies vary somewhat from country to country, the
majority are similar to those used in the United States.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
8) Protecting industries deemed important for national security and retaliating against unfair
foreign competition are economic arguments for government intervention.
Answer: FALSE
Explanation: These are political arguments for government intervention and cover a range of
issues, including preserving jobs, protecting industries deemed important for national security,
retaliating against unfair foreign competition, protecting consumers from "dangerous" products,
furthering the goals of foreign policy, and advancing the human rights of individuals in exporting
countries.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-02 Understand why governments sometimes intervene in international
trade.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
9) The infant industry argument is the latest argument for government intervention in trade.
Answer: FALSE
Explanation: The infant industry argument is by far the oldest economic argument for
government intervention. Alexander Hamilton proposed it in 1792.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-02 Understand why governments sometimes intervene in international
trade.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
3
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
10) GATT has not recognized the infant industry argument as a legitimate reason for
protectionism.
Answer: FALSE
Explanation: The infant industry argument has had substantial appeal for the governments of
developing nations during the past 50 years, and the GATT has recognized the infant industry
argument as a legitimate reason for protectionism.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-02 Understand why governments sometimes intervene in international
trade.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
11) Governments do not always act in the national interest when they intervene in the economy;
politically important interest groups often influence them.
Answer: TRUE
Explanation: Governments do not always act in the national interest when they intervene in the
economy; politically important interest groups often influence them.
Difficulty: 1 Easy
Topic: Government Policies Affecting Trade
Learning Objective: 07-03 Summarize and explain the arguments against strategic trade policy.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
12) Trade wars benefit countries with interventionist governments.
Answer: FALSE
Explanation: In many cases, the resulting trade war between two or more interventionist
governments will leave all countries involved worse off than if a hands-off approach had been
adopted in the first place.
Difficulty: 1 Easy
Topic: Government Policies Affecting Trade
Learning Objective: 07-03 Summarize and explain the arguments against strategic trade policy.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
4
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
13) During the 1980s and early 1990s, the world trading system erected by the GATT gained
momentum as protectionist demands generally decreased across the world.
Answer: FALSE
Explanation: During the 1980s and early 1990s, the world trading system erected by the GATT
came under strain as pressures for greater protectionism increased around the world.
Difficulty: 1 Easy
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
14) The World Trade Organization was created as part of the Uruguay Round.
Answer: TRUE
Explanation: The Uruguay Round dragged on for seven years before an agreement was reached
December 15, 1993. It went into effect July 1, 1995. The World Trade Organization was created to
implement the GATT agreement.
Difficulty: 1 Easy
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
15) The WTO does not have the power to impose trade sanctions.
Answer: FALSE
Explanation: Arbitration panel reports on trade disputes between member countries are
automatically adopted by the WTO. Countries that have been found by the arbitration panel to
violate GATT rules may appeal to a permanent appellate body, but its verdict is binding. If
offenders fail to comply with the recommendations of the arbitration panel, trading partners have
the right to compensation or, in the last resort, to impose trade sanctions.
Difficulty: 1 Easy
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
5
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
16) Antidumping actions are concentrated in certain sectors of the economy such as basic metal
industries, chemicals, plastics, and machinery and electrical equipment.
Answer: TRUE
Explanation: Antidumping actions seem to be concentrated in certain sectors of the economy
such as basic metal industries (e.g., aluminum and steel), chemicals, plastics, and machinery and
electrical equipment. These four sectors since 1995 have been characterized by periods of intense
competition and excess productive capacity, which have led to low prices and profits (or losses)
for firms in those industries.
Difficulty: 1 Easy
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
17) The TRIPS regulations oblige WTO members to grant and enforce patents lasting at least 20
years and copyrights lasting 50 years.
Answer: TRUE
Explanation: The TRIPS regulations oblige WTO members to grant and enforce patents lasting at
least 20 years and copyrights lasting 50 years. Rich countries had to comply with the rules within a
year. Poor countries, in which such protection generally was much weaker, had five years' grace,
and the very poorest had 10 years.
Difficulty: 1 Easy
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
6
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
18) One of the successful outcomes of the Doha Round negotiations has been that many nations
have proceeded with bilateral free trade agreements.
Answer: FALSE
Explanation: As of early 2017, the goal was to reduce tariffs for manufactured and agricultural
goods by 60 to 70 percent and to cut subsidies to half of their current level—but getting nations to
agree to those goals was proving exceedingly difficult. In response to the apparent failure of the
Doha Round negotiations to progress, many nations have pushed forward with bilateral free trade
agreements.
Difficulty: 1 Easy
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
19) Tariffs on industrial goods remain higher than tariffs on services.
Answer: FALSE
Explanation: Tariffs on services remain higher than on industrial goods. The average tariff on
business and financial services imported into the United States, for example, is 8.2 percent, into the
EU it is 8.5 percent, and into Japan it is 19.7 percent. Given the rising value of cross-border trade in
services, reducing these figures can be expected to yield substantial gains.
Difficulty: 1 Easy
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
20) Tariff barriers lower the costs of exporting products to a country.
Answer: FALSE
Explanation: Trade barriers constrain a firm's ability to disperse its productive activities in such a
manner. Tariff barriers raise the costs of exporting products to a country (or of exporting partly
finished products between countries).
Difficulty: 1 Easy
Topic: Trade Restrictions
Learning Objective: 07-05 Explain the implications for managers of developments in the world
trading system.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
7
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
21) To conform to local content regulations, a firm may have to locate more production activities
in a given market than it would otherwise.
Answer: TRUE
Explanation: To conform to local content regulations, a firm may have to locate more production
activities in a given market than it would otherwise. From the firm's perspective, the consequence
might be to raise costs above the level that could be achieved if each production activity was
dispersed to the optimal location for that activity.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-05 Explain the implications for managers of developments in the world
trading system.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
22) ________ are levied as a proportion of the value of the imported good.
A) Specific tariffs
B) Import quotas
C) Ad valorem tariffs
D) Tariff rate quotas
Answer: C
Explanation: Tariffs fall into two categories. Specific tariffs are levied as a fixed charge for each
unit of a good imported. Ad valorem tariffs are levied as a proportion of the value of the imported
good.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
8
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
23) A ________ helps domestic producers to compete against foreign imports.
A) An ad valorem tariff
B) A specific tariff
C) An import quota
D) A subsidy
Answer: D
Explanation: A subsidy is a government payment to a domestic producer. By lowering
production costs, subsidies help domestic producers in two ways: (1) competing against foreign
imports and (2) gaining export markets.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
24) The extra profit that producers make when supply is artificially limited by an import quota is
referred to as a
A) quota rent.
B) specific tariff.
C) tariff rate quota.
D) subsidy.
Answer: A
Explanation: The extra profit that producers make when supply is artificially limited by an
import quota is referred to as a quota rent.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
9
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
25) The ________ specifies that government agencies must give preference to American products
when putting contracts for equipment out to bid unless the foreign products have a significant price
advantage.
A) General Agreement on Tariffs and Trade
B) Buy America Act
C) American Reinvestment Act
D) Smoot-Hawley Act
Answer: B
Explanation: A little-known law in the United States, the Buy America Act, specifies that
government agencies must give preference to American products when putting contracts for
equipment out to bid unless the foreign products have a significant price advantage.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
26) What term refers to a situation in which a government does not attempt to restrict what its
citizens can buy or sell to another country?
A) tariffs
B) import quotas
C) free trade
D) subsidies
Answer: C
Explanation: Free trade refers to a situation in which a government does not attempt to restrict
what its citizens can buy from or sell to another country.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
10
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
27) Which of the following is one of the main instruments of trade policy?
A) tariffs
B) credit portfolios
C) opportunity costs
D) countervailing duties
Answer: A
Explanation: Trade policy uses seven main instruments: tariffs, subsidies, import quotas,
voluntary export restraints, local content requirements, administrative policies, and antidumping
duties. Tariffs are the oldest and simplest instrument of trade policy.
Difficulty: 2 Medium
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Analyze
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
28) Specific tariffs are
A) levied as a proportion of the value of the imported good.
B) government payment to domestic producers.
C) in the form of manufacturing or production requirements of goods.
D) levied as a fixed charge for each unit of a good imported.
Answer: D
Explanation: Specific tariffs are levied as a fixed charge for each unit of a good imported (for
example, $3 per barrel of oil).
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
11
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
29) Tariffs do not benefit
A) consumers.
B) domestic producers.
C) governments.
D) domestic firms.
Answer: A
Explanation: The important thing to understand about an import tariff is who suffers and who
gains. The government gains, because the tariff increases government revenues. Domestic
producers gain, because the tariff affords them some protection against foreign competitors by
increasing the cost of imported foreign goods. Consumers lose because they must pay more for
certain imports.
Difficulty: 2 Medium
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
30) Which of the following observations about tariffs is true?
A) Tariffs are generally anti-producer and pro-consumer.
B) Export tariffs are used to raise revenue for the government.
C) Export tariffs are far more common than import tariffs.
D) Import tariffs increase the overall efficiency of the world economy.
Answer: B
Explanation: Export tariffs are far less common than import tariffs. In general, export tariffs have
two objectives: first, to raise revenue for the government, and second, to reduce exports from a
sector, often for political reasons.
Difficulty: 2 Medium
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
12
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
31) Antidumping duties are often called
A) special circumstance duties.
B) positive duties.
C) retroactive duties.
D) countervailing duties.
Answer: D
Explanation: Antidumping policies are designed to punish foreign firms that engage in dumping.
If a complaint has merit, the Commerce Department may impose an antidumping duty on the
offending foreign imports (antidumping duties are often called countervailing duties).
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
32) Import tariffs
A) reduce the price of foreign goods.
B) create efficient utilization of resources.
C) reduce the overall efficiency of the world economy.
D) are generally pro-consumer and anti-producer.
Answer: C
Explanation: Import tariffs reduce the overall efficiency of the world economy. They reduce
efficiency because a protective tariff encourages domestic firms to produce products at home that,
in theory, could be produced more efficiently abroad. The consequence is an inefficient utilization
of resources.
Difficulty: 2 Medium
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
13
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
33) In the United States, the only firms allowed to import cheese are certain trading companies,
each of which is allocated the right to import a maximum number of pounds of cheese each year.
This is an example of
A) a subsidy.
B) an import quota.
C) a local content requirement.
D) an ad valorem tariff.
Answer: B
Explanation: An import quota is a direct restriction on the quantity of some good that may be
imported into a country. The restriction is usually enforced by issuing import licenses to a group of
individuals or firms.
Difficulty: 2 Medium
Topic: Trade Restrictions
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
34) ________ a requirement that some specific fraction of a good be produced domestically.
A) Administrative trade policies are
B) The Buy American Act is
C) A local content requirement is
D) Bureaucratic rules are
Answer: C
Explanation: A local content requirement is a requirement that some specific fraction of a good
be produced domestically. Administrative trade policies are bureaucratic rules designed to make it
difficult for imports to enter a country.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
14
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
35) A company that sells its product in a foreign market below the cost of production may be
accused of
A) pandering.
B) profiteering.
C) carnivorous behavior.
D) dumping.
Answer: D
Explanation: In the context of international trade, dumping is variously defined as selling goods
in a foreign market at below their costs of production or as selling goods in a foreign market at
below their "fair" market value.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
36) Governments use ________ to boost exports and restrict imports.
A) subsidies
B) local content requirements
C) administrative trade policies
D) formal instruments of trade policy
Answer: C
Explanation: Administrative trade policies are bureaucratic rules that are almost always
deliberately designed to restrict the flow of a particular import into a country. The Japanese are
considered masters of this trade barrier. Students will probably use the example of tulip bulbs
when discussing this question. The Netherlands exports tulip bulbs to almost every country of the
world except Japan. The reason is that Japanese customs inspectors insist on checking every tulip
bulb by cutting it vertically down the middle, which in effect ruins the bulb.
Difficulty: 3 Hard
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
15
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
37) If a domestic industry lacks the capacity to meet demand, an ________ can raise prices for
both the domestically produced and the imported good.
A) import tariff
B) import quota
C) import subsidy
D) ad valorem tariff
Answer: B
Explanation: The extra profit that producers make when supply is artificially limited by an
import quota is referred to as a quota rent. If a domestic industry lacks the capacity to meet
demand, an import quota can raise prices for both the domestically produced and the imported
good. This happened in the U.S. sugar industry, in which a tariff rate quota system has long limited
the amount foreign producers can sell in the U.S. market. According to one study, import quotas
have caused the price of sugar in the United States to be as much as 40 percent greater than the
world price.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
38) By lowering production costs, ________ help domestic producers compete against foreign
imports.
A) subsidies
B) duties
C) quotas
D) tariffs
Answer: A
Explanation: By lowering production costs, subsidies help domestic producers in two ways: (1)
competing against foreign imports and (2) gaining export markets.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
16
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
39) Which of the following observations about subsidies is true?
A) Government subsidies must be paid for, typically by taxing individuals and corporations.
B) Subsidies are used to reduce exports from a sector, often for political reasons.
C) Whether subsidies generate national benefits that exceed their national costs is debatable.
D) Subsidies help foreign producers gain a competitive advantage over domestic producers.
Answer: A
Explanation: A subsidy is a government payment to a domestic producer. Government subsidies
must be paid for, typically by taxing individuals and corporations.
Difficulty: 2 Medium
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
40) Which of the following is a consequence of subsidies?
A) Subsidies make domestic producers vulnerable to foreign competition.
B) Subsidies lead to lowered production.
C) Subsidies protect inefficient domestic producers.
D) Subsidies produce revenue for the government.
Answer: C
Explanation: In practice, many subsidies are not that successful at increasing the international
competitiveness of domestic producers. Rather, they tend to protect the inefficient and promote
excess production.
Difficulty: 2 Medium
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
17
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
41) According to the ________ policy, subsidies can help a firm achieve a first-mover advantage
in an emerging industry.
A) strategic trade
B) antidumping
C) tariff quota
D) free trade
Answer: A
Explanation: Advocates of strategic trade policy favor subsidies to help domestic firms achieve a
dominant position in those industries in which economies of scale are important and the world
market is not large enough to profitably support more than a few firms. According to this
argument, subsidies can help a firm achieve a first-mover advantage in an emerging industry.
Difficulty: 2 Medium
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
42) An ____ is a direct restriction on the quantity of some good that may be imported into a
country.
A) import tariff
B) import quota
C) import subsidy
D) ad valorem tariff
Answer: B
Explanation: An import quota is a direct restriction on the quantity of some good that may be
imported into a country. The restriction is usually enforced by issuing import licenses to a group of
individuals or firms.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
18
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
43) A common hybrid of a quota and a tariff is known as
A) an import tariff quota.
B) a voluntary export restraint.
C) an ad valorem tariff.
D) a tariff rate quota.
Answer: D
Explanation: A common hybrid of a quota and a tariff is known as a tariff rate quota. Under a
tariff rate quota, a lower tariff rate is applied to imports within the quota than those over the quota.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
44) Who benefits from an import tariff?
A) the government
B) consumers
C) foreign producers
D) everyone
Answer: A
Explanation: The government gains, because the tariff increases government revenues. Domestic
producers gain, because the tariff affords them some protection against foreign competitors by
increasing the cost of imported foreign goods.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
19
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
45) ________ is a quota on trade imposed by the exporting country, typically at the request of the
importing country's government.
A) Voluntary export restraint
B) Specific tariff quota
C) Trade reconciliation
D) Ad valorem tariff
Answer: A
Explanation: A voluntary export restraint (VER) is a quota on trade imposed by the exporting
country, typically at the request of the importing country's government.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
46) The Japanese government was pressured by the U.S. government to place limits on the number
of vehicles exported to the United States by Japanese automobile producers in 1981. This is an
example of
A) tariff rate quota.
B) specific tariffs.
C) voluntary export restraint.
D) ad valorem tariff.
Answer: C
Explanation: A voluntary export restraint (VER) is a quota on trade imposed by the exporting
country, typically at the request of the importing country's government. One of the most famous
historical examples is the limitation on auto exports to the United States enforced by Japanese
automobile producers in 1981.
Difficulty: 2 Medium
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
20
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
47) Tariff rate quotas are common in agriculture, where their goal is to
A) reduce the use of synthetic fertilizers.
B) limit imports over quota.
C) increase agricultural imports.
D) increase foreign competition.
Answer: B
Explanation: Under a tariff rate quota, a lower tariff rate is applied to imports within the quota
than those over the quota. Tariff rate quotas are common in agriculture, where their goal is to limit
imports over quota.
Difficulty: 2 Medium
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
48) A quota rent is
A) a quota on trade imposed by the exporting country.
B) levied as a fixed charge for each unit of a good imported.
C) levied as a proportion of the value of the imported good.
D) the extra profit producers make when supply is artificially limited by an import quota.
Answer: D
Explanation: The extra profit that producers make when supply is artificially limited by an
import quota is referred to as a quota rent.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
21
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
49) Foreign producers typically agree to voluntary export restrictions because
A) their manufacturing capacity is limited.
B) they can divert their exports to other countries and charge more for their products.
C) they fear far more damaging punitive tariffs or import quotas might follow if they do not.
D) they are required to by the World Trade Organization.
Answer: C
Explanation: Foreign producers agree to VERs because they fear more damaging punitive tariffs
or import quotas might follow if they do not. Agreeing to a VER is seen as a way to make the best
of a bad situation by appeasing protectionist pressures in a country.
Difficulty: 2 Medium
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
50) Which of the following statements concerning a voluntary export restraint is true?
A) It benefits domestic producers by limiting import competition.
B) In most cases, it benefits consumers.
C) It lowers the domestic price of an imported good.
D) It is a variant of the ad valorem tariff.
Answer: A
Explanation: As with all restrictions on trade, quotas do not benefit consumers. An import quota
or VER always raises the domestic price of an imported good. When imports are limited to a low
percentage of the market by a quota or VER, the price is bid up for that limited foreign supply.
Difficulty: 2 Medium
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
22
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
51) According to ________, some specific fraction of a good must be produced domestically.
A) import quotas
B) voluntary export restraints
C) local content requirements
D) antidumping duties
Answer: C
Explanation: A local content requirement is a requirement that some specific fraction of a good
be produced domestically. The requirement can be expressed either in physical terms or in value
terms.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
52) According to the Buy America Act, if a company wishes to win a contract from a U.S.
government agency to provide some equipment, it must ensure that at least 51 percent of the
product by value is manufactured in the United States. This is an example of
A) antidumping duties.
B) voluntary export restraints.
C) import quotas.
D) local content requirements.
Answer: D
Explanation: The Buy America Act specifies that government agencies must give preference to
American products when putting contracts for equipment out to bid unless the foreign products
have a significant price advantage. The law specifies a product as "American" if 51 percent of the
materials by value are produced domestically. This amounts to a local content requirement.
Difficulty: 2 Medium
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
23
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
53) Local content regulations
A) protect domestic producers by limiting foreign competition.
B) lower the prices of imported components.
C) tend to benefit consumers and not producers.
D) encourage outsourcing of production units.
Answer: A
Explanation: Local content regulations provide protection for a domestic producer of parts in the
same way an import quota does: by limiting foreign competition. The aggregate economic effects
are also the same; domestic producers benefit, but the restrictions on imports raise the prices of
imported components.
Difficulty: 2 Medium
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
54) Administrative trade policies are
A) requirements that some specific fraction of a good be produced domestically.
B) quotas on trade imposed by the exporting country.
C) bureaucratic rules designed to make it difficult for imports to enter a country.
D) designed to punish foreign firms that engage in dumping.
Answer: C
Explanation: Administrative trade policies are bureaucratic rules designed to make it difficult for
imports to enter a country. It has been argued that the Japanese are the masters of this trade barrier.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
24
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
55) The Netherlands exports tulip bulbs to almost every country in the world except Japan. This
was because in Japan, customs inspectors insisted on checking every tulip bulb by cutting it
vertically down the middle. This is an example of which of the following trade barriers?
A) export restraint
B) administrative trade policies
C) local content requirement
D) ad valorem
Answer: B
Explanation: Administrative trade policies are bureaucratic rules designed to make it difficult for
imports to enter a country. It has been argued that the Japanese are the masters of this trade barrier.
Difficulty: 2 Medium
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
56) ________ is variously defined as selling goods in a foreign market at below their costs of
production or as selling goods in a foreign market at below their "fair" market value.
A) Export restraint
B) Dumping
C) Local content requirement
D) Ad valorem
Answer: B
Explanation: In the context of international trade, dumping is variously defined as selling goods
in a foreign market at below their costs of production or as selling goods in a foreign market at
below their "fair" market value.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
25
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
57) In 1997, two South Korean manufacturers of semiconductors, LG Semicon and Hyundai
Electronics, were accused of selling dynamic random access memory chips (DRAMs) in the U.S.
market at below their costs of production. It was alleged that the firms were trying to unload their
excess production in the United States. This is an example of
A) an ad valorem tariff.
B) a subsidy.
C) dumping.
D) an import quota.
Answer: C
Explanation: In the context of international trade, dumping is variously defined as selling goods
in a foreign market at below their costs of production or as selling goods in a foreign market at
below their "fair" market value.
Difficulty: 2 Medium
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
58) What was the purpose of the establishment of the Common Agricultural Policy (CAP) by the
European Union?
A) to increase imports and raise prices
B) to protect the jobs of Europe's farmers
C) to increase the import of grapes for the wine industry
D) to make farmers in Europe more productive
Answer: B
Explanation: A political motive underlay establishment of the Common Agricultural Policy
(CAP) by the European Union. The CAP was designed to protect the jobs of Europe's politically
powerful farmers by restricting imports and guaranteeing prices. However, the higher prices that
resulted from the CAP have cost Europe's consumers dearly.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-02 Understand why governments sometimes intervene in international
trade.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
26
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
59) According to the infant industry argument, many developing countries have a potential
________ in manufacturing, but new manufacturing industries cannot initially compete with
established industries in developed countries.
A) absolute advantage
B) comparative advantage
C) opportunity cost
D) competitive advantage
Answer: B
Explanation: The infant industry argument is by far the oldest economic argument for
government intervention. According to this argument, many developing countries have a potential
comparative advantage in manufacturing, but new manufacturing industries cannot initially
compete with established industries in developed countries.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-02 Understand why governments sometimes intervene in international
trade.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
60) Strategic trade policy suggests that a government should use ________ to support promising
firms that are active in newly emerging industries.
A) tariff rate quotas
B) quota rents
C) subsidies
D) ad valorem tariffs
Answer: C
Explanation: It is argued that by appropriate actions, a government can help raise national
income if it can somehow ensure that the firm or firms that gain first-mover advantages in an
industry are domestic rather than foreign enterprises. Thus, according to the strategic trade policy
argument, a government should use subsidies to support promising firms that are active in newly
emerging industries.
Difficulty: 2 Medium
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-02 Understand why governments sometimes intervene in international
trade.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
27
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
61) The U.S. government has used the threat of punitive trade sanctions to try to get the Chinese
government to enforce intellectual property laws. This is an example of government intervention
based on
A) human rights protection.
B) national security.
C) consumer protection.
D) retaliation.
Answer: D
Explanation: Some argue that governments should use the threat to intervene in trade policy as a
bargaining tool to help open foreign markets and force trading partners to play by the rules of the
game. The U.S. government has used the threat of punitive trade sanctions to try to get the Chinese
government to enforce intellectual property laws.
Difficulty: 2 Medium
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-02 Understand why governments sometimes intervene in international
trade.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
62) According to the ________ argument, governments should temporarily support new industries
until they have grown strong enough to meet international competition.
A) retaliatory action
B) human rights
C) infant industry
D) antidumping
Answer: C
Explanation: The infant industry argument is by far the oldest economic argument for
government intervention. According to this argument, many developing countries have a potential
comparative advantage in manufacturing, but new manufacturing industries cannot initially
compete with established industries in developed countries.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-02 Understand why governments sometimes intervene in international
trade.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
28
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
63) The infant industry argument is criticized because it relies on an assumption that
A) new manufacturing industries in developing nations can initially compete with established
industries in developed countries.
B) selling goods in a foreign market at below their "fair" market value is legally and ethically
justified.
C) the domestic industry in a developing nation lacks the capacity to meet demand.
D) firms are unable to make efficient long-term investments by borrowing money from the
domestic or international capital market.
Answer: D
Explanation: The infant industry argument relies on an assumption that firms are unable to make
efficient long-term investments by borrowing money from the domestic or international capital
market. Consequently, governments have been required to subsidize long-term investments.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-02 Understand why governments sometimes intervene in international
trade.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
29
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
64) According to the strategic trade policy argument,
A) government intervention is not required because firms can borrow money from the capital
markets to finance the required investments.
B) selling goods in a foreign market at below their "fair" market value is legally and ethically
justified.
C) government support can help domestic firms overcome the first-mover advantages enjoyed by
foreign competitors.
D) a government should use subsidies to support promising firms that are active in old, established
industries.
Answer: C
Explanation: According to the strategic trade policy argument, a government can help raise
national income if it can somehow ensure that the firm or firms that gain first-mover advantages in
an industry are domestic rather than foreign enterprises. The second component of the strategic
trade policy argument is that it might pay a government to intervene in an industry by helping
domestic firms overcome the barriers to entry created by foreign firms that have already reaped
first-mover advantages.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-02 Understand why governments sometimes intervene in international
trade.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
65) Which of the following is a political reason for governments to intervene in markets?
A) to help citizens obtain jobs in foreign markets
B) to aid their country's businesses in foreign markets
C) to subsidize multinational companies
D) to protect jobs and industries
Answer: D
Explanation: There are a number of political reasons governments intervene in markets. The
most common reason for intervention is to protect jobs and industries. Governments may also
intervene to protect national security, to threaten punitive retaliatory actions, to protect consumers
or to protect human rights, and to further foreign policy objectives.
Difficulty: 2 Medium
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-02 Understand why governments sometimes intervene in international
trade.
Bloom's: Analyze
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
30
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
66) Strategic trade policy suggests that in industries where the existence of substantial scale
economies implies that the world will profitably support only a few firms, countries may
predominate in the export of certain products simply because they had firms that were able to
A) influence the assignment of tariffs.
B) receive government subsidies.
C) capture first-mover advantages.
D) capitalize on late-mover advantages.
Answer: C
Explanation: Strategic trade policy suggests that in industries where the existence of substantial
scale economies implies that the world will profitably support only a few firms, countries may
predominate in the export of certain products simply because they had firms that were able to
capture first-mover advantages. According to strategic trade policy, a government can help raise
national incomes if it can ensure that the firms that gain first-mover advantages in such industries
are domestic rather than foreign. Further, the theory argues that it might pay governments to
intervene in an industry if it helps domestic firms overcome the barriers to entry created by foreign
firms that have already reaped first-mover advantages.
Difficulty: 2 Medium
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-02 Understand why governments sometimes intervene in international
trade.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
67) Economist Paul Krugman has suggested that trade policy designed to retaliate against another
country's trade policy would
A) benefit the multinational firms of both countries.
B) benefit the citizens of both countries.
C) hurt the multinational firms of both countries.
D) hurt the citizens of both countries.
Answer: D
Explanation: Paul Krugman argues that a strategic trade policy aimed at establishing domestic
firms in a dominant position in a global industry is a beggar-thy-neighbor policy that boosts
national income at the expense of other countries. In many cases, the resulting trade war between
two or more interventionist governments will leave all countries involved worse off than if a
hands-off approach had been adopted in the first place.
Difficulty: 2 Medium
Topic: Government Policies Affecting Trade
Learning Objective: 07-03 Summarize and explain the arguments against strategic trade policy.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
31
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
68) Economist Paul Krugman suggests that strategic trade policy aimed at establishing domestic
firms in a dominant position in a global industry is a beggar-thy-neighbor policy that
A) provides enhanced protection for intellectual property of those firms.
B) boosts national income at the expense of other countries.
C) reduces domestic agricultural profits.
D) depletes national income to the benefit of other countries.
Answer: B
Explanation: Paul Krugman suggests that strategic trade policy aimed at establishing domestic
firms in a dominant position in a global industry is a beggar-thy-neighbor policy that boosts
national income at the expense of other countries. Consequently, a country that uses this type of
policy will probably draw retaliatory action. The resulting trade war would leave both countries
worse off than if a free trade approach had been implemented to start. Krugman suggests that to
avoid the disruptions a trade war would create, countries should instead help establish the rules of
the game that minimize the use of trade-distorting subsidies.
Difficulty: 2 Medium
Topic: Government Policies Affecting Trade
Learning Objective: 07-03 Summarize and explain the arguments against strategic trade policy.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
69) Economic problems during the Great Depression were compounded in 1930 when the U.S.
Congress passed the ________, aimed at avoiding rising unemployment by protecting domestic
industries and diverting consumer demand away from foreign products.
A) Smoot-Hawley Act
B) Antidumping Act
C) Helms-Burton Act
D) D'Amato Act
Answer: A
Explanation: Economic problems were compounded in 1930 when the U.S. Congress passed the
Smoot-Hawley tariff. Aimed at avoiding rising unemployment by protecting domestic industries
and diverting consumer demand away from foreign products, the Smoot-Hawley Act erected an
enormous wall of tariff barriers.
Difficulty: 1 Easy
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
32
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
70) Free trade as a government policy was first officially embraced by Great Britain in 1846, when
the British Parliament repealed a law that placed a high tariff on
A) all agricultural products.
B) wheat.
C) textiles.
D) corn.
Answer: D
Explanation: Free trade as a government policy was first officially embraced by Great Britain in
1846, when the British Parliament repealed the Corn Laws.
Difficulty: 1 Easy
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
71) The Smoot-Hawley Act was aimed at
A) diverting consumer demand toward foreign products.
B) promoting unrestricted free trade.
C) limiting global warming.
D) avoiding rising unemployment.
Answer: D
Explanation: Aimed at avoiding rising unemployment by protecting domestic industries and
diverting consumer demand away from foreign products, the Smoot-Hawley Act erected an
enormous wall of tariff barriers. Almost every industry was rewarded with its made-to-order tariff.
Difficulty: 1 Easy
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
33
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
72) What was the result of the Smoot-Hawley Act?
A) Other countries reacted by raising their own tariff barriers.
B) Other countries reacted by lowering their trade barriers.
C) U.S. exports increased.
D) The United States began to get out of the Great Depression.
Answer: A
Explanation: The Smoot-Hawley Act had a damaging effect on employment abroad. Other
countries reacted by raising their own tariff barriers. U.S. exports tumbled in response, and the
world slid further into the Great Depression.
Difficulty: 1 Easy
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
73) Which of the following is a reason for the pressure for greater protectionism that occurred
during the 1980s and early 1990s?
A) The U.S. Congress erected an enormous wall of tariff barriers.
B) Japanese economic failure strained the world trading system.
C) The persistent trade surplus in the United States strained the world trading system.
D) Many countries found ways to get around GATT regulations.
Answer: D
Explanation: The world trading system was strained by the persistent trade deficit in the world's
largest economy, the United States. From a political perspective, the matter was worsened in 1992
by the $45 billion U.S. trade deficit with Japan, a country perceived as not playing by the rules.
Difficulty: 2 Medium
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
34
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
74) Until 1995, GATT rules applied only to
A) services.
B) industrial goods.
C) textiles.
D) agricultural products.
Answer: B
Explanation: Until 1995, GATT rules applied only to industrial goods (i.e., manufactured goods
and commodities). Until the Uruguay Round, GATT rules had applied only to trade in
manufactured goods and commodities. In the Uruguay Round, member countries sought to extend
GATT rules to cover trade in services.
Difficulty: 1 Easy
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
75) According to the 1986 Uruguay Round, the ________ was to be created to implement the
GATT agreement.
A) World Trade Organization
B) International Monetary Fund
C) United Nations
D) World Bank
Answer: A
Explanation: The Uruguay Round contained the following provision: The World Trade
Organization was to be created to implement the GATT agreement.
Difficulty: 1 Easy
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
35
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
76) After the Uruguay Round of GATT negotiations extended global trading rules to cover trade in
services, the first two industries targeted for reform by the WTO were
A) textiles and technology.
B) telecommunications and financial services.
C) automotive and aerospace.
D) agriculture and consulting services.
Answer: B
Explanation: The WTO was encouraged to extend its reach to encompass regulations governing
foreign direct investment, something the GATT had never done. Two of the first industries
targeted for reform were the global telecommunication and financial services industries.
Difficulty: 1 Easy
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
77) The WTO argues that removing tariff barriers and subsidies in the agricultural sector could
A) protect domestic agriculture in developed nations.
B) lower the overall level of agricultural trade.
C) restrict global economic growth.
D) lower prices to consumers.
Answer: D
Explanation: The WTO argues that removing tariff barriers and subsidies could significantly
boost the overall level of trade, lower prices to consumers, and raise global economic growth by
freeing consumption and investment resources for more productive uses.
Difficulty: 1 Easy
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
36
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
78) The TRIPS regulations established at the 1995 Uruguay Round
A) established regulations on patents and copyrights.
B) set a new level of agriculture subsidies.
C) organized OECD countries to eliminate tariffs on textiles.
D) established new tariff levels on technology.
Answer: A
Explanation: The 1995 Uruguay agreement that established the WTO also contained an
agreement to protect intellectual property (the Trade-Related Aspects of Intellectual Property
Rights, or TRIPS, agreement). The TRIPS regulations oblige WTO members to grant and enforce
patents lasting at least 20 years and copyrights lasting 50 years.
Difficulty: 1 Easy
Topic: Property Rights and Intellectual Property Rights
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
79) TRIPS regulations oblige WTO members to
A) grant and enforce patents lasting at least 100 years.
B) grant and enforce copyrights lasting 100 years.
C) comply with the rules within five years in the case of the rich countries.
D) comply with the rules within 10 years in the case of the poorest countries.
Answer: D
Explanation: The 1995 Uruguay agreement that established the WTO also contained an
agreement to protect intellectual property (the Trade-Related Aspects of Intellectual Property
Rights, or TRIPS, agreement). The TRIPS regulations oblige WTO members to grant and enforce
patents lasting at least 20 years and copyrights lasting 50 years. The very poorest countries had 10
years to comply with the rules.
Difficulty: 1 Easy
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
37
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
80) ________ are the highest rate that can be charged, which is often, but not always, the rate that
is charged.
A) Ad valorem tariff rates
B) Tariff rents
C) Specific tariff rates
D) Bound tariff rates
Answer: D
Explanation: Bound tariff rates are the highest rate that can be charged, which is often, but not
always, the rate that is charged. Australia and South Korea, both OECD countries, still have bound
tariff rates of 15.1 percent and 24.6 percent, respectively, on imports of transportation equipment.
Difficulty: 1 Easy
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
81) The WTO's GATS has taken the lead in
A) providing enhanced protection for intellectual property.
B) extending free trade agreements to services.
C) reducing agricultural subsidies.
D) enforcing GATT rules.
Answer: B
Explanation: The WTO's General Agreement on Trade in Services (GATS) has taken the lead in
extending free trade agreements to services.
Difficulty: 1 Easy
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
38
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
82) Tariff rates on agricultural products are generally
A) much lower than tariff rates on manufactured products or services.
B) much lower than import fees on electronics.
C) much higher than tariff rates on manufactured products or services.
D) much higher than import fees on electronics.
Answer: C
Explanation: Tariff rates on agricultural products are generally much higher than tariff rates on
manufactured products or services. The implication is that consumers in these countries are paying
significantly higher prices than necessary for agricultural products imported from abroad, which
leaves them with less money to spend on other goods and services.
Difficulty: 2 Medium
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
83) One issue at the forefront of the current agenda of the WTO is the
A) decrease in antidumping policies.
B) low level of protectionism in agriculture.
C) strong protection for intellectual property rights in many nations.
D) continued high tariff rates on nonagricultural goods and services in many nations.
Answer: D
Explanation: Four issues at the forefront of the current agenda of the WTO are the increase in
antidumping policies, the high level of protectionism in agriculture, the lack of strong protection
for intellectual property rights in many nations, and continued high tariff rates on nonagricultural
goods and services in many nations.
Difficulty: 2 Medium
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
39
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
84) WTO rules allow countries to ________ foreign goods that are being sold cheaper than at
home, or below their cost of production, when domestic producers can show that they are being
harmed.
A) impose antidumping duties on
B) subsidize
C) lower the import quota on
D) place countervailing duties on
Answer: A
Explanation: WTO rules allow countries to impose antidumping duties on foreign goods that are
being sold cheaper than at home, or below their cost of production, when domestic producers can
show that they are being harmed.
Difficulty: 1 Easy
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
85) The ________ raised tariff barriers in the hope of protecting jobs and diverting consumer
demand away from foreign products.
A) Smoot-Hawley Act
B) Helms-Burton Act
C) General Agreement on Tariffs and Trade
D) Buy America Act
Answer: A
Explanation: Aimed at avoiding rising unemployment by protecting domestic industries and
diverting consumer demand away from foreign products, the Smoot-Hawley Act erected an
enormous wall of tariff barriers.
Difficulty: 2 Medium
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
40
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
86) A key goal of the 1986 Uruguay Round was to
A) extend GATT to cover trade in commodities.
B) extend GATT rules to cover trade in services.
C) increase agricultural subsidies.
D) loosen the GATT's monitoring and enforcement mechanisms.
Answer: B
Explanation: In the Uruguay Round, member countries sought to extend GATT rules to cover
trade in services. They also sought to write rules governing the protection of intellectual property,
to reduce agricultural subsidies, and to strengthen the GATT's monitoring and enforcement
mechanisms.
Difficulty: 1 Easy
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
87) A key issue in the "millennium round" of the WTO was to
A) increase barriers to cross-border trade in agricultural products.
B) extend GATT to cover trade in commodities.
C) further reduce barriers to cross-border trade and investment.
D) extend GATT rules to cover trade in services.
Answer: C
Explanation: At the end of November 1999, representatives from the WTO's member states met
in Seattle, Washington. The goal of the meeting was to launch a new round of talks—dubbed "the
millennium round"—aimed at further reducing barriers to cross-border trade and investment.
Difficulty: 2 Medium
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
41
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
88) Inadequate protections for intellectual property
A) increase the incentive for innovation.
B) led to the Smoot-Hawley Act.
C) reduce the incentive for innovation.
D) are one of the issues addressed by the local content requirement.
Answer: C
Explanation: Inadequate protections for intellectual property reduce the incentive for innovation.
Because innovation is a central engine of economic growth and rising living standards, the
argument has been that a multilateral agreement is needed to protect intellectual property.
Difficulty: 1 Easy
Topic: Property Rights and Intellectual Property Rights
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
89) ________ in agriculture could jump-start economic growth among the world's poorer nations
and alleviate global poverty.
A) Quota rents
B) Free trade
C) Strategic trade policy
D) Subsidies
Answer: B
Explanation: Developing nations have been pushing hard for reforms that would allow their
producers greater access to the protected markets of the developed nations. Free trade in
agriculture could help to jump-start economic growth among the world's poorer nations and
alleviate global poverty.
Difficulty: 1 Easy
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
42
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
90) Which of the following is a drawback of government intervention?
A) It may invite retaliation and trigger a trade war.
B) The policies may be captured by foreign investors and turned to their advantage.
C) Despite being well executed, the intervention is unlikely to work.
D) They usually establish new tariff levels on technology—to the detriment of all in the industry.
Answer: A
Explanation: Government intervention has three drawbacks. Intervention can be self-defeating
because it tends to protect the inefficient rather than help firms become efficient global
competitors. Intervention is dangerous; it may invite retaliation and trigger a trade war. Finally,
intervention is unlikely to be well executed, given the opportunity for such a policy to be captured
by special-interest groups.
Difficulty: 2 Medium
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-05 Explain the implications for managers of developments in the world
trading system.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
91) Which of the following is a trade barrier that affects a firm's strategy?
A) Tariffs lower the cost of exporting.
B) Quotas may enhance a firm's ability to serve a country from outside of that country.
C) To conform to local content regulations, a firm may have to locate more production activities in
a given market than it would otherwise.
D) The threat of antidumping actions promotes the firm's ability to use aggressive pricing to gain
market share in a country.
Answer: C
Explanation: There are four main ways trade barriers affect a firm's strategy. First, tariffs raise
the cost of exporting, putting the firm at a competitive disadvantage. Second, quotas may limit a
firm's ability to serve a country from outside of that country. Third, to conform to local content
regulations, a firm may have to locate more production activities in a given market than it would
otherwise. Finally, the threat of antidumping actions limits the firm's ability to use aggressive
pricing to gain market share in a country.
Difficulty: 2 Medium
Topic: Government Policies Affecting Trade
Learning Objective: 07-05 Explain the implications for managers of developments in the world
trading system.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
43
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
92) Many firms, of all national origins, increasingly depend on ________ for their competitive
advantage.
A) globally dispersed production systems
B) specific tariffs
C) infant industries
D) subsidies
Answer: A
Explanation: We live in a world where many firms of all national origins increasingly depend on
globally dispersed production systems for their competitive advantage.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-05 Explain the implications for managers of developments in the world
trading system.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
93) Identify the true statement about trade barriers.
A) They lower the costs of exporting products to a country.
B) They may put a firm at a competitive advantage to indigenous competitors.
C) They may help a firm to serve a country from locations outside of that country.
D) To conform to local content regulations, a firm may have to locate more production activities in
a given market than it would otherwise.
Answer: D
Explanation: Tariff barriers raise the costs of exporting products to a country (or of exporting
partly finished products between countries). This may put the firm at a competitive disadvantage to
indigenous competitors in that country.
Difficulty: 2 Medium
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-05 Explain the implications for managers of developments in the world
trading system.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
44
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
94) Many firms, of all national origins, increasingly depend on ________ for their competitive
advantage.
A) globally dispersed production systems
B) specific tariffs
C) infant industries
D) subsidies
Answer: A
Explanation: We live in a world where many firms of all national origins increasingly depend on
globally dispersed production systems for their competitive advantage.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-05 Explain the implications for managers of developments in the world
trading system.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
95) Business firms that lobby their governments to engage in protectionism may miss the
opportunity to build ________ by constructing a globally dispersed production system.
A) an absolute advantage
B) a competitive advantage
C) a strategic trade advantage
D) a comparative advantage
Answer: B
Explanation: Given the danger of retaliatory action, business firms that lobby their governments
to engage in protectionism must realize that by doing so they may be denying themselves the
opportunity to build a competitive advantage by constructing a globally dispersed production
system.
Difficulty: 1 Easy
Topic: Government Policies Affecting Trade
Learning Objective: 07-05 Explain the implications for managers of developments in the world
trading system.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
45
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
96) Compare and contrast import quotas and voluntary export restraints.
Answer: An import quota is a direct restriction on the quantity of some good that may be
imported into a country. The restriction is normally enforced by issuing import licenses to a group
of individuals or firms. In contrast, a voluntary export restraint (VER) is a quota on trade imposed
by the exporting country, typically at the request of the importing country's government. Foreign
producers agree to VERs because they fear more damaging punitive tariffs or import quotas might
follow if they do not. Both import quotas and VERs benefit domestic producers, but hurt
consumers through higher prices.
Difficulty: 3 Hard
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
97) Describe the Buy America Act. What is its connection with local content requirements?
Answer: The Buy America Act specifies that government agencies must give preference to
American products when putting contracts for equipment out to bid unless the foreign products
have a significant price advantage. The law specifies a product as being "American" if 51 percent
of the materials by value are produced domestically. This amounts to a local content requirement
that calls for a specific fraction of a good to be produced locally.
Difficulty: 3 Hard
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
46
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
98) Define dumping. How do governments respond to charges of dumping?
Answer: Dumping is defined as selling goods in a foreign market at below their costs of
production, or as selling goods in a foreign market at below their "fair" market value. Antidumping
policies are designed to punish foreign firms that engage in dumping. If a firm is found to be
dumping, countervailing duties may be imposed. These duties can be fairly substantial and stay in
place for up to five years.
Difficulty: 3 Hard
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
99) Explain the notion of predatory behavior with regard to dumping.
Answer: A firm that is dumping is selling its product in a foreign market at below the cost of
production, or is selling goods in a foreign market at below their "fair" market value. Dumping
may be the result of predatory behavior, with producers using substantial profits from their home
markets to subsidize profits in a foreign market with a goal of driving indigenous competitors out
of that market. Once this has been achieved, the predatory firm will raise prices and earn
substantial profits.
Difficulty: 3 Hard
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-01 Identify the policy instruments used by governments to influence
international trade flows.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
47
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
100) Discuss the economic reasons for government intervention in markets.
Answer: The economic reasons for government intervention have undergone a renaissance in
recent times. The oldest argument for intervention is the infant industry argument. According to
this argument, many developing countries have a potential comparative advantage in
manufacturing, but new manufacturing industries cannot initially compete with established
industries in developed countries. Strategic trade policy is the other main reason given for
economic government intervention in markets.
Difficulty: 3 Hard
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-02 Understand why governments sometimes intervene in international
trade.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
101) Discuss the infant industry argument for intervention in markets. What is GATT's position on
the argument?
Answer: Alexander Hamilton proposed the infant industry argument for intervention in markets
in 1792. According to this argument, many developing countries have a potential comparative
advantage in manufacturing, but new manufacturing industries cannot initially compete with
established industries in developed countries. To allow manufacturing to get a toehold, the
argument is that governments should temporarily support new industries until they have grown
strong enough to meet international competitors. GATT has recognized the infant industry
argument as a legitimate reason for protectionism.
Difficulty: 3 Hard
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-02 Understand why governments sometimes intervene in international
trade.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
48
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
102) Summarize Paul Krugman's arguments against adopting a trade policy that benefits domestic
firms at the expense of other countries.
Answer: Krugman argues that a strategic trade policy aimed at establishing domestic firms in a
dominant position in a global industry is a beggar-thy-neighbor policy that boosts national income
at the expense of other countries. A country that attempts to use such policies will probably
provoke retaliation. In many cases, the resulting trade war between two or more interventionist
governments will leave all countries involved worse off than if a hands-off approach had been
adopted in the first place. If the U.S. government were to respond to the Airbus subsidy by
increasing its own subsidies to Boeing, for example, the result might be that the subsidies would
cancel each other out. In the process, both European and U.S. taxpayers would end up supporting
an expensive and pointless trade war, and both Europe and the United States would be worse off.
Difficulty: 3 Hard
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-03 Summarize and explain the arguments against strategic trade policy.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
103) Discuss the establishment of GATT. What was GATT's objective?
Answer: The GATT was a multilateral agreement whose objective was to liberalize trade by
eliminating tariffs, subsidies, import quotas, and other trade barriers. GATT was established in
1947 with 19 members. Membership increased to more than 120 nations by the time it was
superseded by the WTO. Under GATT, tariff reduction was spread over eight rounds. The last
round, the Uruguay Round, resulted in the establishment of the WTO, which, among other things,
took over the role of GATT in the global economy.
Difficulty: 3 Hard
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
49
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
104) What happened to GATT during the 1980s and early 1990s?
Answer: During the 1980s and early 1990s, the world trading system established by GATT came
under significant strain as pressures for greater protectionism mounted around the world. Three
issues in particular were important. First, the economic success of Japan strained the world trading
system. Second, the world's trading system was further strained by the persistent trade deficit in
the world's largest economy, the United States. Finally, many countries found ways to get around
GATT regulations.
Difficulty: 3 Hard
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
50
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
105) What has been the experience of the WTO to date? What does the future look like for the
organization?
Answer: By 2016, the WTO had 164 members, including China, which joined at the end of 2001,
and Russia, which joined in 2012. WTO members collectively account for 98 percent of world
trade. Since its formation, the WTO has remained at the forefront of efforts to promote global free
trade. Its creators expressed the belief that the enforcement mechanisms granted to the WTO
would make it more effective at policing global trade rules than the GATT had been. The great
hope was that the WTO might emerge as an effective advocate and facilitator of future trade deals,
particularly in areas such as services. The experience so far has been mixed. After a strong early
start, since the late 1990s the WTO has been unable to get agreements to further reduce barriers to
international trade and investment. There has been very slow progress with the current round of
trade talks (the Doha Round). There was also a shift back toward some limited protectionism
following the global financial crisis of 2008–2009. More recently, the 2016 vote by the British to
leave the European Union (Brexit) and the election of Donald Trump to the U.S. presidency have
suggested that the world may be shifting back toward greater protectionism. These developments
have raised a number of questions about the future direction of the WTO.
The first two decades in the life of the WTO suggest that its policing and enforcement mechanisms
are having a positive effect. Between 1995 and 2015, more than 500 trade disputes between
member countries were brought to the WTO. This record compares with a total of 196 cases
handled by the GATT over almost half a century. Of the cases brought to the WTO, three-fourths
have been resolved by informal consultations between the disputing countries. Resolving the
remainder has involved more formal procedures, but these have been largely successful. In
general, countries involved have adopted the WTO's recommendations. The fact that countries are
using the WTO represents an important vote of confidence in the organization's dispute resolution
procedures.
Difficulty: 3 Hard
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
51
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
106) What are the central issues facing the WTO at the present time?
Answer: Four issues at the top of the agenda for the WTO are the increase in antidumping
policies, the high level of protectionism in agriculture, the lack of strong protection for intellectual
property rights in many nations, and continued high tariff rates on nonagricultural goods and
services in many nations.
Difficulty: 3 Hard
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
107) Why are tariff rates on agricultural products generally higher than tariff rates on
manufactured products or services?
Answer: Tariff rates on agricultural products are typically higher than tariffs on manufactured
products because high tariff rates on agricultural products were designed to protect domestic
agriculture and traditional farming communities from foreign competition. The International
Monetary Fund (IMF) estimates indicate that removing the tariffs and subsidies could raise global
economic welfare by $128 billion annually. Others suggest gains as high as $182 billion.
Difficulty: 3 Hard
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Evaluate
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
52
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
108) What is the TRIPS agreement? Why was it established?
Answer: The 1995 Uruguay agreement that established the WTO also contained an agreement to
protect intellectual property (the Trade-Related Aspects of Intellectual Property Rights, or TRIPS,
agreement). The TRIPS regulations oblige WTO members to grant and enforce patents lasting at
least 20 years and copyrights lasting 50 years. The basis for this agreement was a strong belief
among signatory nations that the protection of intellectual property through patents, trademarks,
and copyrights must be an essential element of the international trading system. Inadequate
protections for intellectual property reduce the incentive for innovation. Because innovation is a
central engine of economic growth and rising living standards, the argument has been that a
multilateral agreement is needed to protect intellectual property.
Difficulty: 3 Hard
Topic: Property Rights and Intellectual Property Rights
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
109) Discuss the Doha Round of trade talks.
Answer: The Doha Round began in 2001. Its agenda focused on cutting tariffs on industrial
goods and services, phasing out subsidies to agricultural producers, reducing barriers to
cross-border investment, and limiting the use of antidumping laws. The talks are currently
ongoing. They have been characterized by halting progress punctuated by significant setbacks and
missed deadlines. A September 2003 meeting in Cancún, Mexico, broke down, primarily because
there was no agreement on how to proceed with reducing agricultural subsidies and tariffs; the EU,
United States, and India, among others, proved less than willing to reduce tariffs and subsidies to
their politically important farmers, while countries such as Brazil and certain West African nations
wanted free trade as quickly as possible. In 2004, both the United States and the EU made a
determined push to start the talks again. Since then, however, little progress has been made, and
the talks are in deadlock, primarily because of disagreements over how deep the cuts in subsidies
to agricultural producers should be. As of early 2017, the goal was to reduce tariffs for
manufactured and agricultural goods by 60 to 70 percent, and to cut subsidies to half of their
current level—but getting nations to agree to these goals was proving exceedingly difficult.
Difficulty: 3 Hard
Topic: The World Trading System, GATT, and the WTO
Learning Objective: 07-04 Describe the development of the world trading system and the current
trade issues.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
53
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
110) Explain the disadvantages of government protectionism as it relates to competitive
advantage.
Answer: We live in a world where many firms of all national origins increasingly depend on
globally dispersed production systems for their competitive advantage. Such systems are the result
of freer trade. Freer trade has brought great advantages to firms that have exploited it and to
consumers who benefit from the resulting lower prices. Given the danger of retaliatory action,
business firms that lobby their governments to engage in protectionism must realize that by doing
so they may be denying themselves the opportunity to build a competitive advantage by
constructing a globally dispersed production system. By encouraging their governments to engage
in protectionism, their own activities and sales overseas may be jeopardized if other governments
retaliate.
Difficulty: 3 Hard
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 07-05 Explain the implications for managers of developments in the world
trading system.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
54
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
International Business, 12e (Hill)
Chapter 8
Foreign Direct Investment
1) The amount of foreign direct investment (FDI) undertaken over a given time period is known as
the flow of FDI.
Answer: TRUE
Explanation: The flow of FDI refers to the amount of FDI undertaken over a given time period
(normally a year).
Difficulty: 1 Easy
Topic: Trends in Foreign Direct Investment
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment (FDI) in
the world economy.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
2) FDI has been declining in the last few decades because protectionist pressures have become less
intense.
Answer: FALSE
Explanation: Despite the general decline in trade barriers over the past 30 years, firms still fear
protectionist pressures. Executives see FDI as a way of circumventing future trade barriers.
Difficulty: 1 Easy
Topic: Trends in Foreign Direct Investment
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment (FDI) in
the world economy.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
3) Mergers and acquisitions are quicker to execute than greenfield investments.
Answer: TRUE
Explanation: Mergers and acquisitions are quicker to execute than greenfield investments. This is
an important consideration in the modern business world where markets evolve very rapidly.
Difficulty: 1 Easy
Topic: Trends in Foreign Direct Investment
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment (FDI) in
the world economy.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
1
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
4) Licensing involves the establishment of a new operation in a foreign country.
Answer: FALSE
Explanation: Licensing involves granting a foreign entity (the licensee) the right to produce and
sell the firm's product in return for a royalty fee on every unit sold.
Difficulty: 1 Easy
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
5) By placing tariffs on imported goods, governments can increase the cost of exporting relative to
foreign direct investment and licensing.
Answer: TRUE
Explanation: By placing tariffs on imported goods, governments can increase the cost of
exporting relative to foreign direct investment and licensing.
Difficulty: 1 Easy
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
6) An oligopoly is an industry composed of a limited number of large firms.
Answer: TRUE
Explanation: An oligopoly is an industry composed of a limited number of large firms (e.g., an
industry in which four firms control 80 percent of a domestic market would be defined as an
oligopoly).
Difficulty: 1 Easy
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
2
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
7) Rivals rarely imitate what a firm does in an oligopoly.
Answer: FALSE
Explanation: Rivals often quickly imitate what a firm does in an oligopoly.
Difficulty: 1 Easy
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
8) John Dunning pioneered the eclectic paradigm.
Answer: TRUE
Explanation: The eclectic paradigm has been championed by the British economist John
Dunning.
Difficulty: 1 Easy
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
9) According to the pragmatic nationalistic view, the MNE is a tool for exploiting host countries to
the exclusive benefit of their capitalist-imperialist home countries.
Answer: FALSE
Explanation: According to the radical view, the MNE is a tool for exploiting host countries to the
exclusive benefit of their capitalist-imperialist home countries.
Difficulty: 2 Medium
Topic: Overview of Foreign Direct Investment
Learning Objective: 08-03 Understand how political ideology shapes a government's attitudes
toward FDI.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
3
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
10) Only a few countries have adopted the free market view in its pure form.
Answer: TRUE
Explanation: Although few countries have adopted a pure free market policy stance, an
increasing number of countries are gravitating toward the free market end of the spectrum and
have liberalized their foreign investment regime.
Difficulty: 1 Easy
Topic: Overview of Foreign Direct Investment
Learning Objective: 08-03 Understand how political ideology shapes a government's attitudes
toward FDI.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
11) Countries adopting a pragmatic stance pursue policies designed to maximize the national
benefits and minimize the national costs.
Answer: TRUE
Explanation: Countries adopting a pragmatic stance pursue policies designed to maximize the
national benefits and minimize the national costs. According to this view, FDI should be allowed
so long as the benefits outweigh the costs.
Difficulty: 1 Easy
Topic: Overview of Foreign Direct Investment
Learning Objective: 08-03 Understand how political ideology shapes a government's attitudes
toward FDI.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
12) Research supports the view that multinational firms often transfer significant technology when
they invest in a foreign country.
Answer: TRUE
Explanation: Research supports the view that multinational firms often transfer significant
technology when they invest in a foreign country.
Difficulty: 1 Easy
Topic: Benefits and Challenges of Foreign Direct Investment
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
4
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
13) Direct effects of FDI arise when jobs are created in local suppliers as a result of the FDI and
when jobs are created because of increased local spending by employees of the MNE.
Answer: FALSE
Explanation: Indirect effects arise when jobs are created in local suppliers as a result of the
investment and when jobs are created because of increased local spending by employees of the
MNE.
Difficulty: 2 Medium
Topic: Benefits and Challenges of Foreign Direct Investment
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
14) Governments normally are concerned when their country is running a surplus on the current
account of their balance of payments.
Answer: FALSE
Explanation: Governments normally are concerned when their country is running a deficit on the
current account of their balance of payments.
Difficulty: 1 Easy
Topic: Benefits and Challenges of Foreign Direct Investment
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
15) In general, FDI in the form of greenfield investments should increase competition.
Answer: TRUE
Explanation: In general, while FDI in the form of greenfield investments should increase
competition, it is less clear that this is the case when the FDI takes the form of acquisition of an
established enterprise in the host nation.
Difficulty: 1 Easy
Topic: Benefits and Challenges of Foreign Direct Investment
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
5
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
16) For the home country, the current account of the balance of payments improves if the purpose
of the foreign investment is to serve the home market from a low-cost production location.
Answer: FALSE
Explanation: The current account of the balance of payments suffers if the purpose of the foreign
investment is to serve the home market from a low-cost production location.
Difficulty: 2 Medium
Topic: Benefits and Challenges of Foreign Direct Investment
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
17) Offshore production refers to FDI undertaken to serve the host market.
Answer: FALSE
Explanation: The term offshore production refers to FDI undertaken to serve the home market.
Difficulty: 1 Easy
Topic: Benefits and Challenges of Foreign Direct Investment
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
18) The WTO supports the promotion of international trade in services.
Answer: TRUE
Explanation: The WTO embraces the promotion of international trade in services.
Difficulty: 1 Easy
Topic: Government Intervention in Foreign Direct Investment
Learning Objective: 08-05 Explain the range of policy instruments that governments use to
influence FDI.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
6
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
19) One way countries have encouraged firms to undertake FDI is through double taxation.
Answer: FALSE
Explanation: To encourage domestic firms to undertake FDI, many countries have eliminated
double taxation of foreign income (i.e., taxation of income in both the host country and the home
country).
Difficulty: 1 Easy
Topic: Government Intervention in Foreign Direct Investment
Learning Objective: 08-05 Explain the range of policy instruments that governments use to
influence FDI.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
20) The British advanced corporation tax system taxed British companies' foreign earnings at a
higher rate than their domestic earnings. This tax code created an incentive for British companies
to invest abroad.
Answer: FALSE
Explanation: This tax code created an incentive for British companies to invest at home in order
to help create jobs at home instead of in other nations.
Difficulty: 1 Easy
Topic: Government Intervention in Foreign Direct Investment
Learning Objective: 08-05 Explain the range of policy instruments that governments use to
influence FDI.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
21) Tax concessions, low-interest loans, and grants or subsidies are all incentives that governments
offer to foreign firms to invest in their countries.
Answer: TRUE
Explanation: It is common for governments to offer incentives to foreign firms to invest in their
countries. Such incentives take many forms, but the most common are tax concessions,
low-interest loans, and grants or subsidies.
Difficulty: 1 Easy
Topic: Government Intervention in Foreign Direct Investment
Learning Objective: 08-05 Explain the range of policy instruments that governments use to
influence FDI.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
7
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
22) Because licensing is more costly and more risky than FDI, other things being equal, the
theories argue that FDI is preferable to licensing.
Answer: FALSE
Explanation: This is backwards: Because FDI is more costly and more risky than licensing, other
things being equal, licensing is preferable to FDI.
Difficulty: 2 Medium
Topic: Government Intervention in Foreign Direct Investment
Learning Objective: 08-06 Identify the implications for managers of the theory and government
policies associated with FDI.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
23) Licensing is usually a good option for firms in high-tech industries where protecting
firm-specific expertise is of paramount importance.
Answer: FALSE
Explanation: Licensing is usually not a good option for firms in high-tech industries where
protecting firm-specific expertise is of paramount importance.
Difficulty: 2 Medium
Topic: Government Intervention in Foreign Direct Investment
Learning Objective: 08-06 Identify the implications for managers of the theory and government
policies associated with FDI.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
24) FDI occurs when a firm
A) ships its products from one country to another.
B) invests directly in facilities to produce a product in a foreign country.
C) invests in the shares of another company operating in the same country.
D) grants permission to another company in a different country to use its brand name.
Answer: B
Explanation: Foreign direct investment (FDI) occurs when a firm invests directly in facilities to
produce or market a product in a foreign country.
Difficulty: 1 Easy
Topic: Overview of Foreign Direct Investment
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment (FDI) in
the world economy.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
8
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
25) Which of the following is an example of a greenfield investment?
A) A Chinese sugar maker sets up a sugar crushing facility in Cuba.
B) A Serbian automobile company purchases a Croatian component manufacturer.
C) A Finnish mobile phone manufacturer expands its production facility in Finland.
D) An Indian oil exploration company acquires an oil refining company.
Answer: A
Explanation: A greenfield investment involves the establishment of a new operation in a foreign
country.
Difficulty: 2 Medium
Topic: Overview of Foreign Direct Investment
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment (FDI) in
the world economy.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
26) Which of the following statements is true about the growth of foreign direct investment in the
world economy over the last few decades?
A) FDI has experienced a slower growth than world output.
B) FDI has accelerated faster than world trade growth.
C) FDI has remained the same over the past few decades.
D) FDI has dropped dramatically.
Answer: B
Explanation: The past 25 years have seen a marked increase in both the flow and stock of FDI in
the world economy. Over the past 25 years, the flow of FDI has accelerated faster than the growth
in world trade and world output.
Difficulty: 2 Medium
Topic: Trends in Foreign Direct Investment
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment (FDI) in
the world economy.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
9
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
27) The majority of cross-border investment in the developed world is in the form of
A) hostile takeovers.
B) greenfield investments.
C) competitive investments.
D) mergers and acquisitions.
Answer: D
Explanation: The majority of cross-border investment is in the form of mergers and acquisitions
rather than greenfield investments.
Difficulty: 1 Easy
Topic: Trends in Foreign Direct Investment
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment (FDI) in
the world economy.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
28) An Italian car manufacturer purchases a U.S. producer of car tires. This is an example of
A) an acquisition.
B) an absolute advantage.
C) a greenfield investment.
D) a merger.
Answer: A
Explanation: This is an example of an acquisition. A greenfield investment involves the
establishment of a new operation in a foreign country.
Difficulty: 2 Medium
Topic: Overview of Foreign Direct Investment
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment (FDI) in
the world economy.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
10
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
29) Developing nations currently account for ________ of FDI in the form of cross-border
mergers and acquisitions.
A) well over half
B) about one-third or less
C) about 50 percent
D) the largest share
Answer: B
Explanation: FDI flows into developed nations differ markedly from those into developing
nations. In the case of developing nations, only about one-third or less of FDI is in the form of
cross-border mergers and acquisitions. Even though developed nations still account for the largest
share of FDI inflows, FDI into developing nations has increased.
Difficulty: 1 Easy
Topic: Trends in Foreign Direct Investment
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment (FDI) in
the world economy.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
30) Since World War II, the largest source country for FDI has been
A) China.
B) Japan.
C) the United States.
D) the Netherlands.
Answer: C
Explanation: Since World War II, the United States has been the largest source country for FDI, a
position it retained during the late 1990s and early 2000s. Other important source countries include
the United Kingdom, France, Germany, the Netherlands, and Japan.
Difficulty: 1 Easy
Topic: Trends in Foreign Direct Investment
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment (FDI) in
the world economy.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
11
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
31) Which of the following factors has had a positive effect on the volume of foreign trade
investments?
A) emerging social democracies
B) fluctuating current rates
C) aging demographics
D) world economy globalization
Answer: D
Explanation: The globalization of the world economy is also having a positive effect on the
volume of FDI. Many firms see the whole world as their market, and they are undertaking FDI in
an attempt to make sure they have a significant presence in many regions of the world.
Difficulty: 2 Medium
Topic: Trends in Foreign Direct Investment
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment (FDI) in
the world economy.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
32) What has made the United States an attractive target for foreign direct investment?
A) its unstable economy
B) its unfavorable political environment
C) its wealthy domestic markets
D) its closed society
Answer: C
Explanation: The United States has been an attractive target for FDI because of its large and
wealthy domestic markets, its dynamic and stable economy, its favorable political environment,
and the openness of the country to the concept of FDI.
Difficulty: 1 Easy
Topic: Trends in Foreign Direct Investment
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment (FDI) in
the world economy.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
12
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
33) The stock of FDI refers to the
A) amount of FDI undertaken over a given period of time.
B) total accumulated value of foreign-owned assets at a given time.
C) flow of FDI out of a country.
D) amount of foreign direct investment made by domestic companies over a given period of time.
Answer: B
Explanation: The stock of FDI refers to the total accumulated value of foreign-owned assets at a
given time.
Difficulty: 1 Easy
Topic: Trends in Foreign Direct Investment
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment (FDI) in
the world economy.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
34) The ________ of FDI refers to the amount of FDI undertaken over a year.
A) stock
B) net value
C) accumulated value
D) flow
Answer: D
Explanation: The flow of FDI refers to the amount of FDI undertaken over a given time period
(normally a year).
Difficulty: 1 Easy
Topic: Trends in Foreign Direct Investment
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment (FDI) in
the world economy.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
13
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
35) What is the primary reason Africa has attracted FDI in recent years?
A) growth of the services sector
B) complete deregulation of markets
C) wave of privatization
D) raw material availability
Answer: D
Explanation: In recent years, Chinese enterprises have emerged as major investors in Africa,
particularly in extraction industries where they seem to be trying to assure future supplies of
valuable raw materials.
Difficulty: 2 Medium
Topic: Trends in Foreign Direct Investment
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment (FDI) in
the world economy.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
36) What primarily explains why developing nations are characterized by a lower percentage of
cross-border mergers and acquisitions compared to developed nations?
A) fewer target firms to acquire in developing nations
B) fierce opposition to mergers and acquisitions in developed nations
C) unwillingness of foreign companies to invest in developing nations
D) presence of import quotas in developing nations
Answer: A
Explanation: In the case of developing nations, only about one-third of FDI is in the form of
cross-border mergers and acquisitions. The lower percentage of mergers and acquisitions may
simply reflect the fact that there are fewer target firms to acquire in developing nations.
Difficulty: 2 Medium
Topic: Trends in Foreign Direct Investment
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment (FDI) in
the world economy.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
14
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
37) When contemplating FDI, why do firms apparently prefer to acquire existing assets rather than
undertake greenfield investments?
A) Greenfield investments are characterized by reduced management control.
B) Mergers and acquisitions are preferred because most greenfield investments fail.
C) It is easier and less risky for a firm to build strategic assets than acquire similar assets.
D) Mergers and acquisitions are quicker to execute than greenfield investments.
Answer: D
Explanation: Mergers and acquisitions are quicker to execute than greenfield investments. This is
an important consideration in the modern business world where markets evolve very rapidly.
Difficulty: 3 Hard
Topic: Trends in Foreign Direct Investment
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment (FDI) in
the world economy.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
38) ________ arises when two or more enterprises encounter each other in different regional
markets, national markets, or industries.
A) Comparative advantage
B) Multipoint competition
C) Competitive advantage
D) Economic advantage
Answer: B
Explanation: Multipoint competition arises when two or more enterprises encounter each other in
different regional markets, national markets, or industries. Economic theory suggests that firms
will try to match each other's moves in different markets to try to hold each other in check. If a firm
is successful with this strategy, the firm will ensure that a rival does not take a commanding
position in one market and then use the profits generated in that market to underwrite competitive
attacks in other markets.
Difficulty: 1 Easy
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
15
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
39) ________ arise(s) from using resource endowments or assets that are tied to a particular
foreign location and that a firm finds valuable to combine with its own unique assets.
A) Multipoint competition
B) The eclectic paradigm
C) Location-specific advantages
D) Outflow of FDI
Answer: C
Explanation: Location-specific advantages are advantages that arise from using resource
endowments or assets that are tied to a particular foreign location and that a firm finds valuable to
combine with its own unique assets. Natural resources such as oil and minerals, for example, are
specific to certain locations. Firms must undertake FDI to exploit such foreign resources.
Difficulty: 2 Medium
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
40) ________ occurs when a firm legally allows the right to produce its product, to use its
production processes, or to use its brand name or trademark to another firm.
A) Licensing
B) Acquisition
C) Internalization
D) Merger
Answer: A
Explanation: Licensing occurs when a firm (the licensor) licenses the right to produce its product,
to use its production processes, or to use its brand name or trademark to another firm (the licensee).
In return for giving the licensee these rights, the licensor collects a royalty fee on every unit the
licensee sells. The licensor also benefits from the arrangement in that the licensee bears the cost
and risk of expanding into a foreign market.
Difficulty: 1 Easy
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
16
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
41) Which branch of economic theory seeks to explain why firms often prefer foreign direct
investment over licensing as a strategy for entering foreign markets?
A) internalization theory
B) product life-cycle theory
C) multipoint competition theory
D) strategic behavior theory
Answer: A
Explanation: A branch of economic theory known as internalization theory seeks to explain why
firms often prefer foreign direct investment over licensing as a strategy for entering foreign
markets.
Difficulty: 2 Medium
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
42) A French wind power company gives an Indonesian company the right to produce and sell
wind turbines in return for a royalty fee on every unit sold. Which business practice is this an
example of?
A) acquisition
B) licensing
C) exporting
D) greenfield investment
Answer: B
Explanation: Licensing involves granting a foreign entity (the licensee) the right to produce and
sell the firm's product in return for a royalty fee on every unit sold.
Difficulty: 2 Medium
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
17
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
43) When transportation costs are added to production costs, it becomes unprofitable to ship some
products over a large distance. This is particularly true of products that
A) have a low value-to-weight ratio.
B) have a high value-to-weight ratio.
C) can be produced only in one region.
D) require locally sourced raw materials.
Answer: A
Explanation: When transportation costs are added to production costs, it becomes unprofitable to
ship some products over a large distance. This is particularly true of products that have a low
value-to-weight ratio and that can be produced in almost any location.
Difficulty: 2 Medium
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
44) ________ seeks to explain why firms often prefer foreign direct investment over licensing as a
strategy for entering foreign markets.
A) Knickerbocker's theory
B) Internalization theory
C) The noninterventionist theory
D) The eclectic paradigm
Answer: B
Explanation: Internalization theory seeks to explain why firms often prefer foreign direct
investment over licensing as a strategy for entering foreign markets.
Difficulty: 1 Easy
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
18
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
45) ________ gives a firm tight control over manufacturing, marketing, and strategy in a foreign
country that may be required to maximize its profitability.
A) Licensing
B) Internalization
C) Foreign direct investment
D) A merger
Answer: C
Explanation: Licensing does not give a firm the tight control over manufacturing, marketing, and
strategy in a foreign country that may be required to maximize its profitability.
Difficulty: 1 Easy
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
46) ________ and its extensions can help to explain imitative FDI behavior by firms in
oligopolistic industries.
A) Internalization theory
B) The eclectic paradigm
C) The noninterventionist theory
D) Knickerbocker's theory
Answer: D
Explanation: Knickerbocker's theory and its extensions can help to explain imitative FDI
behavior by firms in oligopolistic industries.
Difficulty: 1 Easy
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
19
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
47) Which of the following specifically reduces the viability of an exporting strategy specifically
for products with low value-to-weight ratios?
A) foreign exchange controls
B) trade barriers
C) transportation costs
D) output quality
Answer: C
Explanation: When transportation costs are added to production costs, it becomes unprofitable to
ship some products over a large distance. This is particularly true of products that have a low
value-to-weight ratio and that can be produced in almost any location.
Difficulty: 2 Medium
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
48) Which of the following is a way in which governments increase the attractiveness of FDI and
licensing relative to exporting?
A) by implementing import quotas
B) by imposing FDI limits in industries
C) by increasing tax rates
D) by limiting free flow of capital
Answer: A
Explanation: By limiting imports through quotas, governments increase the attractiveness of FDI
and licensing.
Difficulty: 3 Hard
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
20
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
49) Identify the theory that seeks to explain why firms often prefer foreign direct investment over
licensing as a strategy for entering foreign markets.
A) internalization theory
B) product life-cycle theory
C) perfect markets theory
D) random walk theory
Answer: A
Explanation: A branch of economic theory known as internalization theory seeks to explain why
firms often prefer foreign direct investment over licensing as a strategy for entering foreign
markets (this approach is also known as the market imperfections approach).
Difficulty: 1 Easy
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
50) In which of the following situations does the internalization theory recommend FDI as
opposed to licensing?
A) when the firm has know-how that can be adequately protected by a licensing contract
B) when the firm produces products that have a low value-to-weight ratio
C) when a firm's skills and know-how are amenable to licensing
D) when the firm needs tight control over a foreign entity
Answer: D
Explanation: Licensing does not give a firm the tight control over manufacturing, marketing, and
strategy in a foreign country that may be required to maximize its profitability. When tight control
over a foreign entity is desirable, foreign direct investment is preferable to licensing.
Difficulty: 2 Medium
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
21
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
51) Which of the following best describes an industry composed of a limited number of large
firms?
A) an oligopoly
B) a monopoly
C) an oligarchy
D) a perfectly competitive market
Answer: A
Explanation: An oligopoly is an industry composed of a limited number of large firms (e.g., an
industry in which four firms control 80 percent of a domestic market would be defined as an
oligopoly).
Difficulty: 1 Easy
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
52) Which of the following is a direct consequence of the interdependence between firms in an
oligopoly?
A) increased regulation
B) increased consumer welfare
C) imitative behavior
D) longer product life cycles
Answer: C
Explanation: The interdependence between firms in an oligopoly leads to imitative behavior;
rivals often quickly imitate what a firm does in an oligopoly.
Difficulty: 1 Easy
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
22
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
53) Which of the following observations concerning Knickerbocker's theory is true?
A) It does not explain imitative FDI behavior by firms in oligopolistic industries.
B) Economists favor this theory as an explanation for FDI compared to the internalization theory.
C) It addresses the issue of whether FDI is more efficient than exporting or licensing for expanding
abroad.
D) It does not explain why the first firm in an oligopoly decides to undertake FDI rather than to
export or license.
Answer: D
Explanation: Although Knickerbocker's theory and its extensions can help to explain imitative
FDI behavior by firms in oligopolistic industries, it does not explain why the first firm in an
oligopoly decides to undertake FDI rather than to export or license.
Difficulty: 3 Hard
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
54) ________ arises when two or more enterprises encounter each other in different regional
markets, national markets, or industries.
A) Horizontal integration
B) Multipoint competition
C) An oligopoly
D) Vertical integration
Answer: B
Explanation: Multipoint competition arises when two or more enterprises encounter each other in
different regional markets, national markets, or industries.
Difficulty: 1 Easy
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
23
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
55) According to Knickerbocker's theory
A) when a firm has valuable know-how that cannot be adequately protected by a licensing
contract, it engages in FDI.
B) when a firm's skills and know-how are not amenable to licensing, it usually prefers the FDI
route.
C) by placing tariffs on imported goods, governments indirectly increase the cost of exporting
relative to foreign direct investment and licensing.
D) when a firm that is part of an oligopolistic industry expands into a foreign market, other firms in
the industry will be compelled to make similar investments.
Answer: D
Explanation: Imitative behavior can take many forms in an oligopoly. One firm raises prices, the
others follow; one expands into a foreign market and the rivals imitate lest they be left at a
disadvantage in the future.
Difficulty: 2 Medium
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
56) What is the term that describes when two or more enterprises encounter each other in different
regional markets, national markets, or industries?
A) multipoint competition
B) monopoly
C) location-specific competition
D) oligopoly
Answer: A
Explanation: Multipoint competition arises when two or more enterprises encounter each other in
different regional markets, national markets, or industries.
Difficulty: 1 Easy
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
24
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
57) Which of the following is a major drawback of using Knickerbocker's theory in explaining
FDI?
A) It ignores the fact that firms invest in a foreign country when demand in that country will
support local production.
B) It does not explain why the first firm in an oligopoly decides to undertake FDI rather than to
export or license.
C) It fails to identify when it is profitable to invest abroad.
D) It ignores the fact that licensing as an entry strategy has its limitations.
Answer: B
Explanation: Although Knickerbocker's theory and its extensions can help explain imitative FDI
behavior by firms in oligopolistic industries, it does not explain why the first firm in an oligopoly
decides to undertake FDI rather than to export or license.
Difficulty: 2 Medium
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
58) The ________ suggests that a firm will establish production facilities where foreign assets or
resource endowments that are important to the firm are located.
A) product life-cycle theory
B) internalization theory
C) multipoint competition theory
D) eclectic paradigm
Answer: D
Explanation: According to the eclectic paradigm, it requires the firm to establish production
facilities where those foreign assets or resource endowments are located.
Difficulty: 1 Easy
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
25
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
59) Advantages that arise from using resource endowments or assets that are tied to a particular
place and that a firm finds valuable to combine with its own unique assets are known as
A) location-specific advantages.
B) capital-specific advantages.
C) absolute advantages.
D) production factor advantages.
Answer: A
Explanation: By location-specific advantages, John Dunning means the advantages that arise
from utilizing resource endowments or assets that are tied to a particular foreign location and that a
firm finds valuable to combine with its own unique assets.
Difficulty: 1 Easy
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
60) According to the ________ view of FDI, multinational enterprises (MNE) extract profits from
the host country and take them to their home country, giving nothing of value to the host country in
exchange.
A) imperialist
B) conservative
C) free market
D) radical
Answer: D
Explanation: Radical writers see the MNE as a tool for exploiting host countries to the exclusive
benefit of their capitalist-imperialist home countries. They argue that MNEs extract profits from
the host country and take them to their home country, giving nothing of value to the host country in
exchange.
Difficulty: 1 Easy
Topic: Overview of Foreign Direct Investment
Learning Objective: 08-03 Understand how political ideology shapes a government's attitudes
toward FDI.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
26
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
61) Which view of FDI traces its roots to classical economics and the international trade theories
of Adam Smith and David Ricardo?
A) imperialist
B) conservative
C) free market
D) radical
Answer: C
Explanation: The free market view traces its roots to classical economics and the international
trade theories of Adam Smith and David Ricardo. The intellectual case for this view has been
strengthened by the internalization explanation of FDI.
Difficulty: 1 Easy
Topic: Overview of Foreign Direct Investment
Learning Objective: 08-03 Understand how political ideology shapes a government's attitudes
toward FDI.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
62) Which political view allows FDI so long as the benefits outweigh the costs?
A) the traditional view
B) the pragmatic nationalist view
C) the radical view
D) the free market view
Answer: B
Explanation: The pragmatic nationalist view is that FDI has both benefits and costs. According to
this view, FDI should be allowed so long as the benefits outweigh the costs.
Difficulty: 1 Easy
Topic: Overview of Foreign Direct Investment
Learning Objective: 08-03 Understand how political ideology shapes a government's attitudes
toward FDI.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
27
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
63) A country rejects FDI proposals in certain industries. It does so because the tangible
advantages of such investments are lesser than potential costs like loss of employment and
reduction of overall well-being. However, it aggressively pursues inviting foreign investments in
sectors like infrastructure, education, and health care because of the benefits that accrue with them.
Which political view of FDI is discussed in this example?
A) the pure market view
B) the free market view
C) the radical view
D) the pragmatic nationalist view
Answer: D
Explanation: The pragmatic nationalist view is that FDI has both benefits and costs. According to
this view, FDI should be allowed so long as the benefits outweigh the costs.
Difficulty: 2 Medium
Topic: Overview of Foreign Direct Investment
Learning Objective: 08-03 Understand how political ideology shapes a government's attitudes
toward FDI.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
64) The country of Manystan has adopted neither a radical policy nor a free market policy, but
rather one that posits that FDI has both benefits and costs. This is best described as
A) pragmatic nationalism.
B) postmodernism.
C) the free market view.
D) the noninterventionist principle.
Answer: A
Explanation: Countries that have adopted neither a radical policy nor a free market policy toward
FDI have a policy that can best be described as pragmatic nationalism. The pragmatic nationalist
view is that FDI has both benefits and costs.
Difficulty: 1 Easy
Topic: Overview of Foreign Direct Investment
Learning Objective: 08-03 Understand how political ideology shapes a government's attitudes
toward FDI.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
28
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
65) ________ traces its roots to Marxist political and economic theory.
A) The radical view
B) Pragmatic nationalism
C) The free market view
D) The noninterventionist principle
Answer: A
Explanation: The radical view traces its roots to Marxist political and economic theory.
Difficulty: 1 Easy
Topic: Overview of Foreign Direct Investment
Learning Objective: 08-03 Understand how political ideology shapes a government's attitudes
toward FDI.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
66) ________ argues that FDI is a benefit to both the source country and the host country.
A) Pragmatic nationalism
B) The free market view
C) The noninterventionist principle
D) The radical view
Answer: B
Explanation: The free market view argues that international production should be distributed
among countries according to the theory of comparative advantage.
Difficulty: 1 Easy
Topic: Overview of Foreign Direct Investment
Learning Objective: 08-03 Understand how political ideology shapes a government's attitudes
toward FDI.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
29
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
67) The pragmatic nationalist view highlights ________ of FDI.
A) only the benefits
B) only the costs
C) both the benefits and costs
D) neither the benefits nor the costs
Answer: C
Explanation: The pragmatic nationalist view is that FDI has both benefits and costs. According to
this view, FDI should be allowed so long as the benefits outweigh the costs.
Difficulty: 2 Medium
Topic: Overview of Foreign Direct Investment
Learning Objective: 08-03 Understand how political ideology shapes a government's attitudes
toward FDI.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
68) An aspect of ________ is the tendency to aggressively court FDI believed to be in the national
interest by, for example, offering subsidies to foreign MNEs in the form of tax breaks or grants.
A) the radical view
B) the noninterventionist principle
C) the free market view
D) pragmatic nationalism
Answer: D
Explanation: An aspect of pragmatic nationalism is the tendency to aggressively court FDI
believed to be in the national interest by, for example, offering subsidies to foreign MNEs in the
form of tax breaks or grants.
Difficulty: 2 Medium
Topic: Overview of Foreign Direct Investment
Learning Objective: 08-03 Understand how political ideology shapes a government's attitudes
toward FDI.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
30
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
69) Recent years have seen a ________ in the number of countries that adhere to a radical ideology
regarding FDI.
A) marked decline
B) slight decline
C) marked increase
D) slight increase
Answer: A
Explanation: Recent years have seen a marked decline in the number of countries that adhere to a
radical ideology regarding FDI.
Difficulty: 1 Easy
Topic: Overview of Foreign Direct Investment
Learning Objective: 08-03 Understand how political ideology shapes a government's attitudes
toward FDI.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
70) The free market view argues that international production should be distributed among
countries according to the
A) eclectic paradigm.
B) theory of competitive advantage.
C) new trade theory.
D) theory of comparative advantage.
Answer: D
Explanation: The intellectual case for the free market view has been strengthened by the
internalization explanation of FDI. The free market view argues that international production
should be distributed among countries according to the theory of comparative advantage.
Countries should specialize in the production of those goods and services that they can produce
most efficiently. Within this framework, the MNE is an instrument for dispersing the production of
goods and services to the most efficient locations around the globe. Viewed this way, FDI by the
MNE increases the overall efficiency of the world economy.
Difficulty: 2 Medium
Topic: Overview of Foreign Direct Investment
Learning Objective: 08-03 Understand how political ideology shapes a government's attitudes
toward FDI.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
31
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
71) According to pragmatic nationalist view, FDI should be allowed so long as
A) the benefits outweigh the costs.
B) they do not aggressively court domestic firms.
C) the costs outweigh the benefits.
D) the MNE does not seek tax breaks or grants.
Answer: A
Explanation: The pragmatic nationalist view is that FDI has both benefits and costs. FDI can
benefit a host country by bringing capital, skills, technology, and jobs, but those benefits come at a
cost.
According to this view, FDI should be allowed so long as the benefits outweigh the costs. Another
aspect of pragmatic nationalism is the tendency to aggressively court FDI believed to be in the
national interest by, for example, offering subsidies to foreign MNEs in the form of tax breaks or
grants.
Difficulty: 2 Medium
Topic: Overview of Foreign Direct Investment
Learning Objective: 08-03 Understand how political ideology shapes a government's attitudes
toward FDI.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
72) Why is it said that not all the new jobs created by FDI represent net additions in employment?
A) because of the uncertainty of the overall economic environment
B) because most of the job creation is indirect in nature
C) because jobs created by an investment may be offset by the jobs lost in domestic companies
D) because the unemployment rate more or less remains constant over the short term
Answer: C
Explanation: Cynics argue that not all the "new jobs" created by FDI represent net additions in
employment. In the case of FDI by Japanese auto companies in the United States, some argue that
the jobs created by this investment have been more than offset by the jobs lost in U.S.-owned auto
companies, which have lost market share to their Japanese competitors.
Difficulty: 3 Hard
Topic: Benefits and Challenges of Foreign Direct Investment
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
32
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
73) When a company brings capital and/or technology to a host country, the host country benefits
from the
A) political effect of FDI.
B) resource-transfer effect of FDI.
C) balance-of-payments effect of FDI.
D) bandwagon effect of FDI.
Answer: B
Explanation: Foreign direct investment can make a positive contribution to a host economy by
supplying capital, technology, and management resources that would otherwise not be available
and thus boost that country's economic growth rate.
Difficulty: 2 Medium
Topic: Benefits and Challenges of Foreign Direct Investment
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
74) A country's ________ keep track of its payments to and its receipts from other countries.
A) federal payments ledgers
B) concurrent accounts
C) checks-and-balances accounts
D) balance-of-payments accounts
Answer: D
Explanation: A country's balance-of-payments accounts track both its payments to and its
receipts from other countries.
Difficulty: 1 Easy
Topic: Benefits and Challenges of Foreign Direct Investment
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
33
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
75) Host country citizens that are employed by an MNE following an FDI are an example of
A) an internality.
B) a direct effect.
C) an externality.
D) an indirect effect.
Answer: B
Explanation: Direct effects of FDI arise when a foreign MNE employs a number of host-country
citizens.
Difficulty: 2 Medium
Topic: Benefits and Challenges of Foreign Direct Investment
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
76) A country's ________ accounts keep track of both its payments to and its receipts from other
countries.
A) current
B) offshore
C) balance-of-payments
D) currency
Answer: C
Explanation: A country's balance-of-payments accounts track both its payments to and its
receipts from other countries.
Difficulty: 1 Easy
Topic: Benefits and Challenges of Foreign Direct Investment
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
34
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
77) If the FDI is a substitute for imports of goods or services, the effect can be to improve the
________ of the host country's balance of payments.
A) offshore account
B) currency account
C) market imperfections
D) current account
Answer: D
Explanation: If the FDI is a substitute for imports of goods or services, the effect can be to
improve the current account of the host country's balance of payments.
Difficulty: 2 Medium
Topic: Benefits and Challenges of Foreign Direct Investment
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
78) FDI can benefit the home country's ________ if the foreign subsidiary creates demands for
home-country exports of capital equipment, intermediate goods, complementary products, and the
like.
A) balance of payments
B) oligopolistic industry
C) current accounts
D) licensing endeavors
Answer: A
Explanation: FDI can benefit the home country's balance of payments if the foreign subsidiary
creates demands for home-country exports of capital equipment, intermediate goods,
complementary products, and the like.
Difficulty: 2 Medium
Topic: Benefits and Challenges of Foreign Direct Investment
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
35
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
79) Which of the following arises when a country is importing more goods and services than it is
exporting?
A) current account surplus
B) trade deficit
C) trade surplus
D) trade balance
Answer: B
Explanation: A current account deficit, or trade deficit as it is often called, arises when a country
is importing more goods and services than it is exporting.
Difficulty: 1 Easy
Topic: Benefits and Challenges of Foreign Direct Investment
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
80) In which of the following situations would FDI improve the current account of the host
country's balance of payments?
A) if the foreign subsidiary imports a substantial number of its inputs from abroad
B) if the FDI reduces existing employment opportunities
C) if the FDI is a substitute for imports of goods or services
D) if the FDI results in substitution of products produced domestically
Answer: C
Explanation: If the FDI is a substitute for imports of goods or services, the effect can be to
improve the current account of the host country's balance of payments. Much of the FDI by
Japanese automobile companies in the United States and Europe, for example, can be seen as
substituting for imports from Japan.
Difficulty: 2 Medium
Topic: Benefits and Challenges of Foreign Direct Investment
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
36
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
81) In which way can the source country's balance of payments benefit from FDI made in a foreign
country?
A) from cash outflow during the initial investment to finance the FDI
B) if the purpose of the foreign investment is to serve the home market from a low-cost production
location
C) from the inward flow of foreign earnings
D) if FDI is a substitute for direct exports
Answer: C
Explanation: FDI can benefit the home (source) country's balance of payments from the inward
flow of foreign earnings.
Difficulty: 2 Medium
Topic: Benefits and Challenges of Foreign Direct Investment
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
82) How is the adverse effect of the balance of payments for the home country due to FDI usually
offset?
A) by increased imports to the home country as a result of the FDI
B) by the subsequent inflow of foreign earnings
C) by substituting direct exports made earlier from the home country
D) by further investments usually made to expand foreign operations
Answer: B
Explanation: For the home country, the balance of payments suffers from the initial capital
outflow required to finance the FDI. This effect, however, is usually more than offset by the
subsequent inflow of foreign earnings.
Difficulty: 2 Medium
Topic: Benefits and Challenges of Foreign Direct Investment
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
37
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
83) FDI undertaken to serve the home market is known as
A) outsourcing.
B) FDI substitution.
C) offshore production.
D) home market FDI.
Answer: C
Explanation: The term offshore production refers to FDI undertaken to serve the home market.
Difficulty: 1 Easy
Topic: Benefits and Challenges of Foreign Direct Investment
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
84) How can FDI undertaken to serve the home market stimulate economic growth in the home
country?
A) by freeing home-country resources to concentrate on activities where the home country has a
comparative advantage
B) by importing more goods and services than it is exporting
C) by circumventing trade barriers that may have prevented direct exports in the past
D) by reducing demand for home-country exports of capital equipment, intermediate goods, and
complementary products
Answer: A
Explanation: Far from reducing home-country employment, such FDI may actually stimulate
economic growth (and hence employment) in the home country by freeing home-country
resources to concentrate on activities where the home country has a comparative advantage.
Difficulty: 3 Hard
Topic: Benefits and Challenges of Foreign Direct Investment
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
38
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
85) What is double taxation in the context of FDI?
A) taxation at twice the normal rate for foreign companies
B) taxing the producers as well as suppliers
C) taxation of income in both home and host country
D) taxation of both income as well as dividends paid
Answer: C
Explanation: As an incentive to encourage domestic firms to undertake FDI, many countries
have eliminated double taxation of foreign income (i.e., taxation of income in both the host
country and the home country).
Difficulty: 2 Medium
Topic: Government Intervention in Foreign Direct Investment
Learning Objective: 08-05 Explain the range of policy instruments that governments use to
influence FDI.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
86) Through their choice of policies, home countries can both encourage and restrict FDI by local
firms. Policies designed to encourage outward FDI include which of the following?
A) tax rebates
B) political pressure
C) expropriation
D) domestic risk insurance
Answer: B
Explanation: Through their choice of policies, home countries can both encourage and restrict
FDI by local firms. Policies designed to encourage outward FDI include: foreign risk insurance,
capital assistance, tax incentives, and political pressure.
Difficulty: 2 Medium
Topic: Government Intervention in Foreign Direct Investment
Learning Objective: 08-05 Explain the range of policy instruments that governments use to
influence FDI.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
39
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
87) The two most common methods of restricting inward FDI are ownership restraints and
A) resource endowments.
B) performance requirements.
C) national sovereignty.
D) incentives.
Answer: B
Explanation: Host governments use a wide range of controls to restrict FDI in one way or
another. The two most common are ownership restraints and performance requirements.
Difficulty: 1 Easy
Topic: Government Intervention in Foreign Direct Investment
Learning Objective: 08-05 Explain the range of policy instruments that governments use to
influence FDI.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
88) Which of the following is a home-country policy aimed at restricting outward FDI flow?
A) taxing domestic companies' foreign earnings at a higher rate than their domestic earnings
B) implementation of government-backed insurance programs to cover major types of foreign
investment risk
C) eliminating double taxation of foreign income
D) persuading host countries to relax their restrictions on inbound FDI
Answer: A
Explanation: Countries have occasionally manipulated tax rules to try to encourage their firms to
invest at home. The objective behind such policies is to create jobs at home rather than in other
nations.
Difficulty: 2 Medium
Topic: Government Intervention in Foreign Direct Investment
Learning Objective: 08-05 Explain the range of policy instruments that governments use to
influence FDI.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
40
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
89) ________ is essentially the service-industry version of licensing, although it normally involves
much longer-term commitments.
A) Franchising
B) Subsidizing
C) Greenfield investment
D) Patenting
Answer: A
Explanation: Franchising is essentially the service-industry version of licensing, although it
normally involves much longer-term commitments than licensing.
Difficulty: 1 Easy
Topic: Government Intervention in Foreign Direct Investment
Learning Objective: 08-06 Identify the implications for managers of the theory and government
policies associated with FDI.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
90) From the perspective of a firm negotiating the terms of an investment with a host government,
the firm's bargaining power is high when the
A) firm has a short time in which to complete the negotiations.
B) host government places a high value on what the firm has to offer.
C) number of comparable alternatives open to the firm is low.
D) host government does not places a high value on the firm's offering.
Answer: B
Explanation: From the perspective of a firm negotiating the terms of an investment with a host
government, the firm's bargaining power is high when the host government places a high value on
what the firm has to offer, the number of comparable alternatives open to the firm is greater, and
the firm has a long time in which to complete the negotiations.
Difficulty: 2 Medium
Topic: Government Intervention in Foreign Direct Investment
Learning Objective: 08-06 Identify the implications for managers of the theory and government
policies associated with FDI.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
41
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
91) The ________ and Knickerbocker's theory of FDI tend to be less useful from a business
perspective because they are descriptive rather than analytical.
A) noninterventionist theory
B) internalization theory
C) eclectic paradigm
D) product life-cycle theory
Answer: D
Explanation: The product life-cycle theory and Knickerbocker's theory of FDI tend to be less
useful from a business perspective because they are descriptive rather than analytical.
Difficulty: 1 Easy
Topic: Government Intervention in Foreign Direct Investment
Learning Objective: 08-06 Identify the implications for managers of the theory and government
policies associated with FDI.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
92) As transportation costs or trade barriers increase, exporting becomes unprofitable, and the
choice is between FDI and
A) subsidies.
B) incentives.
C) licensing.
D) resource endowments.
Answer: C
Explanation: As transportation costs or trade barriers increase, exporting becomes unprofitable,
and the choice is between FDI and licensing.
Difficulty: 1 Easy
Topic: Government Intervention in Foreign Direct Investment
Learning Objective: 08-06 Identify the implications for managers of the theory and government
policies associated with FDI.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
42
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
93) Licensing would be a good option for firms in which of the following industries?
A) It would be a good option in high-technology industries in which protecting firm-specific
expertise is of paramount importance.
B) It would be a good option in global oligopolies, in which competitive interdependence requires
that multinational firms maintain tight control over foreign operations.
C) It would be a good option in industries in which intense cost pressures require that multinational
firms maintain tight control over foreign operations.
D) It would be a good option in fragmented, low-technology industries in which globally dispersed
manufacturing is not an option.
Answer: D
Explanation: Licensing tends to be more common, and more profitable, in fragmented,
low-technology industries in which globally dispersed manufacturing is not an option. A good
example is the fast food industry.
Difficulty: 2 Medium
Topic: Government Intervention in Foreign Direct Investment
Learning Objective: 08-06 Identify the implications for managers of the theory and government
policies associated with FDI.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
94) Discuss the two main forms of FDI.
Answer: FDI takes on two main forms. The first is a greenfield investment, which involves the
establishment of a new operation in a foreign country. The second involves acquiring or merging
with an existing firm in the foreign country. Acquisitions can be a minority (where the foreign firm
takes a 10 percent to 49 percent interest in the firm's voting stock), majority (foreign interest of 50
percent to 99 percent), or full outright stake (foreign interest of 100 percent). The majority of
cross-border investment is in the form of mergers and acquisitions rather than greenfield
investments.
Difficulty: 3 Hard
Topic: Overview of Foreign Direct Investment
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment (FDI) in
the world economy.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
43
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
95) Discuss the trends in FDI over the past 30 years. Be sure to differentiate between the stock of
FDI and the flow of FDI.
Answer: The flow of FDI refers to the amount of FDI undertaken over a given period, while the
stock of FDI refers to the total accumulated value of foreign-owned assets at a given time. The past
30 years have seen a marked increase in both the flow and the stock of FDI in the world economy.
Over this period, the flow of FDI accelerated faster than the growth in world trade and world
output.
Difficulty: 3 Hard
Topic: Trends in Foreign Direct Investment
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment (FDI) in
the world economy.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
96) Discuss the reasons for the growth in FDI over the past 30 years.
Answer: FDI has grown more rapidly than world trade and world output for several reasons.
First, despite the general decline in trade barriers over the past 30 years, firms still fear
protectionist pressures. Executives see FDI as a way of circumventing future trade barriers. Given
the rising pressures for protectionism associated with the election of Donald Trump as president in
the United States and the decision by the British to leave the European Union, this seems likely to
continue for some time. Second, much of the increase in FDI has been driven by the political and
economic changes that have been occurring in many of the world's developing nations. Finally, the
globalization of the world economy is also having a positive impact on the volume of FDI as many
firms now see the whole world as their market.
Difficulty: 3 Hard
Topic: Trends in Foreign Direct Investment
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment (FDI) in
the world economy.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
44
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
97) What is a greenfield investment? How does it compare to an acquisition? Which form of FDI is
a firm more likely to choose? Explain your answer.
Answer: FDI can take the form of a greenfield investment in a new facility or an acquisition of or
a merger with an existing local firm. Research shows that most FDI takes the form of mergers and
acquisitions rather than greenfield investments. Mergers and acquisitions are more popular for
three reasons. First, mergers and acquisitions are quicker to execute than greenfield investments.
This is an important consideration in the modern business world where markets evolve very
rapidly. Many firms apparently believe that if they do not acquire a desirable target firm, then their
global rivals will. Second, foreign firms are acquired because those firms have valuable strategic
assets. Third, firms make acquisitions because they believe they can increase the efficiency of the
acquired firm by transferring capital, technology, or management skills.
Difficulty: 3 Hard
Topic: Trends in Foreign Direct Investment
Learning Objective: 08-01 Recognize current trends regarding foreign direct investment (FDI) in
the world economy.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
98) Discuss why firms selling products with low value-to-weight ratios choose FDI over
exporting.
Answer: Products with low value-to-weight ratios such as soft drinks or cement are frequently
produced in the market where they are consumed. When transportation costs are added to
production costs, it becomes unprofitable to shift such products over a long distance. For firms that
can produce low value-to-weight products at almost any location, the attractiveness of exporting
decreases and FDI or licensing becomes more appealing.
Difficulty: 3 Hard
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
45
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
99) What are the major drawbacks of licensing according to the internalization theory?
Answer: According to the internalization theory, licensing has three major drawbacks as a
strategy for exploiting foreign market opportunities. First, licensing may result in a firm giving
away valuable technological know-how to a potential foreign competitor. A second problem is that
licensing does not give a firm the tight control over manufacturing, marketing, and strategy in a
foreign country that may be required to maximize its profitability. A third problem with licensing
arises when the firm's competitive advantage is based not as much on its products as on the
management, marketing, and manufacturing capabilities that produce those products. The problem
here is that such capabilities are often not amenable to licensing.
Difficulty: 3 Hard
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
100) What is an oligopoly? Discuss the impact of interdependence in an oligopoly.
Answer: An oligopoly is an industry composed of a limited number of large firms. A critical
competitive feature of such industries is interdependence of the major players: What one firm does
can have an immediate impact on the major competitors, forcing a response in kind. By cutting
prices, one firm in an oligopoly can take market share away from its competitors, forcing them to
respond with similar price cuts to retain their market share. Thus, the interdependence between
firms in an oligopoly leads to imitative behavior; rivals often quickly imitate what a firm does in an
oligopoly. Imitative behavior can take many forms in an oligopoly. One firm raises prices, the
others follow; one expands capacity, and the rivals imitate lest they be left at a disadvantage in the
future.
Difficulty: 3 Hard
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
46
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
101) Why do many economists favor internalization theory as an explanation for FDI compared to
Knickerbocker's theory?
Answer: Although Knickerbocker's theory and its extensions can help to explain imitative FDI
behavior by firms in oligopolistic industries, it does not explain why the first firm in an oligopoly
decides to undertake FDI rather than to export or license. Internalization theory addresses this
phenomenon. The imitative theory also does not address the issue of whether FDI is more efficient
than exporting or licensing for expanding abroad. Again, internalization theory addresses the
efficiency issue. For these reasons, many economists favor internalization theory as an explanation
for FDI.
Difficulty: 3 Hard
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
102) Discuss an example that substantiates Dunning's argument about location-specific
advantages.
Answer: An obvious example of Dunning's arguments are natural resources, such as oil and other
minerals, which are by their character specific to certain locations. Dunning suggests that to
exploit such foreign resources, a firm must undertake FDI. Clearly this explains the FDI
undertaken by many of the world's oil companies, which have to invest where oil is located in
order to combine their technological and managerial capabilities with this valuable
location-specific resource.
Difficulty: 3 Hard
Topic: Theories of Foreign Direct Investment
Learning Objective: 08-02 Explain the different theories of FDI.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
47
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
103) Discuss the benefits and costs of FDI from the perspective of a host country and from the
perspective of the home country.
Answer: The main benefits of inward FDI for a host country arise from resource-transfer effects,
employment effects, balance-of-payments effects, and effects on competition and economic
growth. Three costs of FDI concern host countries. They arise from possible adverse effects on
competition within the host nation, adverse effects on the balance of payments, and the perceived
loss of national sovereignty and autonomy.
The benefits of FDI to the home (source) country arise from three sources. First, the home
country's balance of payments benefits from the inward flow of foreign earnings. Second, the
current account of the balance of payments suffers if the purpose of the foreign investment is to
serve the home market from a low-cost production location. Third, the current account of the
balance of payments suffers if the FDI is a substitute for direct exports. The most important
cost/concern of FDI for the home country centers on the balance-of-payments and employment
effects of outward FDI.
Difficulty: 3 Hard
Topic: Benefits and Challenges of Foreign Direct Investment
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
104) What are the possible adverse effects of FDI on a host country's balance-of-payments
position?
Answer: The possible adverse effects of FDI on a host country's balance-of-payments position
are twofold. First, set against the initial capital inflow that comes with FDI must be the subsequent
outflow of earnings from the foreign subsidiary to its parent company. Such outflows show up as
capital outflow on balance-of-payments accounts. Some governments have responded to such
outflows by restricting the amount of earnings that can be repatriated to a foreign subsidiary's
home country. A second concern arises when a foreign subsidiary imports a substantial number of
its inputs from abroad, which results in a debit on the current account of the host country's balance
of payments.
Difficulty: 3 Hard
Topic: Benefits and Challenges of Foreign Direct Investment
Learning Objective: 08-04 Describe the benefits and costs of FDI to home and host countries.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
48
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
105) Describe some home-country policies that encourage outward FDI.
Answer: Many investor nations now have government-backed insurance programs to cover
major types of foreign investment risk. The types of risks insurable through these programs
include the risks of expropriation, war losses, and the inability to transfer profits back home.
In addition, several advanced countries also have special funds or banks that make government
loans to firms wishing to invest in developing countries. As a further incentive to encourage
domestic firms to undertake FDI, many countries have eliminated double taxation of foreign
income. Last, and perhaps most significant, a number of investor countries (including the United
States) have used their political influence to persuade host countries to relax their restrictions on
inbound FDI.
Difficulty: 3 Hard
Topic: Government Intervention in Foreign Direct Investment
Learning Objective: 08-05 Explain the range of policy instruments that governments use to
influence FDI.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
106) What are the ways in which host governments restrict inward FDI?
Answer: Host governments use a wide range of controls to restrict FDI in one way or another.
The two most common are ownership restraints and performance requirements. Ownership
restraints can take several forms. In some countries, foreign companies are excluded from specific
fields. In other industries, foreign ownership may be permitted although a significant proportion of
the equity of the subsidiary must be owned by local investors. Performance requirements can also
take several forms. Performance requirements are controls over the behavior of the MNE's local
subsidiary. The most common performance requirements are related to local content, exports,
technology transfer, and local participation in top management.
Difficulty: 3 Hard
Topic: Government Intervention in Foreign Direct Investment
Learning Objective: 08-05 Explain the range of policy instruments that governments use to
influence FDI.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
49
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
107) Describe the situations when licensing is not a good option for a firm.
Answer: Licensing is not a good option in three situations. First, licensing is hazardous in
high-tech industries where protecting firm-specific expertise is very important. Second, licensing
is not attractive in global oligopolies where tight control is necessary so that firms have the ability
to launch coordinated attacks against global competitors. Finally, in industries where intense cost
pressures require that MNEs maintain tight control over foreign operations, licensing is not the
best option.
Difficulty: 3 Hard
Topic: Government Intervention in Foreign Direct Investment
Learning Objective: 08-06 Identify the implications for managers of the theory and government
policies associated with FDI.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
108) When a firm is considering FDI, what are some of the negotiating points it must weigh before
making its decision?
Answer: Despite the move toward a free market stance in recent years, many countries still have
a rather pragmatic stance toward FDI. In such cases, a firm considering FDI must often negotiate
the specific terms of the investment with the country's government. Such negotiations center on
two broad issues. If the host government is trying to attract FDI, the central issue is likely to be the
kind of incentives the host government is prepared to offer to the MNE and what the firm will
commit in exchange. If the host government is uncertain about the benefits of FDI and might
choose to restrict access, the central issue is likely to be the concessions that the firm must make to
be allowed to go forward with a proposed investment.
Difficulty: 3 Hard
Topic: Government Intervention in Foreign Direct Investment
Learning Objective: 08-06 Identify the implications for managers of the theory and government
policies associated with FDI.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
50
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
International Business, 12e (Hill)
Chapter 9
Regional Economic Integration
1) Charlyce lives in a country where there are no barriers to the trade of goods and services. This is
called a free trade area.
Answer: TRUE
Explanation: In a free trade area, all barriers to the trade of goods and services among member
countries are removed.
Difficulty: 1 Easy
Topic: Overview of Trade
Learning Objective: 09-01 Describe the different levels of regional economic integration.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
2) In a customs union, trade barriers are eliminated among member countries, and each country
maintains its own external trade policies.
Answer: FALSE
Explanation: A customs union eliminates trade barriers between member countries and adopts a
common external trade policy.
Difficulty: 1 Easy
Topic: Overview of Trade
Learning Objective: 09-01 Describe the different levels of regional economic integration.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
3) The European Union is an example of a perfect economic union.
Answer: FALSE
Explanation: The EU is an economic union, although an imperfect one because not all members
have adopted the euro.
Difficulty: 1 Easy
Topic: Overview of Regional Economic Integration and its Different Levels
Learning Objective: 09-01 Describe the different levels of regional economic integration.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
1
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
4) Coordination and policy harmonization problems are largely a function of the number of
countries that seek agreement.
Answer: TRUE
Explanation: The greater the number of countries involved, the more perspectives that must be
reconciled, and the harder it will be to reach agreement.
Difficulty: 1 Easy
Topic: Overview of Regional Economic Integration and its Different Levels
Learning Objective: 09-02 Understand the economic and political arguments for regional
economic integration.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
5) Because of the fact that everyone benefits from economic integration, it is easy to achieve and
sustain.
Answer: FALSE
Explanation: While a nation as a whole may benefit significantly from a regional free trade
agreement, certain groups will lose, at least in the short to medium term.
Difficulty: 2 Medium
Topic: Economic and Political Arguments Surrounding Regional Economic Integration
Learning Objective: 09-02 Understand the economic and political arguments for regional
economic integration.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
6) Concerns about national sovereignty in the EU have been a major impediment to economic
integration.
Answer: TRUE
Explanation: A major impediment to integration arises from concerns over national sovereignty
because close economic integration demands that countries give up some degree of control over
such key issues as monetary policy, fiscal policy (e.g., tax policy), and trade policy.
Difficulty: 1 Easy
Topic: Economic and Political Arguments Surrounding Regional Economic Integration
Learning Objective: 09-02 Understand the economic and political arguments for regional
economic integration.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
2
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
7) A regional free trade agreement will benefit the world only when the amount of trade it creates
exceeds the amount of trade it diverts.
Answer: TRUE
Explanation: A regional free trade agreement will benefit the world only if the amount of trade it
creates exceeds the amount it diverts.
Difficulty: 2 Medium
Topic: Economic and Political Arguments Surrounding Regional Economic Integration
Learning Objective: 09-03 Understand the economic and political arguments against regional
economic integration.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
8) The Treaty of Rome, signed in 1957, established the European Free Trade Association.
Answer: FALSE
Explanation: With the signing of the Treaty of Rome in 1957, the European Community was
established.
Difficulty: 1 Easy
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
9) A central reason for the establishment of the EU was the devastation of Western Europe during
two world wars and the desire for a lasting peace.
Answer: TRUE
Explanation: The European Union (EU) is the product of two political factors: (1) the devastation
of Western Europe during two world wars and the desire for a lasting peace, and (2) the European
nations' desire to hold their own on the world's political and economic stage.
Difficulty: 2 Medium
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
3
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
10) The Council of the European Union is responsible for proposing EU legislation, implementing
it, and monitoring compliance with EU laws by member states.
Answer: FALSE
Explanation: The European Commission is responsible for proposing EU legislation,
implementing it, and monitoring compliance with EU laws by member states.
Difficulty: 1 Easy
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
11) The judges of the European Court of Justice are required to act as representatives of national
interests, rather than as independent officials.
Answer: FALSE
Explanation: The judges are required to act as independent officials, rather than as
representatives of national interests.
Difficulty: 1 Easy
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
12) The Single European Act committed EU countries to adopting a common currency by January
1, 1999.
Answer: FALSE
Explanation: In February 1992, EC members signed the Maastricht Treaty that committed them
to adopting a common currency by January 1, 1999.
Difficulty: 1 Easy
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
4
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
13) Establishment of the euro created the largest currency zone in the world, replacing the position
the U.S. dollar had held for decades.
Answer: FALSE
Explanation: By adopting the euro, the EU has created the second most widely traded currency in
the world after that of the U.S. dollar.
Difficulty: 1 Easy
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
14) A key benefit resulting from the adoption of the euro is the ability to compare prices across
member markets.
Answer: TRUE
Explanation: The adoption of a common currency makes it easier to compare prices across
Europe. This has been increasing competition because it has become easier for consumers to shop
around.
Difficulty: 2 Medium
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
15) The implied loss of national sovereignty to the European Central Bank (ECB) underlies the
decision by Great Britain, Denmark, and Sweden to stay out of the euro zone for now.
Answer: TRUE
Explanation: The implied loss of national sovereignty to the ECB underlies the decision by Great
Britain, Denmark, and Sweden to stay out of the euro zone.
Difficulty: 2 Medium
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
5
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
16) Since its establishment, the euro has had a stable trading history.
Answer: FALSE
Explanation: Since its establishment January 1, 1999, the euro has had a volatile trading history
against the world's major currency, the U.S. dollar.
Difficulty: 2 Medium
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
17) The Andean Pact is a highly successful common market modeled after the EU.
Answer: FALSE
Explanation: The Andean Pact was largely based on the EU model, but was far less successful at
achieving its stated goals.
Difficulty: 1 Easy
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
18) Political turmoil in several African nations has persistently impeded any meaningful progress
in economic integration.
Answer: TRUE
Explanation: Significant political turmoil in several African nations has persistently impeded any
meaningful progress.
Difficulty: 2 Medium
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
6
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
19) A benefit to companies of economic integration is the opportunity to centralize their
production and reduce costs.
Answer: TRUE
Explanation: Rather than producing a product in each of the 27 EU countries or the three NAFTA
countries, a firm may be able to serve the whole EU or North American market from a single
location.
Difficulty: 2 Medium
Topic: The Debate Concerning Global and Regional Economic Integration
Learning Objective: 09-05 Understand the implications for business that are inherent in regional
economic integration agreements.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
20) Once the barriers to trade and investment are removed, companies are able to realize cost
economies by centralizing production in key locations and producing a standardized product for a
single multiple-country market.
Answer: FALSE
Explanation: This is hampered by differences in culture and competitive practices, limiting
companies' ability to realize cost economies.
Difficulty: 2 Medium
Topic: The Debate Concerning Global and Regional Economic Integration
Learning Objective: 09-05 Understand the implications for business that are inherent in regional
economic integration agreements.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
7
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
21) From least integrated to most integrated, the levels of economic integration are a:
A) common market, a free trade area, an economic union, a customs union, and a political union.
B) free trade area, a customs union, a common market, an economic union, and a political union.
C) customs union, a free trade area, a common market, a political union, and an economic union.
D) common market, an economic union, a customs union, a free trade area, and a political union.
Answer: B
Explanation: Several levels of economic integration are possible in theory. From least integrated
to most integrated, they are a free trade area, a customs union, a common market, an economic
union, and, finally, a full political union.
Difficulty: 2 Medium
Topic: Overview of Regional Economic Integration and its Different Levels
Learning Objective: 09-01 Describe the different levels of regional economic integration.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
22) Which level of economic integration eliminates trade barriers between member countries and
adopts a common external trade policy?
A) political union
B) customs union
C) common market
D) economic union
Answer: B
Explanation: A customs union eliminates trade barriers between member countries and adopts a
common external trade policy. Establishment of a common external trade policy necessitates
significant administrative machinery to oversee trade relations with nonmembers.
Difficulty: 1 Easy
Topic: Overview of Regional Economic Integration and its Different Levels
Learning Objective: 09-01 Describe the different levels of regional economic integration.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
8
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
23) Which feature of a common market differentiates it from a customs union?
A) requires harmonization of members' tax rates
B) has a common currency
C) holds a common external trade policy toward nonmembers
D) allows factors of production to move freely among members
Answer: D
Explanation: In a common market, labor and capital are free to move because there are no
restrictions on immigration, emigration, or cross-border flows of capital between member
countries.
Difficulty: 2 Medium
Topic: Overview of Regional Economic Integration and its Different Levels
Learning Objective: 09-01 Describe the different levels of regional economic integration.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
24) ________ involves the free flow of products and factors of production between member
countries, the adoption of a common external trade policy, a common currency, harmonization of
members' tax rates, and a common monetary and fiscal policy.
A) An economic union
B) A common market
C) A customs union
D) A free trade area
Answer: A
Explanation: An economic union involves the free flow of products and factors of production
between member countries, the adoption of a common external trade policy, a common currency,
harmonization of members' tax rates, and a common monetary and fiscal policy.
Difficulty: 1 Easy
Topic: Overview of Regional Economic Integration and its Different Levels
Learning Objective: 09-01 Describe the different levels of regional economic integration.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
9
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
25) Which is the most enduring free trade area in the world?
A) Central America Free Trade Association (CAFTA)
B) European Free Trade Association (EFTA)
C) Association of Southeast Asian Nations (ASEAN)
D) North American Free Trade Association (NAFTA)
Answer: B
Explanation: The most enduring free trade area in the world is the European Free Trade
Association (EFTA). Established in January 1960, EFTA currently joins four countries—Norway,
Iceland, Liechtenstein, and Switzerland—down from seven in 1995. EFTA was founded by those
Western European countries that initially decided not to be part of the European Community. The
emphasis of EFTA has been on free trade in industrial goods. Agriculture was left out of the
arrangement, each member being allowed to determine its own level of support. Members are also
free to determine the level of protection applied to goods coming from outside the EFTA.
Difficulty: 2 Medium
Topic: Overview of Regional Economic Integration and its Different Levels
Learning Objective: 09-01 Describe the different levels of regional economic integration.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
26) Which feature of an economic union differentiates it from a common market?
A) Free flow of products and factors of production between member countries
B) a common monetary and fiscal policy
C) a common external trade policy toward nonmembers
D) ability of factors of production to move freely between members
Answer: B
Explanation: An economic union entails even closer economic integration and cooperation than a
common market. Like the common market, an economic union involves the free flow of products
and factors of production among member countries and the adoption of a common external trade
policy, but it also requires a common currency, harmonization of members' tax rates, and a
common monetary and fiscal policy.
Difficulty: 2 Medium
Topic: Overview of Regional Economic Integration and its Different Levels
Learning Objective: 09-01 Describe the different levels of regional economic integration.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
10
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
27) Which of the following is a reason the European Union is considered an imperfect economic
union?
A) Factors of production are not allowed to move freely between member countries.
B) Not all members of the union have adopted the euro.
C) Almost all markets are heavily regulated.
D) Products and services are not allowed to move freely between member countries.
Answer: B
Explanation: The EU is an economic union, although an imperfect one because not all members
of the EU have adopted the euro, the currency of the EU; differences in tax rates and regulations
across countries still remain; and some markets, such as the market for energy, are still not fully
deregulated.
Difficulty: 2 Medium
Topic: Overview of Regional Economic Integration and its Different Levels
Learning Objective: 09-01 Describe the different levels of regional economic integration.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
28) The move toward economic union raises the issue of how to make a coordinating bureaucracy
accountable to the citizens of member nations. Which of the following offers a solution to this
problem?
A) a common market
B) a free trade area
C) a customs union
D) a political union
Answer: D
Explanation: The move toward economic union raises the issue of how to make a coordinating
bureaucracy accountable to the citizens of member nations. The answer is through political union
in which a central political apparatus coordinates the economic, social, and foreign policy of the
member states.
Difficulty: 2 Medium
Topic: Overview of Regional Economic Integration and its Different Levels
Learning Objective: 09-01 Describe the different levels of regional economic integration.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
11
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
29) ________ has no barriers to trade between member countries, includes a common external
trade policy, and allows factors of production to move freely between members.
A) An economic union
B) A common market
C) A customs union
D) A full political union
Answer: B
Explanation: A common market has no barriers to trade between member countries, includes a
common external trade policy, and allows factors of production to move freely between members.
Difficulty: 1 Easy
Topic: Overview of Regional Economic Integration and its Different Levels
Learning Objective: 09-01 Describe the different levels of regional economic integration.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
30) ________ entails even closer economic integration and cooperation than a common market.
A) A customs union
B) A free trade area
C) An economic union
D) A political union
Answer: C
Explanation: An economic union entails even closer economic integration and cooperation than a
common market.
Difficulty: 1 Easy
Topic: Overview of Regional Economic Integration and its Different Levels
Learning Objective: 09-01 Describe the different levels of regional economic integration.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
12
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
31) Country X and Country Y reach an agreement to boost bilateral trade. They agree to remove all
barriers to the trade of goods and services. They, however, are free to determine their own trade
policies with regard to nonmembers. Which level of economic integration is this an example of?
A) a customs union
B) an economic union
C) a common market
D) a free trade area
Answer: D
Explanation: In a free trade area, all barriers to the trade of goods and services among member
countries are removed. Each country, however, is allowed to determine its own trade policies with
regard to nonmembers.
Difficulty: 2 Medium
Topic: Overview of Regional Economic Integration and its Different Levels
Learning Objective: 09-01 Describe the different levels of regional economic integration.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
32) Which feature of a customs union differentiates it from a free trade area?
A) harmonization of members' tax rates
B) a common currency
C) a common external trade policy toward nonmembers
D) ability of factors of production to move freely between members
Answer: C
Explanation: A customs union eliminates trade barriers between member countries and adopts a
common external trade policy. Establishment of a common external trade policy necessitates
significant administrative machinery to oversee trade relations with nonmembers.
Difficulty: 2 Medium
Topic: Overview of Regional Economic Integration and its Different Levels
Learning Objective: 09-01 Describe the different levels of regional economic integration.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
13
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
33) Three countries agree to remove barriers to trade between member countries and adopt a
common external trade policy toward nonmembers. They also agree to allow people and other
factors of production to move freely across their borders. Which level of economic integration is
this an example of?
A) bonded market
B) customs union
C) free trade area
D) common market
Answer: D
Explanation: A common market has no barriers to trade between member countries, includes a
common external trade policy, and allows factors of production to move freely between members.
Difficulty: 2 Medium
Topic: Overview of Regional Economic Integration and its Different Levels
Learning Objective: 09-01 Describe the different levels of regional economic integration.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
34) ________ 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) A free trade area
B) A common market
C) An economic union
D) A customs union
Answer: C
Explanation: An economic union entails even closer economic integration and cooperation than a
common market. Like the common market, an economic union involves the free flow of products
and factors of production among member countries and the adoption of a common external trade
policy, but it also requires a common currency, harmonization of members' tax rates, and a
common monetary and fiscal policy.
Difficulty: 1 Easy
Topic: Overview of Regional Economic Integration and its Different Levels
Learning Objective: 09-01 Describe the different levels of regional economic integration.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
14
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
35) Linking neighboring countries economically and making them interdependent
A) increases the potential for violent conflict.
B) creates increased political tensions.
C) leads to dilution of cultures.
D) creates incentives to increase political cooperation as well.
Answer: D
Explanation: Linking neighboring economies and making them increasingly dependent on each
other creates incentives for political cooperation between the neighboring states and reduces the
potential for violent conflict.
Difficulty: 2 Medium
Topic: Economic and Political Arguments Surrounding Regional Economic Integration
Learning Objective: 09-02 Understand the economic and political arguments for regional
economic integration.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
36) Why doesn't Great Britain use the euro as its national currency?
A) It would have to convert its economic structure to the euro.
B) It would have to relinquish control of its monetary policy to the EU.
C) It would have to change its financial markets operations.
D) It would have to obtain approval from the U.S. Federal Reserve.
Answer: B
Explanation: Although most members have signed on to use the euro as their currency, Great
Britain remains an important holdout. A politically important segment of public opinion in that
country opposes a common currency on the grounds that it would require relinquishing control of
the country's monetary policy to the EU, which many British perceive as a bureaucracy run by
foreigners.
Difficulty: 2 Medium
Topic: Economic and Political Arguments Surrounding Regional Economic Integration
Learning Objective: 09-02 Understand the economic and political arguments for regional
economic integration.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
15
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
37) A political benefit of economic integration is that it
A) enables participants to achieve gains from the free flow of trade.
B) enables participants to achieve gains from the free flow of investment.
C) allows countries to specialize in the production of goods and services that they can produce
most efficiently.
D) reduces the potential for violent conflict.
Answer: D
Explanation: Linking neighboring economies and making them increasingly dependent on each
other creates incentives for political cooperation between the neighboring states and reduces the
potential for violent conflict.
Difficulty: 2 Medium
Topic: Economic and Political Arguments Surrounding Regional Economic Integration
Learning Objective: 09-02 Understand the economic and political arguments for regional
economic integration.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
38) Which of the following explains why economic integration has never been easy to achieve or
sustain, despite the strong economic and political arguments in support?
A) No country has shown significant improvement because of economic integration.
B) Countries fear a reduction of their political weight in the world because of economic
integration.
C) Linking neighboring economies and making them increasingly dependent on each other creates
little incentive for political cooperation.
D) While a nation as a whole may benefit significantly, certain groups may lose.
Answer: D
Explanation: Although economic integration aids the majority, it has its costs. While a nation as a
whole may benefit significantly from a regional free trade agreement, certain groups will lose, at
least in the short to medium term.
Difficulty: 2 Medium
Topic: Economic and Political Arguments Surrounding Regional Economic Integration
Learning Objective: 09-02 Understand the economic and political arguments for regional
economic integration.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
16
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
39) ________ occurs when high-cost domestic producers are replaced by low-cost producers
within the free trade area.
A) Trade deficit
B) Trade diversion
C) Trade creation
D) Trade distortion
Answer: C
Explanation: Trade creation occurs when high-cost domestic producers are replaced by low-cost
producers within the free trade area.
Difficulty: 1 Easy
Topic: Economic and Political Arguments Surrounding Regional Economic Integration
Learning Objective: 09-03 Understand the economic and political arguments against regional
economic integration.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
40) Which of the following occurs when lower-cost external suppliers are replaced by higher-cost
suppliers within the free trade area?
A) efficiency gain
B) trade diversion
C) trade deficit
D) trade creation
Answer: B
Explanation: Trade diversion occurs when lower-cost external suppliers are replaced by
higher-cost suppliers within the free trade area. A regional free trade agreement will benefit the
world only if the amount of trade it creates exceeds the amount it diverts.
Difficulty: 1 Easy
Topic: Economic and Political Arguments Surrounding Regional Economic Integration
Learning Objective: 09-03 Understand the economic and political arguments against regional
economic integration.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
17
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
41) Country A and Country B entered into a free trade agreement recently. After this, Country A
starts importing heavy machinery from Country B. Country A previously imported such
machinery at lower rates from another country. Which of the following has occurred in this
scenario?
A) trade creation
B) efficiency gain
C) trade deficit
D) trade diversion
Answer: D
Explanation: Trade diversion occurs when lower-cost external suppliers are replaced by
higher-cost suppliers within the free trade area.
Difficulty: 2 Medium
Topic: Economic and Political Arguments Surrounding Regional Economic Integration
Learning Objective: 09-03 Understand the economic and political arguments against regional
economic integration.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
42) To ensure that a free trade agreement does not result in trade diversion, which of the following
has to come within the scope of the WTO?
A) nontariff barriers
B) services
C) energy markets
D) tax rates
Answer: A
Explanation: The only way to guard against the possibility of trade diversion is to increase the
scope of the WTO so it covers nontariff barriers to trade.
Difficulty: 1 Easy
Topic: Economic and Political Arguments Surrounding Regional Economic Integration
Learning Objective: 09-03 Understand the economic and political arguments against regional
economic integration.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
18
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
43) ________ may also occur when higher-cost external producers are replaced by lower-cost
external producers within the free trade area.
A) Trade creation
B) A customs union
C) Trade diversion
D) A common market
Answer: A
Explanation: Trade creation occurs when higher-cost external producers are replaced by
lower-cost external producers within the free trade area.
Difficulty: 1 Easy
Topic: Economic and Political Arguments Surrounding Regional Economic Integration
Learning Objective: 09-03 Understand the economic and political arguments against regional
economic integration.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
44) Which of the following is a concern of some economists regarding regional integration?
A) The benefits of regional integration are determined by the extent of trade diversion.
B) The benefits of regional integration may have been oversold, while the costs have been ignored.
C) A regional free trade agreement will benefit the world only if the amount of trade it diverts
exceeds the amount it creates.
D) The costs of regional integration will be exceedingly high with little chance that the benefits
will outweigh the costs.
Answer: B
Explanation: While there is a general movement toward the establishment of regional free trade
agreements, some economists have suggested that caution be used. According to these economists,
the benefits of regional integration may have been oversold, while the costs have been ignored.
They point out that the benefits of regional integration are determined by the extent of trade
creation as opposed to trade diversion. Trade creation occurs when high-cost domestic producers
are replaced by low-cost producers within the free trade area. It may also occur when higher-cost
external producers are replaced by lower-cost external producers within the free trade area. Trade
diversion occurs when lower-cost external suppliers are replaced by higher-cost suppliers within
the free trade area. A regional free trade agreement will benefit the world only if the amount of
trade it creates exceeds the amount it diverts.
Difficulty: 2 Medium
Topic: Economic and Political Arguments Surrounding Regional Economic Integration
Learning Objective: 09-03 Understand the economic and political arguments against regional
economic integration.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
19
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
45) In theory, WTO rules should ensure that a free trade agreement
A) does not result in trade creation.
B) does not result in trade diversion.
C) results in trade creation.
D) results in trade diversion.
Answer: B
Explanation: In theory, WTO rules should ensure that a free trade agreement does not result in
trade diversion.
Difficulty: 1 Easy
Topic: Economic and Political Arguments Surrounding Regional Economic Integration
Learning Objective: 09-03 Understand the economic and political arguments against regional
economic integration.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
46) The European Community was established by the
A) Treaty of Rome signed in 1957.
B) Maastricht Treaty signed in 1992.
C) Maastricht Treaty of 1994.
D) Single European Act of 1987.
Answer: A
Explanation: With the signing of the Treaty of Rome in 1957, the European Community was
established.
Difficulty: 1 Easy
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
20
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
47) The ________ is responsible for proposing EU legislation, implementing it, and monitoring
compliance with EU laws by member states.
A) European Parliament
B) European Commission
C) Council of the European Union
D) Court of Justice
Answer: B
Explanation: The European Commission is responsible for proposing EU legislation,
implementing it, and monitoring compliance with EU laws by member states.
Difficulty: 1 Easy
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
48) Why is the European Council said to be the ultimate controlling authority within the EU?
A) It is responsible for implementing EU legislation and monitoring compliance with EU laws by
member states.
B) Its role in setting competition policy is becoming increasingly important to business.
C) It has the right to vote on the appointment of commissioners.
D) Draft legislation from the commission can become EU law only if the council agrees.
Answer: D
Explanation: The European Council represents the interests of member states. It is clearly the
ultimate controlling authority within the EU since draft legislation from the commission can
become EU law only if the council agrees.
Difficulty: 2 Medium
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
21
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
49) Which of the following is directly elected by the populations of the member states and is
primarily a consultative rather than legislative body?
A) the European Parliament
B) the European Commission
C) the Council of the European Union
D) the Court of Justice
Answer: A
Explanation: The European Parliament, which now has 732 members, is directly elected by the
populations of the member states. It debates legislation proposed by the commission and
forwarded to it by the council.
Difficulty: 1 Easy
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
50) Which of the following was the outcome of the Treaty of Lisbon signed in 2007?
A) It established the European Community.
B) It resulted in the adoption of the euro.
C) It changed the name of the European Community to the European Union.
D) It increased the power of the European Parliament.
Answer: D
Explanation: After significant debate, in December 2007 the member states signed a new treaty,
the Treaty of Lisbon, under which the power of the European Parliament is increased.
Difficulty: 1 Easy
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
22
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
51) Which of the following observations pertaining to the EU's Court of Justice is correct?
A) It is composed of two judges from each country.
B) It is the supreme appeals court for EU law.
C) Its judges are required to act as representatives of national interests.
D) A member country can bring other members to the court for failing to meet EU treaty
obligations only with the support of two other uninvolved EU countries.
Answer: B
Explanation: The Court of Justice, which is composed of one judge from each country, is the
supreme appeals court for EU law. The judges are required to act as independent officials, rather
than as representatives of national interests.
Difficulty: 2 Medium
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
52) Which of the following observations is true of the euro?
A) It is used by all member states of the European Union.
B) While recommended, it is not required that participating countries give up their own currencies.
C) It required participating countries to give up control over monetary policy.
D) By adopting it, the EU created the most widely traded currency in the world.
Answer: C
Explanation: The euro is now used by 19 of the 29 member states of the European Union.
Difficulty: 2 Medium
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
23
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
53) Which treaty, signed in February 1992, committed EC members to adopting a common
currency by January 1, 1999?
A) the Maastricht Treaty
B) the Treaty of Rome
C) the Single European Act
D) the Treaty of Lisbon
Answer: A
Explanation: In February 1992, EC members signed the Maastricht Treaty that committed them
to adopting a common currency by January 1, 1999.
Difficulty: 1 Easy
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
54) Which of the following is seen as a benefit of the euro?
A) governments gaining greater control over their monetary policies
B) reduced competition in most industries
C) zero interest expense for businesses
D) lower foreign exchange and hedging costs
Answer: D
Explanation: Because of the euro, businesses and individuals realize significant savings from
having to handle one currency, rather than many. These savings come from lower foreign
exchange and hedging costs.
Difficulty: 2 Medium
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
24
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
55) Which of the following is seen as a disadvantage of the euro?
A) higher foreign exchange and hedging costs
B) national authorities losing control over monetary policy
C) difficulty comparing prices across Europe
D) undermining the development of a pan-European capital market
Answer: B
Explanation: The drawback of the euro is that national authorities have lost control over
monetary policy.
Difficulty: 2 Medium
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
56) In ____, similarities in the underlying structure of economic activity make it feasible to adopt a
single currency and use a single exchange rate as an instrument of macroeconomic policy.
A) an optimal currency area
B) a unified economic area
C) a uniform currency zone
D) a monetary zone
Answer: A
Explanation: In an optimal currency area, similarities in the underlying structure of economic
activity make it feasible to adopt a single currency and use a single exchange rate as an instrument
of macroeconomic policy.
Difficulty: 1 Easy
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
25
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
57) Which of the following was required for new applicants to qualify for EU membership?
A) minimum economy size of €1 trillion
B) nationalization of private assets
C) deregulation of markets
D) sustained GDP growth of 10 percent for five years
Answer: C
Explanation: To qualify for EU membership the applicants had to privatize state assets,
deregulate markets, restructure industries, and tame inflation.
Difficulty: 1 Easy
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
58) Which of the following is seen to be a consequence of the expansion of the EU from 15 nations
to 28 nations?
A) delays in decision-making processes
B) elimination of the sovereign debt crisis
C) euro becoming the most traded currency in the world
D) huge initial impact on the overall economic welfare
Answer: A
Explanation: Given the small size of the Eastern European economies, the initial impact of the
EU expansion will probably be small. The biggest notable change might be in the decision-making
processes, where budget negotiations among 28 nations are bound to prove problematic.
Difficulty: 2 Medium
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
26
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
59) Which of the following is a reason Turkey is not yet a member of the EU?
A) Only about 10 percent of Turkey's international trade is with the EU.
B) There are concerns over human rights issues in the country.
C) The country has yet to form a customs union with the EU.
D) Turkey has a weak economy.
Answer: B
Explanation: Full membership for Turkey has been denied because of concerns over human
rights issues (particularly Turkish policies toward its Kurdish minority).
Difficulty: 2 Medium
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
60) How does the NAFTA seem to increase the international competitiveness of U.S. and
Canadian firms?
A) It gives them access to scarce natural resources hitherto unavailable.
B) It increases tariff barriers making the North American market less attractive to Asian
companies.
C) It allows them to take advantage of lower labor costs in Mexico.
D) It gives them production bases in South American markets such as Brazil and Argentina.
Answer: C
Explanation: The international competitiveness of U.S. and Canadian firms that moved
production to Mexico to take advantage of lower labor costs would be enhanced, enabling them to
better compete with Asian and European rivals.
Difficulty: 2 Medium
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
27
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
61) What was the main objection raised by those in the United States and Canada who opposed the
ratification of the NAFTA?
A) job losses
B) balance-of-payment problems
C) threat of competition from Asian companies
D) threat of a loss of national sovereignty
Answer: A
Explanation: Those who opposed NAFTA claimed that ratification would be followed by a mass
exodus of jobs from the United States and Canada into Mexico as employers sought to profit from
Mexico's lower wages and less strict environmental and labor laws.
Difficulty: 2 Medium
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
62) In 1990, Bolivia, Peru, Ecuador, Colombia, and Venezuela relaunched
A) Mercosur.
B) NAFTA.
C) APEC.
D) the Andean Pact.
Answer: D
Explanation: In 1990, Bolivia, Peru, Ecuador, Colombia, and Venezuela relaunched the Andean
Pact.
Difficulty: 1 Easy
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
28
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
63) Mercosur originated as ________ between Brazil and Argentina in 1988.
A) a common market
B) a free trade pact
C) a customs union
D) an economic union
Answer: B
Explanation: Mercosur originated in 1988 as a free trade pact between Brazil and Argentina.
Difficulty: 1 Easy
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
64) According to Alexander Yeats
A) the trade diversion effects of Mercosur outweigh its trade creation effects.
B) the fastest growing items in intra-Mercosur trade were capital-intensive goods produced
efficiently in the member countries.
C) Mercosur countries will be able to compete globally once the group's external trade barriers
come down.
D) the customs union is becoming more perfect over time.
Answer: A
Explanation: According to Alexander Yeats, the trade diversion effects of Mercosur outweigh its
trade creation effects.
Difficulty: 2 Medium
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
29
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
65) In early 2006, six CARICOM members and the United States established the ________, which
was modeled on the EU's single market.
A) Central American Common Market
B) Central America Free Trade Agreement
C) Caribbean Single Market and Economy
D) North American Free Trade Area
Answer: C
Explanation: Modeled on the EU's single market, CSME's goal is to lower trade barriers and
harmonize macroeconomic and monetary policy between member states.
Difficulty: 1 Easy
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
66) Which of the following is true of ASEAN?
A) China, India, South Korea, and Singapore are among its members.
B) Collectively, the member states account for about 55 percent of world trade.
C) It is slowly progressing toward establishing a free trade zone.
D) It has been successful in fulfilling its basic objective of fostering freer trade between member
countries.
Answer: C
Explanation: Formed in 1967, the Association of Southeast Asian Nations (ASEAN) includes
Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines, Singapore, Thailand, and
Vietnam. ASEAN and AFTA are progressing toward establishing a free trade zone.
Difficulty: 2 Medium
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
30
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
67) Which of the following is the most frequently aired objection to free trade in Africa?
A) These economies are too small for free trade to exist.
B) These countries are not ready for a full-fledged political union with a common currency.
C) The countries need to be "protected" by tariff barriers from unfair foreign competition.
D) The larger nations such as South Africa and Kenya stand to lose too much from free trade and
competition.
Answer: C
Explanation: The argument most frequently heard in Africa is that because these countries have
less developed and less diversified economies, they need to be "protected" by tariff barriers from
unfair foreign competition.
Difficulty: 1 Easy
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
68) The ________ represents the interests of member states and is clearly the ultimate controlling
authority within the EU.
A) European Council
B) European Parliament
C) Court of Justice
D) European Commission
Answer: A
Explanation: The European Council represents the interests of member states. It is clearly the
ultimate controlling authority within the EU.
Difficulty: 1 Easy
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
31
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
69) Which of the following, adopted by the member nations of the European Community in 1987,
committed member countries to work toward the establishment of a single market by December
31, 1992?
A) Treaty of Rome
B) Single European Act
C) Treaty of Lisbon
D) Maastricht Treaty
Answer: B
Explanation: The Single European Act became EC law in 1987.
Difficulty: 2 Medium
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
70) How has the euro contributed to increasing competition in the European region?
A) by increasing hedging costs
B) by increasing the cost of capital
C) by making price comparisons easy
D) by enabling a common monetary policy
Answer: C
Explanation: The adoption of a common currency makes it easier to compare prices across
Europe. This has been increasing competition because it has become easier for consumers to shop
around.
Difficulty: 2 Medium
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
32
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
71) There are two main trading blocs in Europe, the European Union and the
A) Mercosur.
B) Andean Community.
C) European Free Trade Association.
D) European Council.
Answer: C
Explanation: Europe has two trading blocs—the European Union and the European Free Trade
Association.
Difficulty: 1 Easy
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
72) The ultimate controlling unit within the EU is the
A) European Commission.
B) European Parliament.
C) Court of Justice.
D) Council of the European Union.
Answer: D
Explanation: The European Council represents the interests of member states. It is clearly the
ultimate controlling authority.
Difficulty: 1 Easy
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
33
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
73) The ________ is primarily a consultative rather than legislative body.
A) European Parliament
B) Court of Justice
C) Council of the European Union
D) European Commission
Answer: A
Explanation: As of 2016, the European Parliament has 751 members and is directly elected by
the populations of the member states. It is primarily a consultative rather than legislative body.
Difficulty: 2 Medium
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
74) The establishment of the euro required participating countries to
A) first convert their currency to U.S. dollars, then to euros.
B) give up national control over monetary policy.
C) create national banks at which citizens can convert their existing currency.
D) maintain their own currency in parallel to the euro.
Answer: B
Explanation: Establishing the euro required participating national governments not only to give
up their own currencies, but also to give up national control over monetary policy.
Difficulty: 1 Easy
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
34
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
75) Three long-term EU members, Great Britain, ________, and Sweden, have not adopted the
euro.
A) France
B) Norway
C) Denmark
D) Greece
Answer: C
Explanation: Three long-term EU members, Great Britain, Denmark, and Sweden, have not
adopted the euro.
Difficulty: 1 Easy
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
76) On average, studies indicate that NAFTA's overall impact has been
A) large but negative.
B) large and positive.
C) small and negative.
D) small but positive.
Answer: D
Explanation: Studies of NAFTA's impact suggest its initial effects are muted, and both advocates
and detractors may have been guilty of exaggeration. On average, studies indicate that NAFTA's
overall impact has been small but positive.
Difficulty: 1 Easy
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
35
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
77) According to ________, the trade diversion effects of Mercosur outweigh its trade creation
effects.
A) Alexander Yeats
B) the majority of economists
C) Jacques Delors
D) the World Trade Organization
Answer: A
Explanation: Alexander Yeats, a critic of Mercosur, points out that the trade diversion effects of
Mercosur outweigh its trade creation effects.
Difficulty: 2 Medium
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
78) The most recent attempt to reenergize the free trade movement in Africa occurred in early
2001, when ________, Uganda, and Tanzania, member states of the East African Community
(EAC), committed themselves to relaunching their bloc, 24 years after it collapsed.
A) Sudan
B) Ethiopia
C) Kenya
D) Somalia
Answer: C
Explanation: In early 2001, Kenya, Uganda, and Tanzania, member states of the East African
Community (EAC), committed themselves to relaunching their bloc, 24 years after it collapsed.
Difficulty: 1 Easy
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
36
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
79) The United States, Canada, and Mexico are member nations of
A) CAFTA.
B) Mercosur.
C) the Andean Pact.
D) NAFTA.
Answer: D
Explanation: The United States, Canada, and Mexico are member nations of the North American
Free Trade Agreement (NAFTA).
Difficulty: 1 Easy
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
80) Four main institutions make up the political structure of the EU. Which of them is responsible
for proposing EU legislation, implementing it, and monitoring compliance with EU laws?
A) European Council
B) Court of Justice
C) European Commission
D) European Parliament
Answer: C
Explanation: Four main institutions make up the political structure of the EU. The European
Commission is responsible for proposing EU legislation, implementing it, and monitoring
compliance with EU laws. The European Council represents the interests of member states. The
European Parliament acts as a consultative body and debates legislation proposed by the
commission and forwarded to it by the council. Finally, the Court of Justice is the supreme appeals
court for EU law.
Difficulty: 2 Medium
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
37
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
81) Which of the following established the second largest currency zone in the world?
A) Treaty of Rome
B) Maastricht Treaty
C) Treaty of Lisbon
D) Single European Act
Answer: B
Explanation: The Maastricht Treaty, signed in 1992 by EC members, committed signatories to
adopting a common currency, the euro, by 1999. The establishment of the euro created the second
largest currency zone in the world, second only to the U.S. dollar. While the 12 participating
countries locked their exchange rates against each other in 1999, euro notes and coins were not
actually issued until 2002. By mid-2002, all prices and routine economic transactions within the
euro zone were in euros.
Difficulty: 2 Medium
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
82) The lowering of barriers to trade and investment among countries has led to ________
throughout the EU.
A) higher costs of borrowing
B) increase prices
C) increase in hedging costs
D) increased price competition
Answer: D
Explanation: The lowering of barriers to trade and investment between countries has led to
increased price competition throughout the EU and NAFTA.
Difficulty: 2 Medium
Topic: The Debate Concerning Global and Regional Economic Integration
Learning Objective: 09-05 Understand the implications for business that are inherent in regional
economic integration agreements.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
38
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
83) Once barriers to trade and investment are removed, companies
A) can realize cost economies by centralizing production in key locations regardless of culture
differences.
B) can treat a group of integrated countries like the EU as a single market and produce
standardized products for it.
C) no longer have to deal with competitive practices that formerly limited their ability to realize
cost economies.
D) may still find it difficult to produce a standardized product for a single multiple-country market.
Answer: D
Explanation: Even after the removal of barriers to trade and investment, enduring differences in
culture and competitive practices often limit the ability of companies to realize cost economies by
centralizing production in key locations and producing a standardized product for a single
multiple-country market.
Difficulty: 2 Medium
Topic: The Debate Concerning Global and Regional Economic Integration
Learning Objective: 09-05 Understand the implications for business that are inherent in regional
economic integration agreements.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
84) The emerging role of the ________ in competition policy suggests the EU is increasingly
willing and able to intervene and impose conditions on companies proposing mergers and
acquisitions.
A) European Commission
B) Court of Justice
C) European Council
D) European Parliament
Answer: A
Explanation: The emerging role of the European Commission in competition policy suggests the
EU is increasingly willing and able to intervene and impose conditions on companies proposing
mergers and acquisitions.
Difficulty: 2 Medium
Topic: The Debate Concerning Global and Regional Economic Integration
Learning Objective: 09-05 Understand the implications for business that are inherent in regional
economic integration agreements.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
39
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
85) Firms outside of trading areas run the risk of being shut out of the single market by the creation
of a
A) "trade fortress."
B) contracting economy.
C) single-market zone.
D) destabilized economy.
Answer: A
Explanation: One threat to firms outside of trading areas is the threat of being shut out of the
single market by the creation of a "trade fortress." The charge that regional economic integration
might lead to a fortress mentality is most often leveled at the EU.
Difficulty: 2 Medium
Topic: The Debate Concerning Global and Regional Economic Integration
Learning Objective: 09-05 Understand the implications for business that are inherent in regional
economic integration agreements.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
86) Discuss the trend toward increased regional economic integration.
Answer: In recent years, there has been a strong move toward regional economic integration, or
agreements made by groups of countries in geographic regions to reduce, and ultimately remove,
tariff and nontariff barriers to the free flow of goods, services, and factors of production among
each other. By 2017, nearly all of the WTO's members had notified the organization of
participation in one or more regional trade agreements. By entering into regional agreements,
groups of countries are hoping to reduce trade barriers more rapidly than can be achieved under the
auspices of the WTO. As of early 2017, there were 432 regional trade agreements in force.
Difficulty: 3 Hard
Topic: Overview of Regional Economic Integration and its Different Levels
Learning Objective: 09-01 Describe the different levels of regional economic integration.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
40
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
87) Compare and contrast a free trade area and a common market. Provide examples.
Answer: All barriers to the trade of goods and services among member countries are removed in
a free trade area; however, each country maintains the right to establish its own policies toward
nonmembers. In contrast, a common market eliminates barriers to trade between member
countries, but also includes a common external trade policy toward nonmembers. The factors of
production are also allowed to move freely between member countries. In addition, in a common
market, labor and capital are free to move because there are no restrictions on immigration,
emigration, or cross-border flows of capital between member nations. The European Free Trade
Area is an example of a free trade area. For years, the European Union functioned as a common
market, although it has now moved beyond this stage.
Examples will vary.
Difficulty: 3 Hard
Topic: Overview of Regional Economic Integration and its Different Levels
Learning Objective: 09-01 Describe the different levels of regional economic integration.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
88) What is the political case for integration? How did political arguments influence the
establishment of the European Union?
Answer: Linking neighboring economies and making them increasingly dependent on each other
creates incentives for political cooperation between the neighboring states, and reduces the
potential for violent conflict. Furthermore, by linking, countries have greater clout and are
politically much stronger in dealing with other nations. These considerations were instrumental in
the establishment of the EU. Europe had suffered through two world wars in the first half of the
twentieth century, and the desire for unity was high. In addition, many Europeans felt that after
World War II the European nation-states were no longer large enough to hold their own in world
markets and world politics. The need for a united Europe to deal with the United States on one side
and the former Soviet Union on the other loomed large in the minds of the EU's founders.
Difficulty: 3 Hard
Topic: Economic and Political Arguments Surrounding Regional Economic Integration
Learning Objective: 09-02 Understand the economic and political arguments for regional
economic integration.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
41
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
89) What are impediments to countries integrating?
Answer: Even with strong economic and political support for integration, two impediments make
integration difficult in many cases. First, although economic integration typically benefits the
majority of the people in a country, certain groups may lose. These groups are likely to be at the
forefront of efforts to stop economic integration. Second, the issue of national sovereignty
becomes important. In many cases, these impediments to integration are very difficult to
overcome.
Difficulty: 2 Medium
Topic: Economic and Political Arguments Surrounding Regional Economic Integration
Learning Objective: 09-02 Understand the economic and political arguments for regional
economic integration.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
90) What prompted the formation of the European Union?
Answer: The European Union is the product of two political factors. First, the devastation of
Western Europe during two world wars and the desire for lasting peace prompted countries to join
forces. Second, the union was formed out of a desire by European nations to hold their own on the
world's political and economic stage. Furthermore, many Europeans were aware of the potential
benefits that could arise from economic integration.
Difficulty: 2 Medium
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
42
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
91) What is the Single European Act? What was the effect of the Single European Act on the EU
economy? Did the Single European Act achieve its goals?
Answer: The Single European Act, which was adopted in 1987, committed member countries to
work toward the establishment of a single market by December 31, 1992. The act proposed that all
frontier controls between EC countries be removed, that the principle of mutual recognition be
applied to product standards, that lower-cost suppliers be permitted into national economies, that
barriers to competition be lifted in the retail banking and insurance businesses, that all restrictions
on foreign exchange transactions between member countries be removed, and that restrictions on
sabotage be abolished. To signify the importance of the act, the European Community also decided
to change its name to the European Union once the act took effect. The Single European Act had a
significant effect on the EU economy as it provided the impetus for restructuring substantial
sections of European industry. Many firms have shifted from national to pan-European production
and distribution systems in an attempt to realize scale economies and better compete in a single
market. The results have included faster economic growth than would otherwise have been the
case. According to empirical research, the single market raised GDP by between 2 and 5 percent in
its first 15 years.
Difficulty: 3 Hard
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Evaluate
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
43
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
92) How will EU countries benefit from the establishment of a single currency? What, if any, are
the costs of a single currency?
Answer: Establishment of the euro was promoted for several reasons. First is the belief that
businesses and individuals will realize significant savings from having to handle one currency
rather than many. Second, the adoption of a common currency will make it easier to compare
prices across Europe. Third, faced with lower prices, European producers will be forced to look for
ways to reduce their production costs to maintain their profit margins. Fourth, the euro has given a
strong boost to the development of a highly liquid pan-European capital market. Finally, the range
of investment options open to both individuals and institutions will increase.
However, in establishing a common currency, nations have had to give up national control over
monetary policy. Another drawback of the euro is that the EU is not what economists would call an
optimal currency area, or an area in which similarities in the underlying structure of economic
activity make it feasible to adopt a single currency
Difficulty: 3 Hard
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
44
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
93) Explain the North American Free Trade Agreement and then debate its ratification.
Answer: NAFTA is a free trade agreement between the United States, Canada, and Mexico.
When the agreement was initially proposed in 1988, there was much debate as to whether the
agreement should be ratified. Proponents of NAFTA argued that NAFTA should be seen as an
opportunity to create an enlarged and more efficient productive base for the entire North American
region. They argued that while some lower-income jobs would move from the United States and
Canada to Mexico, new jobs would be created in the United States and Canada as economic
growth occurred in Mexico as a result of the job transfers. In addition, the international
competitiveness of U.S. and Canadian firms that move production to Mexico to take advantage of
lower labor costs will be enhanced, enabling them to better compete against Asian and European
rivals. Those that opposed NAFTA claimed that U.S. and Canadian citizens would lose their jobs
in alarming numbers as low-income positions were moved to Mexico to take advantage of lower
wage rates. Environmentalists also voiced concerns about NAFTA. Because Mexico has more
lenient environmental protection laws than either the United States or Canada, there was concern
that U.S. and Canadian firms would relocate to Mexico to avoid the cost of protecting the
environment. Finally, there was opposition in Mexico to NAFTA from those who feared a loss of
national sovereignty. Mexican critics feared that NAFTA would allow their country to be
dominated by U.S. and Canadian multinationals, and Mexico would be used as a low-cost
assembly site, while keeping higher-paying jobs in their own countries. Studies of NAFTA's
impact suggest its initial effects are muted, and both advocates and detractors may have been
guilty of exaggeration. On average, studies indicate that NAFTA's overall impact has been small
but positive. NAFTA was meant to increase trade between the three member states, and that it
appears to have done.
Difficulty: 3 Hard
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
45
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
94) Explain how Mercosur has changed over time. What are the implications of these changes?
Answer: Mercosur originated in 1988 as a free trade pact between Brazil and Argentina. Initially,
the reductions in in tariffs and quotas resulting from the agreement led to an 80 percent increase in
trade between the two countries. Encouraged by this early success, the pact was expanded to
include Paraguay and Uruguay as full members. The initial objective was to establish a free trade
area by the end of 1994 and a common market sometime thereafter. In December 1995, Mercosur's
members agreed to a five-year program under which they hoped to perfect their free trade area and
move toward a full customs union—something that has yet to be achieved. According to critics,
including World Bank senior economist Alexander Yeats, the trade diversion effects of Mercosur
outweigh its trade creation effects. Mercosur hit a significant roadblock in 1998, when its member
states slipped into recession and intrabloc trade slumped. Trade fell further in 1999 following a
financial crisis in Brazil that led to the devaluation of the Brazilian real. Hope for a revival arose in
2003, when new Brazilian President Lula da Silva announced his support for a revitalized and
expanded Mercosur modeled after the EU with a larger membership, a common currency, and a
democratically elected Mercosur parliament. Since 2010, however, little progress had been made
in moving Mercosur toward its goals, and the jury is still out on whether it will become a fully
functioning customs union.
Difficulty: 3 Hard
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
95) What is ASEAN? What is its basic goal? How successful is ASEAN?
Answer: The Association of Southeast Asian Nations (ASEAN) was formed in 1967. The
grouping, which includes Brunei, Cambodia, Indonesia, Laos, Malaysia, Myanmar, Philippines,
Singapore, Thailand, and Vietnam, creates a regional grouping of 500 million people. The basic
goal of ASEAN is to foster freer trade between member countries and to achieve cooperation in
their industrial policies. To date, however, progress has been limited. The ASEAN Free Trade
Area came into effect in 2003 between the original six members of ASEAN and has been
successful at cutting tariffs on manufacturing and agricultural products to less than 5 percent.
Difficulty: 2 Medium
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
46
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
96) Describe the state of economic integration in Africa. What factors have hindered the process?
Answer: There have been efforts to establish a trading bloc in Africa for half a century; however,
meaningful progress has been slow. Political turmoil in several nations has hindered the process as
has the suspicion that free trade will result in unfair foreign competition. The most recent effort at
integration came in 2001 when Kenya, Uganda, and Tanzania attempted to establish a customs
union, regional court, legislative assembly, and, eventually, a political federation. In 2015, in what
is a promising sign, representatives from 26 African nations signed an agreement pledging to work
together to establish a free trade area that would remove or reduce many tariffs and eliminate
time-consuming customs procedures between them.
Difficulty: 2 Medium
Topic: History and Implications Regional Economic Agreements
Learning Objective: 09-04 Explain the history, current scope, and future prospects of the world's
most important regional economic agreements.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
97) Discuss the opportunities arising from the creation of the EU for international businesses.
Answer: The creation of a single market through regional economic integration presents
significant opportunities to companies. Markets that were formerly protected from foreign
competition have become more open and the costs of doing business have fallen. The latter is
particularly true in the case of the EU's single market. Companies should also see their costs drop
as they do business in a single, large market as opposed to 28 national markets in the case of the
EU. Production can be centralized in the EU location where the mix of factor costs and skills is
optimal.
Difficulty: 3 Hard
Topic: The Debate Concerning Global and Regional Economic Integration
Learning Objective: 09-05 Understand the implications for business that are inherent in regional
economic integration agreements.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
47
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
98) Describe the disadvantages of economic integration for international businesses. How can
firms protect themselves from these threats?
Answer: Economic integration presents a number of difficulties for companies. For one thing, the
business environment within each grouping has become more competitive. The lowering of
barriers to trade and investment among countries has led to increased price competition throughout
the EU and NAFTA. Over time, price differentials across nations will decline in a single market.
This is a direct threat to any firm doing business in EU or NAFTA countries. To survive in the
tougher single-market environment, firms must take advantage of the opportunities offered by the
creation of a single market to rationalize their production and reduce their costs. Otherwise, they
will be at a severe disadvantage. A further threat to firms outside these trading blocs arises from
the likely long-term improvement in the competitive position of many firms within the areas. This
is particularly relevant in the EU, where many firms have historically been limited by a high cost
structure in their ability to compete globally with North American and Asian firms. The creation of
a single market and the resulting increased competition in the EU produced serious attempts by
many EU firms to reduce their cost structure by rationalizing production. This transformed many
EU companies into more efficient global competitors. The message for non-EU businesses is that
they need to respond to the emergence of more capable European competitors by reducing their
own cost structures. Another threat to firms outside of trading areas is the threat of being shut out
of the single market by the creation of a "trade fortress." The emerging role of the European
Commission in competition policy suggests the EU is increasingly willing and able to intervene
and impose conditions on companies proposing mergers and acquisitions. This is a threat insofar
as it limits the ability of firms to pursue the corporate strategy of their choice. Finally, there is a
clear threat to business that is explicit in the growing opposition to free trade areas.
Difficulty: 3 Hard
Topic: The Debate Concerning Global and Regional Economic Integration
Learning Objective: 09-05 Understand the implications for business that are inherent in regional
economic integration agreements.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
48
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
International Business, 12e (Hill)
Chapter 10
The Foreign Exchange Market
1) The foreign exchange market converts the currency of one country into that of another country.
Answer: TRUE
Explanation: One function of the foreign exchange market is to convert the currency of one
country into the currency of another country.
Difficulty: 1 Easy
Topic: The Main Instruments and Institutions of the Foreign Exchange Market
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
2) When Krista traveled from the United States to England, she had to change her money from
dollars into pounds. Krista was participating in the currency exchange market.
Answer: TRUE
Explanation: When a tourist changes one currency into another, she is participating in the foreign
exchange market.
Difficulty: 1 Easy
Topic: The Main Instruments and Institutions of the Foreign Exchange Market
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
3) Parla liked to gamble, so she sometimes moved her funds from dollars to euros in the hope that
she would make money based on the exchange rates. This demonstrates a carry trade.
Answer: TRUE
Difficulty: 1 Easy
Topic: The Main Instruments and Institutions of the Foreign Exchange Market
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
1
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
4) Currency fluctuations can make seemingly profitable trade and investment deals unprofitable
and vice versa.
Answer: TRUE
Explanation: Currency fluctuations can make seemingly profitable trade and investment deals
unprofitable, and vice versa.
Difficulty: 1 Easy
Topic: The Main Instruments and Institutions of the Foreign Exchange Market
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
5) Carry trade is nonspeculative in nature.
Answer: FALSE
Explanation: The speculative element of carry trade is that its success is based upon a belief that
there will be no adverse movement in exchange rates (or interest rates for that matter) that will
make the trade unprofitable.
Difficulty: 1 Easy
Topic: Functions of the Foreign Exchange Market
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
6) The value of a currency is determined by the interaction between the demand and supply of that
currency relative to the demand and supply of other currencies.
Answer: TRUE
Explanation: The value of a currency is determined by the interaction between the demand and
supply of that currency relative to the demand and supply of other currencies.
Difficulty: 1 Easy
Topic: The Influence of Exchange Rates
Learning Objective: 10-02 Understand what is meant by spot exchange rates.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
2
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
7) If the spot exchange rate is £1 = $1.50 when the market opens, and £1 = $1.48 at the end of the
day, the pound has appreciated, and the dollar has depreciated.
Answer: FALSE
Explanation: Each pound now buys fewer dollars than at the start of the day. The dollar has
appreciated, and the pound has depreciated.
Difficulty: 2 Medium
Topic: Foreign Exchange Risks
Learning Objective: 10-02 Understand what is meant by spot exchange rates.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
8) To minimize the risk of an unanticipated change in exchange rates, a company can protect itself
by entering into a forward exchange contract.
Answer: TRUE
Explanation: When a firm enters into a forward exchange contract, it is taking out insurance
against the possibility that future exchange rate movements will make a transaction unprofitable
by the time that transaction has been executed.
Difficulty: 1 Easy
Topic: The Influence of Exchange Rates
Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring
against foreign exchange risk.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
9) If $1 bought more yen with a spot exchange than with a 30-day forward exchange, it indicates
the dollar is expected to depreciate against the yen in the next 30 days. When this occurs, we say
the dollar is selling at a premium on the 30-day forward market.
Answer: FALSE
Explanation: If $1 bought more yen with a spot exchange than with a 30-day forward exchange, it
indicates foreign exchange dealers expected the dollar to depreciate against the yen in the next 30
days. When this occurs, we say the dollar is selling at a discount on the 30-day forward market.
Difficulty: 2 Medium
Topic: The Influence of Exchange Rates
Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring
against foreign exchange risk.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
3
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
10) If the spot rate is $1 = 120, and the 30-day forward rate is $1 = ×130, the dollar is selling at a
discount in the forward market.
Answer: FALSE
Explanation: In this case, the dollar is selling at a premium on the 30-day forward market.
Difficulty: 2 Medium
Topic: The Influence of Exchange Rates
Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring
against foreign exchange risk.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
11) A currency swap deal enables companies to insure themselves against foreign exchange risk.
Answer: TRUE
Explanation: A currency swap deal enables companies to insure themselves against foreign
exchange risk.
Difficulty: 1 Easy
Topic: The Influence of Exchange Rates
Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring
against foreign exchange risk.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
12) The most important trading centers for currencies are Zurich, Frankfurt, Paris, Hong Kong,
and Sydney.
Answer: FALSE
Explanation: The most important trading centers are London (37 percent of activity), New York
(18 percent of activity), and Zurich, Tokyo, and Singapore (all with around 5 to 6 percent of
activity). Major secondary trading centers include Frankfurt, Paris, Hong Kong, and Sydney.
Difficulty: 1 Easy
Topic: The Main Instruments and Institutions of the Foreign Exchange Market
Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring
against foreign exchange risk.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
4
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
13) Arbitrage opportunities in foreign exchange markets tend to be small and disappear quickly.
Answer: TRUE
Explanation: Because foreign exchange dealers are always watching their computer screens for
arbitrage opportunities, the few that arise tend to be small, and they disappear in minutes.
Difficulty: 2 Medium
Topic: The Role of Arbitrage in the Foreign Exchange Market
Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring
against foreign exchange risk.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
14) If the law of one price were true for all goods and services, the purchasing power parity (PPP)
exchange rate could be found from any individual set of prices.
Answer: TRUE
Explanation: If the law of one price were true for all goods and services, the purchasing power
parity (PPP) exchange rate could be found from any individual set of prices.
Difficulty: 2 Medium
Topic: Economic Theories of Exchange Rate Determination
Learning Objective: 10-04 Understand the different theories explaining how currency exchange
rates are determined and their relative merits.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
15) There are many impediments to the free flow of goods and services in an efficient market.
Answer: FALSE
Explanation: An efficient market has no impediments to the free flow of goods and services, such
as trade barriers.
Difficulty: 1 Easy
Topic: Economic Theories of Exchange Rate Determination
Learning Objective: 10-04 Understand the different theories explaining how currency exchange
rates are determined and their relative merits.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
5
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
16) The purchasing power parity (PPP) theory is a strong predictor of short-run movements in
exchange rates covering time spans of five years or less.
Answer: FALSE
Explanation: While PPP theory seems to yield relatively accurate predictions in the long run, it
does not appear to be a strong predictor of short-run movements in exchange rates covering time
spans of five years or less.
Difficulty: 2 Medium
Topic: Economic Theories of Exchange Rate Determination
Learning Objective: 10-04 Understand the different theories explaining how currency exchange
rates are determined and their relative merits.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
17) The International Fisher Effect states that for any two countries, the spot exchange rate should
change in an equal amount but in the opposite direction to the difference in nominal interest rates
between the two countries.
Answer: TRUE
Explanation: The International Fisher Effect states that for any two countries, the spot exchange
rate should change in an equal amount but in the opposite direction to the difference in nominal
interest rates between the two countries.
Difficulty: 1 Easy
Topic: Economic Theories of Exchange Rate Determination
Learning Objective: 10-04 Understand the different theories explaining how currency exchange
rates are determined and their relative merits.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
18) There is no evidence that psychological factors play an important role in determining the
expectations of market traders as to likely future exchange rates.
Answer: FALSE
Explanation: Evidence reveals that various psychological factors play an important role in
determining the expectations of market traders as to likely future exchange rates.
Difficulty: 1 Easy
Topic: Economic Theories of Exchange Rate Determination
Learning Objective: 10-04 Understand the different theories explaining how currency exchange
rates are determined and their relative merits.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
6
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
19) The efficient market school argues that investing in exchange rate forecasting services would
be a waste of money.
Answer: TRUE
Explanation: The efficient market school argues that forward exchange rates do the best possible
job of forecasting future spot exchange rates, and, therefore, investing in forecasting services
would be a waste of money.
Difficulty: 1 Easy
Topic: Approaches to Exchange Rate Forecasting
Learning Objective: 10-05 Identify the merits of different approaches toward exchange rate
forecasting.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
20) Governments allow convertibility to preserve their foreign exchange reserves.
Answer: FALSE
Explanation: Governments limit convertibility to preserve their foreign exchange reserves.
Difficulty: 1 Easy
Topic: Currency Management and Business Strategy in the Global Monetary System
Learning Objective: 10-05 Identify the merits of different approaches toward exchange rate
forecasting.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
21) Transaction exposure includes obligations for the purchase or sale of goods and services at
previously agreed prices and the borrowing or lending of funds in foreign currencies.
Answer: TRUE
Explanation: Transaction exposure is the extent to which the income from individual transactions
is affected by fluctuations in foreign exchange values. Such exposure includes obligations for the
purchase or sale of goods and services at previously agreed prices and the borrowing or lending of
funds in foreign currencies.
Difficulty: 1 Easy
Topic: Foreign Exchange Risks
Learning Objective: 10-06 Compare and contrast the differences among translation, transaction,
and economic exposure, and what managers can do to manage each type of exposure.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
7
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
22) The impact of currency exchange rates on the reported financial statements of a company is
called economic exposure.
Answer: FALSE
Explanation: Economic exposure is the extent to which a firm's future international earning
power is affected by changes in exchange rates.
Difficulty: 2 Medium
Topic: Foreign Exchange Risks
Learning Objective: 10-06 Compare and contrast the differences among translation, transaction,
and economic exposure, and what managers can do to manage each type of exposure.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
23) The rate at which one currency is converted into another is known as the
A) exchange rate.
B) currency swap rate.
C) fluctuation rate.
D) carry over rate.
Answer: A
Explanation: An exchange rate is the rate at which one currency is converted into another.
Difficulty: 1 Easy
Topic: The Main Instruments and Institutions of the Foreign Exchange Market
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
24) ________ arises from volatile changes in exchange rates.
A) Translational exposure
B) Foreign exchange risk
C) Economic exposure
D) Transactional exposure
Answer: B
Explanation: Foreign exchange risk refers to the adverse consequences of unpredictable changes
in exchange rates.
Difficulty: 1 Easy
Topic: Functions of the Foreign Exchange Market
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
8
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
25) Currency ________ typically involves the short-term movement of funds from one currency to
another in the hopes of profiting from shifts in exchange rates.
A) hedging
B) risk mitigation
C) speculation
D) arbitrage
Answer: C
Explanation: Currency speculation typically involves the short-term movement of funds from
one currency to another in the hopes of profiting from shifts in exchange rates.
Difficulty: 1 Easy
Topic: Functions of the Foreign Exchange Market
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
26) What are the two main functions of the foreign exchange market?
A) trading foreign company equities and converting currency
B) reducing currency volatility and setting interest rates
C) insuring companies against interest rate risk and enabling imports and exports
D) converting currency and providing some insurance against foreign exchange risk
Answer: D
Explanation: The foreign exchange market serves two main functions. The first is to convert the
currency of one country into the currency of another. The second is to provide some insurance
against foreign exchange risk, or the adverse consequences of unpredictable changes in exchange
rates.
Difficulty: 1 Easy
Topic: Functions of the Foreign Exchange Market
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
9
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
27) A pair of shoes costs £40 in Britain. An identical pair costs $50 in the United States when the
exchange rate is £1 = $1.50. Which of the following is correct?
A) The United States offers a better deal.
B) The deal is the same in both countries.
C) Britain offers a better deal.
D) A trader can make money by buying the shoes in Britain and selling in the United States at $50.
Answer: A
Explanation: All else being equal, at an exchange rate £1 = $1.50, the shoe should have cost $60
(40 × 1.5) in the United States. At $50 for a pair, the United States offers a better deal.
Difficulty: 2 Medium
Topic: Functions of the Foreign Exchange Market
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
28) An exchange rate of €1 = $1.30 indicates that
A) $1 is worth 1.30 euros.
B) one could get 1.30 euros for $1.
C) one euro buys 1.30 dollars.
D) one euro buys 0.77 dollars.
Answer: C
Explanation: The exchange rate is the rate at which the market converts one currency into
another. An exchange rate of €1 = $1.30 indicates that every euro is worth 1.3 dollars.
Difficulty: 2 Medium
Topic: Functions of the Foreign Exchange Market
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
10
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
29) The ________ helps consumers compare the relative prices of goods and services in different
countries.
A) interest rate
B) GDP growth rate
C) exchange rate
D) tariff rate
Answer: C
Explanation: The exchange rate is the rate at which the market converts one currency into
another. The exchange rate allows us to compare the relative prices of goods and services in
different countries.
Difficulty: 1 Easy
Topic: The Influence of Exchange Rates
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
30) An American company today invests some of its spare cash in a Hungarian money market
account that will earn 8 percent for two months. Which of the following, if it happens during the
next two months, would imply that the company will earn less than 8 percent on its investment?
A) The Hungarian forint rises in value against the dollar.
B) Interest rates in the United States move down.
C) Short-term interest rates in Hungarian money markets shoot up.
D) The dollar appreciates against the Hungarian forint.
Answer: D
Explanation: If the dollar appreciates, it will mean that the company will get a lesser amount of
dollars when it takes its investment back. Each Hungarian forint will buy fewer dollars than in the
past.
Difficulty: 2 Medium
Topic: Functions of the Foreign Exchange Market
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
11
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
31) International businesses use foreign exchange markets for many reasons. Which of the
following is one of these reasons?
A) to receive payments from domestic investors that are in local currencies
B) to pay a foreign company for its products or services in its native country's currency
C) to invest for short terms in money markets when they have spare cash
D) to cover themselves from all risks involved in currency speculation
Answer: C
Explanation: In general, companies should beware, because speculation by definition is a very
risky business. The company cannot know for sure what will happen to exchange rates. While
speculators may profit handsomely if future currency movements go in the direction predicted,
they can also lose vast amounts of money if they move in the other direction.
Difficulty: 2 Medium
Topic: Functions of the Foreign Exchange Market
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
32) Which term refers to the rate at which one currency is converted into another?
A) basis point
B) spread
C) exchange rate
D) interchange rate
Answer: C
Explanation: The foreign exchange market converts the currency of one country into that of
another country. An exchange rate is simply the rate at which one currency is converted into
another.
Difficulty: 1 Easy
Topic: The Main Instruments and Institutions of the Foreign Exchange Market
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
12
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
33) The short-term movement of funds from one currency to another in the hopes of profiting from
shifts in exchange rates is known as
A) currency arbitrage.
B) currency speculation.
C) currency hedging.
D) currency risk mitigation.
Answer: B
Explanation: Currency speculation is one of the uses of foreign exchange markets.
Difficulty: 1 Easy
Topic: Functions of the Foreign Exchange Market
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
34) Which of the following involves borrowing in one currency where interest rates are low, and
then using the proceeds to invest in another currency where interest rates are high?
A) carry trade
B) swing trade
C) channel trade
D) price action trade
Answer: A
Explanation: The carry trade involves borrowing in one currency where interest rates are low,
and then using the proceeds to invest in another currency where interest rates are high.
Difficulty: 1 Easy
Topic: Functions of the Foreign Exchange Market
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
13
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
35) Assume that the interest rate on borrowing in Japan is 1 percent, while the interest rate on
deposits in Australian banks is 5 percent. A trader borrows in yen and then converts the money into
Australian dollars and deposits it in an Australian bank to make a 4 percent margin. Which type of
trade is this an example of?
A) swing trade
B) carry trade
C) channel trade
D) price action trade
Answer: B
Explanation: The carry trade involves borrowing in one currency where interest rates are low,
and then using the proceeds to invest in another currency where interest rates are high.
Difficulty: 2 Medium
Topic: Functions of the Foreign Exchange Market
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
36) When a tourist goes to a bank in a foreign country to convert money into the local currency, the
exchange rate used is the
A) currency swap rate.
B) forward rate.
C) carry trade.
D) spot rate.
Answer: D
Explanation: When a tourist goes to a bank in a foreign country to convert money into the local
currency, the exchange rate used is the spot rate for that day.
Difficulty: 1 Easy
Topic: Functions of the Foreign Exchange Market
Learning Objective: 10-02 Understand what is meant by spot exchange rates.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
14
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
37) ________ are reported on a real-time basis on many financial websites and are continually
changing—their value being determined by supply and demand for that currency relative to others.
A) Spot exchange rates
B) Currency swaps
C) Forward exchange rates
D) Future exchange rates
Answer: A
Explanation: The spot exchange rate is the rate at which a foreign exchange dealer converts one
currency into another currency on a particular day. Spot exchange rates are reported on a real-time
basis on many financial websites. Spot rates are continually changing, often on a
minute-by-minute basis, their value being determined by supply and demand for that currency
relative to others.
Difficulty: 2 Medium
Topic: The Influence of Exchange Rates
Learning Objective: 10-02 Understand what is meant by spot exchange rates.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
38) When two parties agree to exchange currency and execute the deal immediately, the
transaction is a
A) futures exchange.
B) carry trade.
C) spot exchange.
D) forward exchange.
Answer: C
Explanation: When two parties agree to exchange currency and execute the deal immediately, the
transaction is referred to as a spot exchange.
Difficulty: 2 Medium
Topic: Foreign Exchange Risks
Learning Objective: 10-02 Understand what is meant by spot exchange rates.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
15
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
39) The ________ is the rate at which a foreign exchange dealer converts one currency into
another currency on a particular day.
A) spot exchange rate
B) forward exchange rate
C) futures exchange rate
D) spread
Answer: A
Explanation: The spot exchange rate is the rate at which a foreign exchange dealer converts one
currency into another currency on a particular day.
Difficulty: 1 Easy
Topic: Foreign Exchange Risks
Learning Objective: 10-02 Understand what is meant by spot exchange rates.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
40) Assume that the current exchange rate is €1 = $1.50. If you exchange 1,000 euros for dollars,
you will receive
A) $1,000.
B) $750.
C) $1,500.
D) $667.
Answer: C
Explanation: Each euro is worth $1.50. Therefore, you will receive $1,500 (1,000 × 1.5) for
1,000 euros.
Difficulty: 2 Medium
Topic: Foreign Exchange Risks
Learning Objective: 10-02 Understand what is meant by spot exchange rates.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
16
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
41) ________ are exchange rates governing some specific future date foreign exchange
transactions.
A) Spot exchange rates
B) Forward exchange rates
C) Future exchange rates
D) Currency swaps
Answer: B
Explanation: Forward exchange rates represent market participants' collective predictions of
likely spot exchange rates at specified future dates.
Difficulty: 1 Easy
Topic: The Influence of Exchange Rates
Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring
against foreign exchange risk.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
42) Assuming the 30-day forward exchange rate was $1 = 130 and the spot exchange rate was $1 =
×120, the dollar is selling at a ________ on the 30-day forward market.
A) premium
B) margin
C) discount
D) subsidy
Answer: A
Explanation: $1 would buy more yen with a forward exchange than with a spot exchange. In such
a case, we say the dollar is selling at a premium on the 30-day forward market.
Difficulty: 2 Medium
Topic: The Influence of Exchange Rates
Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring
against foreign exchange risk.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
17
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
43) Which of the following refers to the simultaneous purchase and sale of a given amount of
foreign exchange for two different value dates?
A) currency pairing
B) carry trade
C) currency exchange
D) currency swap
Answer: D
Explanation: Swaps are transacted between international businesses and their banks, between
banks, and between governments when it is desirable to move out of one currency into another for
a limited period without incurring foreign exchange risk.
Difficulty: 1 Easy
Topic: The Influence of Exchange Rates
Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring
against foreign exchange risk.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
44) Which of the following is the most important foreign exchange trading center?
A) London
B) New York
C) Tokyo
D) Singapore
Answer: A
Explanation: The most important trading centers are London (37 percent of activity), New York
(18 percent of activity), and Zurich, Tokyo, and Singapore (all with around 5 to 6 percent of
activity). Major secondary trading centers include Frankfurt, Paris, Hong Kong, and Sydney.
Difficulty: 1 Easy
Topic: The Main Instruments and Institutions of the Foreign Exchange Market
Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring
against foreign exchange risk.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
18
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
45) Assume that the yen/dollar exchange rate quoted in Tokyo at 3:00 p.m. is ¥120 = $1, and the
yen/dollar exchange rate quoted in New York at the same time is ¥123 = $1. A dealer in New York
uses dollars to purchase yen and then immediately sells the yen to buy dollars in Tokyo, thereby
making a profit. The dealer has engaged in
A) a currency swap.
B) an arbitrage.
C) an carry trade.
D) a straddle.
Answer: B
Explanation: Buying a currency low and selling it high is arbitrage.
Difficulty: 2 Medium
Topic: The Role of Arbitrage in the Foreign Exchange Market
Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring
against foreign exchange risk.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
46) ________ is quoted for 30 days, 90 days, and 180 days into the future.
A) A forward exchange rate
B) A currency swap
C) A spot exchange rate
D) An arbitrage
Answer: A
Explanation: For most major currencies, forward exchange rates are quoted for 30 days, 90 days,
and 180 days into the future.
Difficulty: 1 Easy
Topic: The Influence of Exchange Rates
Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring
against foreign exchange risk.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
19
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
47) When two parties agree to exchange currency and execute the deal at some specific time in the
future, a ________ occurs.
A) currency swap
B) forward exchange
C) hedging
D) spot exchange
Answer: B
Explanation: A forward exchange occurs when two parties agree to exchange currency and
execute the deal at some specific date in the future.
Difficulty: 1 Easy
Topic: The Influence of Exchange Rates
Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring
against foreign exchange risk.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
48) Differences in the spot exchange rate and the 30-day forward rate are normal and reflect the
expectations of the foreign exchange market about
A) anticipated currency swap rates.
B) stability in the global marketplace.
C) future currency movements.
D) the carry trades that will occur.
Answer: C
Explanation: Such differences are normal; they reflect the expectations of the foreign exchange
market about future currency movements.
Difficulty: 2 Medium
Topic: The Influence of Exchange Rates
Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring
against foreign exchange risk.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
20
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
49) ________ is the simultaneous purchase and sale of a given amount of foreign exchange for two
different value dates.
A) An arbitrage
B) A carry trade
C) A spot exchange
D) A currency swap
Answer: D
Explanation: A currency swap is the simultaneous purchase and sale of a given amount of foreign
exchange for two different value dates.
Difficulty: 1 Easy
Topic: The Influence of Exchange Rates
Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring
against foreign exchange risk.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
50) The ________ is a global network of banks, brokers, and foreign exchange dealers connected
by electronic communications systems.
A) foreign exchange market
B) united global database
C) global marketplace
D) foreign market database
Answer: A
Explanation: The foreign exchange market is not located in any one place. It is a global network
of banks, brokers, and foreign exchange dealers connected by electronic communications systems.
Difficulty: 1 Easy
Topic: Functions of the Foreign Exchange Market
Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring
against foreign exchange risk.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
21
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
51) The foreign exchange market is
A) open for only 12 hours in a day.
B) the market never sleeps.
C) open for most of the day, but closes for three hours each day—between 2:00 a.m. and 5:00 a.m.
Greenwich Mean Time.
D) open during normal business hours (9:00 a.m. to 5:00 p.m., local time) in each of the primary
locations from which it operates: Tokyo, London, and New York.
Answer: B
Explanation: A key feature of the foreign exchange market is that the market never sleeps.
Tokyo, London, and New York are all shut for only three hours out of every 24.
Difficulty: 1 Easy
Topic: Functions of the Foreign Exchange Market
Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring
against foreign exchange risk.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
52) Although a foreign exchange transaction can involve any two currencies, most transactions
involve ________ on one side.
A) pounds
B) yen
C) dollars
D) euros
Answer: C
Explanation: Although a foreign exchange transaction can involve any two currencies, most
transactions involve dollars on one side.
Difficulty: 1 Easy
Topic: Functions of the Foreign Exchange Market
Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring
against foreign exchange risk.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
22
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
53) ________ are transacted between international businesses and their banks, between banks, and
between governments when it is desirable to move out of one currency into another for a limited
period without incurring foreign exchange risk.
A) Carry trades
B) Currency swaps
C) Arbitrages
D) Currency pairing
Answer: B
Explanation: A currency swap is the simultaneous purchase and sale of a given amount of foreign
exchange for two different value dates. Swaps are transacted between international businesses and
their banks, between banks, and between governments when it is desirable to move out of one
currency into another for a limited period without incurring foreign exchange risk.
Difficulty: 2 Medium
Topic: The Influence of Exchange Rates
Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring
against foreign exchange risk.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
54) Which of the following is one of the most important trading centers in the foreign exchange
market?
A) Beijing
B) Sau Paulo
C) Zurich
D) Seoul
Answer: C
Explanation: The foreign exchange market is a global network of banks, brokers, and foreign
exchange dealers connected by electronic communications systems. The most important trading
centers are London, New York, Zurich, Tokyo, and Singapore.
Difficulty: 1 Easy
Topic: The Main Instruments and Institutions of the Foreign Exchange Market
Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring
against foreign exchange risk.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
23
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
55) The purchasing power parity (PPP) theory argues that the exchange rate will
A) increase if a country is experiencing inflation.
B) change even if relative prices remain unchanged.
C) increase if a country is experiencing deflation.
D) change if relative prices change.
Answer: D
Explanation: The PPP theory argues that the exchange rate will change if relative prices change.
Difficulty: 2 Medium
Topic: Economic Theories of Exchange Rate Determination
Learning Objective: 10-04 Understand the different theories explaining how currency exchange
rates are determined and their relative merits.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
56) Purchasing power parity theory states that given relatively efficient markets, the price of a
"basket of goods" should be
A) much less in industrialized countries.
B) much less in third world countries.
C) variable depending upon the current rate of exchange between the producer and consumer of
the products in the "basket."
D) roughly equivalent in each country.
Answer: D
Explanation: PPP theory states that given relatively efficient markets, the price of a "basket of
goods" should be roughly equivalent in each country. So, if a basket of goods costs $200 in the
United States and ¥20,000 in Japan, PPP predicts that the dollar/yen exchange should be
$200/¥20,000 or $.01 per Japanese yen.
Difficulty: 2 Medium
Topic: Economic Theories of Exchange Rate Determination
Learning Objective: 10-04 Understand the different theories explaining how currency exchange
rates are determined and their relative merits.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
24
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
57) Inflation occurs when
A) the quantity of money in circulation rises faster than the stock of goods and services.
B) the stock of goods and services increases and the quantity of money in circulation decreases.
C) output increases faster than the money supply.
D) the money supply decreases and the output increases.
Answer: A
Explanation: Inflation is a monetary phenomenon. It occurs when the quantity of money in
circulation rises faster than the stock of goods and services, that is, when the money supply
increases faster than output increases.
Difficulty: 2 Medium
Topic: Economic Theories of Exchange Rate Determination
Learning Objective: 10-04 Understand the different theories explaining how currency exchange
rates are determined and their relative merits.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
58) The purchasing power parity (PPP) theory tells us that a country with a high inflation rate will
A) export more goods to other countries.
B) see depreciation in its currency exchange rate.
C) import more goods from other countries.
D) see an appreciation in its currency exchange rate.
Answer: B
Explanation: The PPP theory tells us that a country with a high inflation rate will see depreciation
in its currency exchange rate.
Difficulty: 1 Easy
Topic: Economic Theories of Exchange Rate Determination
Learning Objective: 10-04 Understand the different theories explaining how currency exchange
rates are determined and their relative merits.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
25
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
59) The Fisher Effect states that
A) a country's "real" rate of interest is the sum of the "nominal" interest rate and the expected rate
of inflation over the period for which the funds are to be lent.
B) there is a weak relationship between inflation rates and interest rates.
C) a country's "nominal" interest rate is the sum of the required "real" rate of interest and the
expected rate of inflation over the period for which the funds are to be lent.
D) when investors are free to transfer capital between countries, "nominal" interest rates will be
the same in every country.
Answer: C
Explanation: The Fisher Effect states that a country's "nominal" interest rate is the sum of the
required "real" rate of interest and the expected rate of inflation over the period for which the funds
are to be lent. (i = r + I)
Difficulty: 2 Medium
Topic: Economic Theories of Exchange Rate Determination
Learning Objective: 10-04 Understand the different theories explaining how currency exchange
rates are determined and their relative merits.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
60) The International Fisher Effect has
A) proven to have substantial power at predicting long-run changes in forward exchange rates.
B) proven to have substantial power at predicting short-run changes in spot exchange rates.
C) not proven to be a good predictor of long-run changes in forward exchange rates.
D) not proven to be a good predictor of short-run changes in spot exchange rates.
Answer: D
Explanation: The International Fisher Effect is not a good predictor of short-run changes in spot
exchange rates.
Difficulty: 2 Medium
Topic: Economic Theories of Exchange Rate Determination
Learning Objective: 10-04 Understand the different theories explaining how currency exchange
rates are determined and their relative merits.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
26
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
61) If the demand for dollars outstrips its supply and if the supply of Japanese yen is greater than
the demand for it, what will happen?
A) The dollar will appreciate against the yen.
B) The dollar will depreciate against the yen.
C) The exchange rates will remain the same.
D) The yen will appreciate against the dollar.
Answer: A
Explanation: At the most basic level, exchange rates are determined by the demand and supply of
one currency relative to the demand and supply of another.
Difficulty: 2 Medium
Topic: Economic Theories of Exchange Rate Determination
Learning Objective: 10-04 Understand the different theories explaining how currency exchange
rates are determined and their relative merits.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
62) The ________ states that in competitive markets free of transportation costs and barriers to
trade, identical products sold in different countries must sell for the same price when their price is
expressed in terms of the same currency.
A) law of one price
B) principle of consistent pricing
C) model of fair pricing
D) rational price theory
Answer: A
Explanation: The law of one price states that in competitive markets free of transportation costs
and barriers to trade (such as tariffs), identical products sold in different countries must sell for the
same price when their price is expressed in terms of the same currency. It helps us to understand
how prices are related to exchange rate movements.
Difficulty: 1 Easy
Topic: Economic Theories of Exchange Rate Determination
Learning Objective: 10-04 Understand the different theories explaining how currency exchange
rates are determined and their relative merits.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
27
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
63) According to the law of one price, if the exchange rate between the British pound and the
dollar is £1 = $1.50, a shirt that retails for $120 in New York should sell for ________ in London.
A) £180
B) £50
C) £60
D) £80
Answer: D
Explanation: The shirt will sell for £80 (120 ÷ 1.5). The law of one price states that in competitive
markets free of transportation costs and barriers to trade, identical products sold in different
countries must sell for the same price when their price is expressed in terms of the same currency.
Difficulty: 2 Medium
Topic: Economic Theories of Exchange Rate Determination
Learning Objective: 10-04 Understand the different theories explaining how currency exchange
rates are determined and their relative merits.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
64) Assume that the law of one price holds. A shirt that retails for $120 in New York sells for £60
in London. The exchange rate between the British pound and the dollar is £1 = $1.50. Assuming
away transportation costs and trade barriers, this creates a profit-making opportunity called
A) currency swap.
B) arbitrage.
C) carry trade.
D) straddle.
Answer: B
Explanation: Arbitrage involves the purchase and sale of a commodity at the same time to take
advantage of pricing differentials in two markets.
Difficulty: 2 Medium
Topic: The Role of Arbitrage in the Foreign Exchange Market
Learning Objective: 10-04 Understand the different theories explaining how currency exchange
rates are determined and their relative merits.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
28
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
65) The ________ suggests that given relatively efficient markets, the price of a "basket of goods"
should be roughly equivalent in each country.
A) random walk theory
B) theory of competitive advantage
C) theory of price inflation
D) purchasing power parity theory
Answer: D
Explanation: If the law of one price were true for all goods and services, the PPP exchange rate
could be found from any individual set of prices. By comparing the prices of identical products in
different currencies, it would be possible to determine the "real" or PPP exchange rate that would
exist if markets were efficient.
Difficulty: 1 Easy
Topic: Economic Theories of Exchange Rate Determination
Learning Objective: 10-04 Understand the different theories explaining how currency exchange
rates are determined and their relative merits.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
66) Suppose the price of a Big Mac in New York is $3.00 and the price of a Big Mac in Paris is
equivalent to $3.75 at the prevailing euro/dollar exchange rate. Using the concept of purchasing
power parity, the euro is
A) undervalued by 25 percent against the dollar.
B) overvalued by 25 percent against the dollar.
C) appreciating relative to the dollar.
D) depreciating relative to the dollar.
Answer: B
Explanation: According to the PPP theory, the prices in the two countries should be the same. If
they are not, it implies that the currency is either overvalued against the dollar or undervalued.
Difficulty: 2 Medium
Topic: Economic Theories of Exchange Rate Determination
Learning Objective: 10-04 Understand the different theories explaining how currency exchange
rates are determined and their relative merits.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
29
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
67) Identify the correct statement about the PPP theory.
A) It predicts that exchange rates are determined by relative prices.
B) It yields accurate predictions of short-run movements in exchange rates.
C) It best predicts exchange rate changes for countries with low rates of inflation.
D) It includes transportation costs and trade tariffs.
Answer: A
Explanation: While PPP theory seems to yield relatively accurate predictions in the long run, it
does not appear to be a strong predictor of short-run movements in exchange rates covering time
spans of five years or less.
Difficulty: 2 Medium
Topic: Economic Theories of Exchange Rate Determination
Learning Objective: 10-04 Understand the different theories explaining how currency exchange
rates are determined and their relative merits.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
68) Which of the following occurs when the quantity of money in circulation in a country rises
faster than the country's stock of goods and services?
A) inflation
B) credit squeeze
C) deflation
D) production surplus
Answer: A
Explanation: Inflation occurs when the quantity of money in circulation rises faster than the stock
of goods and services; that is, when the money supply increases faster than output increases.
Difficulty: 1 Easy
Topic: Economic Theories of Exchange Rate Determination
Learning Objective: 10-04 Understand the different theories explaining how currency exchange
rates are determined and their relative merits.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
30
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
69) Which of the following is referred to as the purchasing power parity puzzle?
A) reduced levels of inflation in countries where the growth in the money supply is faster than the
growth in its output
B) the reason countries with high inflation rates see depreciation in their currency exchange rates
C) identical products being sold in different countries for the same price when their price is
expressed in terms of the same currency
D) the failure to find a strong link between relative inflation rates and exchange rate movements
Answer: D
Explanation: The failure to find a strong link between relative inflation rates and exchange rate
movements has been referred to as the purchasing power parity puzzle.
Difficulty: 2 Medium
Topic: Economic Theories of Exchange Rate Determination
Learning Objective: 10-04 Understand the different theories explaining how currency exchange
rates are determined and their relative merits.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
70) The ________ states that a country's "nominal" interest rate is the sum of the required "real"
rate of interest and the expected rate of inflation over the period for which the funds are to be lent.
A) PPP theory
B) efficient market theory
C) law of one price
D) Fisher Effect
Answer: D
Explanation: The Fisher Effect states that a country's "nominal" interest rate (i) is the sum of the
required "real" rate of interest (r) and the expected rate of inflation over the period for which the
funds are to be lent (I). (i = r + I)
Difficulty: 1 Easy
Topic: Economic Theories of Exchange Rate Determination
Learning Objective: 10-04 Understand the different theories explaining how currency exchange
rates are determined and their relative merits.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
31
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
71) It follows from the Fisher Effect that if the real interest rate is the same worldwide, any
difference in interest rates between countries reflects differing expectations about
A) foreign exchange rates.
B) inflation rates.
C) unemployment rates.
D) GDP growth rates.
Answer: B
Explanation: It follows from the Fisher Effect that if the real interest rate is the same worldwide,
any difference in interest rates between countries reflects differing expectations about inflation
rates.
Difficulty: 2 Medium
Topic: Economic Theories of Exchange Rate Determination
Learning Objective: 10-04 Understand the different theories explaining how currency exchange
rates are determined and their relative merits.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
72) The ________ states that, for any two countries, the spot exchange rate should change in an
equal amount but in the opposite direction to the difference in nominal interest rates between the
two countries.
A) purchasing power parity theory
B) efficient market theory
C) International Fisher Effect
D) law of one price
Answer: C
Explanation: The International Fisher Effect states that for any two countries, the spot exchange
rate should change in an equal amount but in the opposite direction to the difference in nominal
interest rates between the two countries.
Difficulty: 1 Easy
Topic: Economic Theories of Exchange Rate Determination
Learning Objective: 10-04 Understand the different theories explaining how currency exchange
rates are determined and their relative merits.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
32
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
73) Which of the following occurs when traders start moving as a herd in the same direction at the
same time?
A) Fisher Effect
B) bandwagon effect
C) arbitrage
D) decoupling of markets
Answer: B
Explanation: The bandwagon effect occurs when traders start moving as a herd in the same
direction at the same time.
Difficulty: 1 Easy
Topic: Economic Theories of Exchange Rate Determination
Learning Objective: 10-04 Understand the different theories explaining how currency exchange
rates are determined and their relative merits.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
74) The ________ school of thought argues that forward exchange rates do the best possible job of
forecasting future spot rates and therefore investing in forecasting services would be a waste of
money.
A) inefficient market
B) efficient market
C) random walk
D) speculative
Answer: B
Explanation: The efficient market school argues that forward exchange rates do the best possible
job of forecasting future spot exchange rates, and, therefore, investing in forecasting services
would be a waste of money.
Difficulty: 1 Easy
Topic: Approaches to Exchange Rate Forecasting
Learning Objective: 10-05 Identify the merits of different approaches toward exchange rate
forecasting.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
33
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
75) With which of the following would a follower of the inefficient market school of thought agree
A) Companies would be better off investing in foreign exchange forecasting services.
B) Forward exchange rates do the best possible job of forecasting future spot exchange rates.
C) Companies can optimize their foreign exchange transactions by using forward markets.
D) Forward rates reflect all available information about likely future changes in exchange rates.
Answer: A
Explanation: The inefficient market school argues that companies can improve the foreign
exchange market's estimate of future exchange rates (as contained in the forward rate) by investing
in forecasting services.
Difficulty: 2 Medium
Topic: Approaches to Exchange Rate Forecasting
Learning Objective: 10-05 Identify the merits of different approaches toward exchange rate
forecasting.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
76) ________ uses price and volume data to determine past trends, which are expected to continue
into the future.
A) Technical analysis
B) Fundamental analysis
C) Efficient market theory
D) Value investing
Answer: A
Explanation: Technical analysis is based on the premise that there are analyzable market trends
and waves and that previous trends and waves can be used to predict future trends and waves.
Difficulty: 1 Easy
Topic: Approaches to Exchange Rate Forecasting
Learning Objective: 10-05 Identify the merits of different approaches toward exchange rate
forecasting.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
34
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
77) A currency is said to be freely convertible when
A) its exchange rate with respect to other currencies is decided by the central bank of the country.
B) residents alone are allowed to convert it into a foreign currency without any limitations.
C) neither residents nor nonresidents are allowed to convert it into a foreign currency.
D) both residents and nonresidents are allowed to purchase unlimited amounts of a foreign
currency with it.
Answer: D
Explanation: A country's currency is said to be freely convertible when the country's government
allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with
it.
Difficulty: 2 Medium
Topic: Currency Management and Business Strategy in the Global Monetary System
Learning Objective: 10-05 Identify the merits of different approaches toward exchange rate
forecasting.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
78) A(n) ________ is one in which prices do not reflect all available information.
A) inefficient market
B) speculative market
C) efficient market
D) externally convertible market
Answer: A
Explanation: An inefficient market is one in which prices do not reflect all available information.
In an inefficient market, forward exchange rates will not be the best possible predictors of future
spot exchange rates.
Difficulty: 2 Medium
Topic: Approaches to Exchange Rate Forecasting
Learning Objective: 10-05 Identify the merits of different approaches toward exchange rate
forecasting.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
35
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
79) ________ draws on economic theory to construct sophisticated econometric models for
predicting exchange rate movements.
A) Lead strategy
B) Fundamental analysis
C) Lag strategy
D) Technical analysis
Answer: B
Explanation: Fundamental analysis draws on economic theory to construct sophisticated
econometric models for predicting exchange rate movements.
Difficulty: 1 Easy
Topic: Approaches to Exchange Rate Forecasting
Learning Objective: 10-05 Identify the merits of different approaches toward exchange rate
forecasting.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
80) If a country has an externally convertible currency
A) neither residents nor nonresidents are allowed to convert it into a foreign currency.
B) both residents and nonresidents can purchase unlimited amounts of a foreign currency with it.
C) only nonresidents may convert it into a foreign currency without any limitations.
D) the government limits convertibility to preserve foreign exchange reserves.
Answer: C
Explanation: A currency is said to be externally convertible when only nonresidents may convert
it into a foreign currency without any limitations.
Difficulty: 2 Medium
Topic: Approaches to Exchange Rate Forecasting
Learning Objective: 10-05 Identify the merits of different approaches toward exchange rate
forecasting.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
36
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
81) Restrictions on external convertibility can
A) hamper foreign companies wishing to do business in that country.
B) allow domestic companies to freely invest abroad.
C) limit the amount of product a foreign company can produce in that country.
D) limit domestic companies' ability to invest abroad.
Answer: D
Explanation: External convertibility restrictions can limit domestic companies' ability to invest
abroad, but they represent few problems for foreign companies wishing to do business in that
country.
Difficulty: 2 Medium
Topic: Currency Management and Business Strategy in the Global Monetary System
Learning Objective: 10-05 Identify the merits of different approaches toward exchange rate
forecasting.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
82) Capital flight is most likely to occur when
A) the value of the domestic currency is depreciating rapidly because of hyperinflation.
B) a country's economic prospects are solid and promising.
C) the value of the domestic currency is appreciating rapidly.
D) the value of the foreign currency is depreciating rapidly.
Answer: A
Explanation: Capital flight is most likely to occur when the value of the domestic currency is
depreciating rapidly because of hyperinflation, or when a country's economic prospects are shaky
in other respects.
Difficulty: 2 Medium
Topic: Approaches to Exchange Rate Forecasting
Learning Objective: 10-05 Identify the merits of different approaches toward exchange rate
forecasting.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
37
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
83) Why do governments limit currency convertibility?
A) to preserve foreign exchange reserves
B) to spend foreign exchange reserves
C) to keep domestic companies from investing abroad
D) to allow nonresidents to convert money to foreign currencies
Answer: A
Explanation: Governments limit convertibility to preserve their foreign exchange reserves. A
country needs an adequate supply of these reserves to service its international debt commitments
and to purchase imports.
Difficulty: 2 Medium
Topic: Currency Management and Business Strategy in the Global Monetary System
Learning Objective: 10-05 Identify the merits of different approaches toward exchange rate
forecasting.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
84) ________ is most likely to occur when the value of the domestic currency is depreciating
rapidly because of hyperinflation or when a country's economic prospects are shaky in other
respects.
A) The random walk effect
B) The Fisher Effect
C) The International Fisher Effect
D) Capital flight
Answer: D
Explanation: Governments typically impose convertibility restrictions on their currency when
they fear that free convertibility will lead to a run on their foreign exchange reserves. This occurs
when residents and nonresidents rush to convert their holdings of domestic currency into a foreign
currency—a phenomenon generally referred to as capital flight.
Difficulty: 1 Easy
Topic: Currency Management and Business Strategy in the Global Monetary System
Learning Objective: 10-05 Identify the merits of different approaches toward exchange rate
forecasting.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
38
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
85) ________ refers to a range of barter-like agreements by which goods and services can be
traded for other goods and services.
A) Countertrade
B) Carry trade
C) Dumping
D) Capital flight
Answer: A
Explanation: Countertrade refers to a range of barter-like agreements by which goods and
services can be traded for other goods and services. Companies can deal with the nonconvertibility
problem by engaging in countertrade.
Difficulty: 1 Easy
Topic: Currency Management and Business Strategy in the Global Monetary System
Learning Objective: 10-05 Identify the merits of different approaches toward exchange rate
forecasting.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
86) The extent to which the income from individual transactions is affected by fluctuations in
foreign exchange values is known as ________ exposure.
A) economic
B) financial
C) translation
D) transaction
Answer: D
Explanation: Transaction exposure is the extent to which the income from individual transactions
is affected by fluctuations in foreign exchange values. It includes obligations for the purchase or
sale of goods and services at previously agreed prices and the borrowing or lending of funds in
foreign currencies.
Difficulty: 1 Easy
Topic: Foreign Exchange Risks
Learning Objective: 10-06 Compare and contrast the differences among translation, transaction,
and economic exposure, and what managers can do to manage each type of exposure.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
39
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
87) ________ is the impact of currency exchange rate changes on the reported financial statements
of a company.
A) Economic exposure
B) Financial exposure
C) Translation exposure
D) Transaction exposure
Answer: C
Explanation: Translation exposure is concerned with the present measurement of past events.
Difficulty: 1 Easy
Topic: Foreign Exchange Risks
Learning Objective: 10-06 Compare and contrast the differences among translation, transaction,
and economic exposure, and what managers can do to manage each type of exposure.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
88) What concept is concerned with the long-run effect of changes in exchange rates on future
prices, sales, and costs?
A) translation exposure
B) economic exposure
C) transaction exposure
D) risk exposure
Answer: B
Explanation: Economic exposure is the extent to which a firm's future international earning
power is affected by changes in exchange rates. Economic exposure is concerned with the long-run
effect of changes in exchange rates on future prices, sales, and costs.
Difficulty: 1 Easy
Topic: Foreign Exchange Risks
Learning Objective: 10-06 Compare and contrast the differences among translation, transaction,
and economic exposure, and what managers can do to manage each type of exposure.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
40
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
89) A(n) ________ involves attempting to collect foreign currency receivables early when a
foreign currency is expected to depreciate and paying foreign currency payables before they are
due when a currency is expected to appreciate.
A) A follower strategy
B) An interim strategy
C) A lead strategy
D) A lag strategy
Answer: C
Explanation: Leading involves accelerating payments from weak-currency to strong-currency
countries and delaying inflows from strong-currency to weak-currency countries.
Difficulty: 1 Easy
Topic: Foreign Exchange Risks
Learning Objective: 10-06 Compare and contrast the differences among translation, transaction,
and economic exposure, and what managers can do to manage each type of exposure.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
90) ________ includes obligations for the purchase or sale of goods and services at previously
agreed prices and the borrowing or lending of funds in foreign currencies.
A) Economic exposure
B) Transaction exposure
C) Corporate financial exposure
D) Translation exposure
Answer: B
Explanation: Transaction exposure is the extent to which the income from individual transactions
is affected by fluctuations in foreign exchange values. Transaction exposure includes obligations
for the purchase or sale of goods and services at previously agreed prices and the borrowing or
lending of funds in foreign currencies. Transaction exposure can be minimized by entering into
forward contracts or swaps, or by leading and lagging payables and receivables.
Difficulty: 2 Medium
Topic: Foreign Exchange Risks
Learning Objective: 10-06 Compare and contrast the differences among translation, transaction,
and economic exposure, and what managers can do to manage each type of exposure.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
41
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
91) A lag strategy involves
A) attempting to collect foreign currency receivables early when a foreign currency is expected to
depreciate.
B) delaying collection of foreign currency receivables if that currency is expected to appreciate.
C) paying foreign currency payables before they are due when a currency is expected to
appreciate.
D) delaying collection of foreign currency receivables if that currency is expected to depreciate.
Answer: B
Explanation: A lag strategy involves delaying collection of foreign currency receivables if that
currency is expected to appreciate and delaying payables if the currency is expected to depreciate.
Difficulty: 2 Medium
Topic: Foreign Exchange Risks
Learning Objective: 10-06 Compare and contrast the differences among translation, transaction,
and economic exposure, and what managers can do to manage each type of exposure.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
92) With the help of an example, explain how a tourist participates in the foreign exchange market.
Answer: The foreign exchange market is a market for converting the currency of one country into
that of another country. When a tourist changes one currency into another, the tourist is
participating in the foreign exchange market. If the euro/dollar exchange rate is €1 = $1.30, then
one euro buys 1.30 U.S. dollars. If the tourist wants to buy a T-shirt in France that costs 20 euros,
the tourist can go to a bank and exchange her $26 for €20.
Examples will vary.
Difficulty: 3 Hard
Topic: Functions of the Foreign Exchange Market
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
42
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
93) What are the main uses of foreign exchange markets for international business?
Answer: The foreign exchange market serves four primary functions for international companies.
First, the market is used to convert payments a company receives in foreign currencies into the
currency of its home country. Second, the market is used to convert the currency of a company's
home country into another currency when it must pay a foreign company for its products and
services in that country's currency. Third, international businesses may use foreign exchange
markets when they have spare cash that they wish to invest for short terms in money markets (of
another country). Fourth, currency speculation is another use of foreign exchange markets.
Difficulty: 2 Medium
Topic: Functions of the Foreign Exchange Market
Learning Objective: 10-01 Describe the functions of the foreign exchange market.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
94) What is meant by the phrases "the dollar is selling at a discount" on the 30-day forward market
and "the dollar is selling at a premium" on the 30-day forward market?
Answer: When a dollar is selling at a discount on the 30-day forward market, it is worth less than
on the spot market, or one dollar buys more foreign currency with a spot exchange than with a
30-day forward contract. If the dollar is selling at a premium on the 30-day forward market,
foreign exchange dealers anticipate the dollar will appreciate against the foreign currency over the
next 30 days.
Difficulty: 3 Hard
Topic: The Influence of Exchange Rates
Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring
against foreign exchange risk.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
43
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
95) Where is the foreign exchange market located? What is the nature of the market? Is the market
growing or shrinking on a global basis?
Answer: The foreign exchange market is not located in any one place. It is a global network of
banks, brokers, and foreign exchange dealers connected by electronic communications systems.
When companies wish to convert currencies, they typically go through their own banks rather than
entering the market directly. The foreign exchange market has been growing at a rapid pace,
reflecting a general growth in the volume of cross-border trade and investment.
Difficulty: 2 Medium
Topic: The Main Instruments and Institutions of the Foreign Exchange Market
Learning Objective: 10-03 Recognize the role that forward exchange rates play in insuring
against foreign exchange risk.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
96) What is the law of one price?
Answer: The law of one price states that in competitive markets, free of transportation costs and
barriers to trade, identical products sold in different countries must sell for the same price when
their prices are expressed in terms of the same currency. If the exchange rate is £1 = $1.50, a
bracelet that sells for $75 in New York should sell for £50 in London.
Difficulty: 2 Medium
Topic: Economic Theories of Exchange Rate Determination
Learning Objective: 10-04 Understand the different theories explaining how currency exchange
rates are determined and their relative merits.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
44
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
97) Discuss the failure of PPP theory to predict exchange rates accurately. What is the purchasing
power parity puzzle?
Answer: The failure to find a strong link between inflation rates and exchange rate movements
has been referred to as the purchasing power parity puzzle. Several reasons contribute to the failure
of PPP as a predictive tool. First, PPP theory assumes away transportation costs and barriers to
entry, yet in practice this is not realistic. Second, PPP theory may not hold if many national
markets are dominated by a handful of multinational enterprises that have sufficient market power
to be able to exercise some influence over prices, control distribution channels, and differentiate
their product offerings between nations. Third, government intervention in the foreign exchange
market influences the value of currencies. Finally, investor psychology has a role in determining
exchange rates.
Difficulty: 3 Hard
Topic: Economic Theories of Exchange Rate Determination
Learning Objective: 10-04 Understand the different theories explaining how currency exchange
rates are determined and their relative merits.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
98) Compare and contrast the Fisher Effect and the International Fisher Effect.
Answer: The Fisher Effect was put forth by Irvin Fisher who formalized the notion that in
countries where inflation is expected to be high, interest rates will also be high because investors
want compensation for the decline in the value of their money. More specifically, the Fisher Effect
states that a country's nominal interest rate is the sum of the required real rate of interest and the
expected rate of inflation over the period for which the funds are to be lent.
The Fisher Effect was extended to incorporate the link between interest rates and exchange rates.
The International Fisher Effect states that for any two countries, the spot exchange rate should
change in an equal amount but in the opposite direction to the difference in nominal interest rates
between the two countries.
Difficulty: 3 Hard
Topic: Economic Theories of Exchange Rate Determination
Learning Objective: 10-04 Understand the different theories explaining how currency exchange
rates are determined and their relative merits.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
45
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
99) Consider the role of investor psychology and bandwagon Effects on how well purchasing
power parity and the international Fisher effect explain short-term movements in exchange rates.
Answer: Neither PPP nor the International Fisher Effect have proven to be good at explaining
short-term movements in exchange rates. One reason for their poor explanatory power may be the
impact of investor psychology on short-run exchange movements. Studies show that expectations
about exchange rates tend to become self-fulfilling prophecies.
A bandwagon effect occurs when investors in increasing numbers start following the lead of
someone who may be pushing the value of a currency up or down due to psychological reasons. As
a bandwagon effect builds up, the expectations of investors become a self-fulfilling prophecy, and
the market moves in the way the investors expected.
Difficulty: 3 Hard
Topic: Economic Theories of Exchange Rate Determination
Learning Objective: 10-04 Understand the different theories explaining how currency exchange
rates are determined and their relative merits.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
100) Discuss the two schools of thought on exchange rate forecasting.
Answer: There are two schools of thought on whether it is worthwhile for a firm to invest in
exchange rate forecasting services. The efficient market school argues that forward exchange rates
do the best possible job of forecasting exchange rates and therefore it is not necessary to invest in
forecasting services. The inefficient market, however, suggests that forward exchange rates are not
the best predictors of future spot rates and that consequently there is value in forecasting services.
Difficulty: 2 Medium
Topic: Approaches to Exchange Rate Forecasting
Learning Objective: 10-05 Identify the merits of different approaches toward exchange rate
forecasting.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
46
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
101) Explain the difference between fundamental analysis and technical analysis.
Answer: Fundamental analysis draws on economic theory to construct sophisticated econometric
models for predicting exchange rate movements. Technical analysis uses price and volume data to
determine past trends that are expected to continue into the future. Both schools of thought are
used to forecast exchange rate movements.
Difficulty: 2 Medium
Topic: Approaches to Exchange Rate Forecasting
Learning Objective: 10-05 Identify the merits of different approaches toward exchange rate
forecasting.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
102) Compare and contrast currencies that are freely convertible, externally convertible, and
nonconvertible.
Answer: A country's currency is said to be freely convertible when the country's government
allows both residents and nonresidents to purchase unlimited amounts of a foreign currency with
it. In contrast, a currency is said to be externally convertible if only nonresidents may convert it
into a foreign currency without limitations. Finally, a currency is nonconvertible when neither
residents nor nonresidents are allowed to convert it into a foreign currency.
Difficulty: 3 Hard
Topic: Approaches to Exchange Rate Forecasting
Learning Objective: 10-05 Identify the merits of different approaches toward exchange rate
forecasting.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
47
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
103) Describe translation exposure. How can translation exposure be minimized?
Answer: Transaction exposure is the extent to which the income from individual transactions is
affected by fluctuations in foreign exchange values. Such exposure includes obligations for the
purchase or sale of goods and services at previously agreed prices and the borrowing or lending of
funds in foreign currencies. Translation exposure is the impact of currency exchange rate changes
on the reported financial statements of a company. Translation exposure is basically concerned
with the present measurement of past events. Like transaction exposure, translation exposure can
be minimized by entering into forward contracts or swaps, or by leading and lagging payables and
receivables. Leading and lagging involve accelerating payments from weak-currency to
strong-currency countries and delaying inflows from strong-currency to weak-currency countries.
Difficulty: 2 Medium
Topic: Foreign Exchange Risks
Learning Objective: 10-06 Compare and contrast the differences among translation, transaction,
and economic exposure, and what managers can do to manage each type of exposure.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
104) Explain the notion of economic exposure. How can economic exposure be minimized?
Answer: Economic exposure is the extent to which a firm's future international earning power is
affected by changes in exchange rates. Economic exposure is concerned with the long-run effect of
changes in exchange rates on future prices, sales, and costs. To reduce economic exposure, a firm
must distribute the firm's productive assets to various locations so the firm's long-run financial
well-being is not severely affected by adverse changes in exchange rates.
Difficulty: 2 Medium
Topic: Foreign Exchange Risks
Learning Objective: 10-06 Compare and contrast the differences among translation, transaction,
and economic exposure, and what managers can do to manage each type of exposure.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
48
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
105) How can a firm minimize its foreign exchange exposure?
Answer: There are several strategies a firm can follow to minimize foreign exchange exposure.
First, central control of exposure is needed to protect resources and ensure that each subunit adopts
the correct mix of tactics and strategies. Second, firms should distinguish between transaction and
translation exposure as compared to economic exposure. Third, the firm needs to forecast future
exchange rate movements, though tricky. Fourth, the firm needs to establish a good reporting
system to monitor the firm's exposure positions. Finally, the firm should produce monthly foreign
exchange exposure reports. These reports should identify how cash flows and balance sheet
elements might be affected by forecasted changes in exchange rates. The reports can then be used
by management as a basis for adopting tactics and strategies to hedge against undue foreign
exchange risks.
Difficulty: 2 Medium
Topic: Foreign Exchange Risks
Learning Objective: 10-06 Compare and contrast the differences among translation, transaction,
and economic exposure, and what managers can do to manage each type of exposure.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
49
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
International Business, 12e (Hill)
Chapter 11
The International Monetary System
1) The international monetary system refers to the institutional arrangements that govern exchange
rates.
Answer: TRUE
Explanation: The international monetary system refers to the institutional arrangements that
govern exchange rates.
Difficulty: 1 Easy
Topic: The History of the Global Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
2) The gold standard called for fixed exchange rates against the U.S. dollar.
Answer: FALSE
Explanation: Pegging currencies to gold and guaranteeing convertibility is known as the gold
standard. By 1880, most of the world's major trading nations, including Great Britain, Germany,
Japan, and the United States, had adopted the gold standard.
Difficulty: 1 Easy
Topic: The History of the Global Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
3) The fixed exchange rate system established at Bretton Woods failed due to speculative
pressures on the U.S. dollar.
Answer: TRUE
Explanation: The U.S. dollar was the only currency that could be converted into gold in the fixed
exchange rate system established at Bretton Woods. As the currency that served as the reference
point for all others, the dollar occupied a central place in the system. The system failed when its
key currency, the U.S. dollar, faced speculative pressure.
Difficulty: 2 Medium
Topic: The History of the Global Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
1
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
4) Gold was declared as the formal reserve asset in the Jamaica agreement of 1976.
Answer: FALSE
Explanation: In the Jamaica agreement, gold was abandoned as a reserve asset. The IMF returned
its gold reserves to members at the current market price, placing the proceeds in a trust fund to help
poor nations.
Difficulty: 1 Easy
Topic: The History of the Global Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
5) Market forces have produced a stable dollar exchange rate under a floating exchange rate
regime.
Answer: FALSE
Explanation: Under a floating exchange rate regime, market forces have produced a volatile
dollar exchange rate. Governments have sometimes responded by intervening in the
market—buying and selling dollars—in an attempt to limit the market's volatility and to correct
what they see as overvaluation or potential undervaluation of the dollar.
Difficulty: 1 Easy
Topic: The History of the Global Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
6) The agreement reached at Bretton Woods established the International Monetary Fund (IMF)
and the World Bank.
Answer: TRUE
Explanation: The agreement reached at Bretton Woods established two multinational
institutions—the International Monetary Fund (IMF) and the World Bank.
Difficulty: 1 Easy
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-02 Explain the role played by the World Bank and the IMF in the
international monetary system.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
2
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
7) After the agreement reached at Bretton Wood, the dollar was the only currency that could be
convertible into gold.
Answer: TRUE
Explanation: Only the dollar remained convertible into gold—at a price of $35 per ounce. Each
country decided what it wanted its exchange rate to be vis-à-vis the dollar and then calculated the
gold par value of the currency based on that selected dollar exchange rate.
Difficulty: 1 Easy
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-02 Explain the role played by the World Bank and the IMF in the
international monetary system.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
8) Implementing a fixed exchange rate regime increases the price inflation in countries.
Answer: FALSE
Explanation: A fixed exchange rate regime imposes monetary discipline on countries, thereby
curtailing price inflation.
Difficulty: 1 Easy
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-02 Explain the role played by the World Bank and the IMF in the
international monetary system.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
9) World Bank offers low-interest loans to risky customers whose credit rating is often poor.
Answer: TRUE
Explanation: World Bank offers low-interest loans to risky customers whose credit rating is often
poor, such as the governments of underdeveloped nations.
Difficulty: 1 Easy
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-02 Explain the role played by the World Bank and the IMF in the
international monetary system.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
3
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
10) Fixed exchange rates lead to speculation and uncertainty in the value of currencies.
Answer: FALSE
Explanation: Speculation can make exchange rates volatile in the floating exchange rate system.
Speculation also adds to the uncertainty surrounding future currency movements that characterizes
floating exchange rate regimes. A fixed exchange rate eliminates such uncertainty.
Difficulty: 2 Medium
Topic: Fixed versus Floating Exchange Rate Systems
Learning Objective: 11-03 Compare and contrast the differences between a fixed and a floating
exchange rate system.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
11) Adopting a pegged exchange rate regime increases the inflationary pressures in a country.
Answer: FALSE
Explanation: Evidence shows that adopting a pegged exchange rate regime moderates
inflationary pressures in a country.
Difficulty: 2 Medium
Topic: Different Exchange Rate Regimes
Learning Objective: 11-04 Identify exchange rate regimes used in the world today and why
countries adopt different exchange rate regimes.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
12) A country that introduces a currency board commits itself to converting its domestic currency
on demand into another currency at a fixed exchange rate.
Answer: TRUE
Explanation: A country that introduces a currency board commits itself to converting its
domestic currency on demand into another currency at a fixed exchange rate. To make this
commitment credible, the currency board holds reserves of foreign currency equal at the fixed
exchange rate to at least 100 percent of the domestic currency issued.
Difficulty: 1 Easy
Topic: Different Exchange Rate Regimes
Learning Objective: 11-04 Identify exchange rate regimes used in the world today and why
countries adopt different exchange rate regimes.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
4
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
13) Interest rates adjust automatically under a strict currency board system.
Answer: TRUE
Explanation: Under a strict currency board system, interest rates adjust automatically. If
investors want to switch out of domestic currency into, for example, U.S. dollars, the supply of
domestic currency will shrink. This will cause interest rates to rise until it eventually becomes
attractive for investors to hold the local currency again.
Difficulty: 2 Medium
Topic: Different Exchange Rate Regimes
Learning Objective: 11-04 Identify exchange rate regimes used in the world today and why
countries adopt different exchange rate regimes.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
14) The International Monetary Fund's original function was to provide a pool of money from
which members could borrow in the short term.
Answer: TRUE
Explanation: The IMF's original function was to provide a pool of money from which members
could borrow, short term, to adjust their balance-of-payments position and maintain their
exchange rate.
Difficulty: 1 Easy
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-05 Understand the debate surrounding the role of the IMF in the
management of financial crises.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
15) The IMF does not expect governments to meet any obligations except to pay back the money it
borrows.
Answer: FALSE
Explanation: The IMF has repeatedly lent money to nations experiencing financial crises,
requesting in return that the governments enact certain macroeconomic policies.
Difficulty: 1 Easy
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-05 Understand the debate surrounding the role of the IMF in the
management of financial crises.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
5
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
16) In 2002, the IMF stepped in to help stabilize the value of the Brazilian currency on foreign
exchange markets by lending it foreign currency. This constitutes a foreign debt crisis.
Answer: FALSE
Explanation: This was a currency crisis. This occurs when a speculative attack on the exchange
value of a currency results in a sharp depreciation in the value of the currency or forces authorities
to expend large volumes of international currency reserves and sharply increase interest rates to
defend the prevailing exchange rate. This happened in Brazil in 2002, and the IMF stepped in to
help stabilize the value of the Brazilian currency on foreign exchange markets by lending it foreign
currency.
Difficulty: 1 Easy
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-05 Understand the debate surrounding the role of the IMF in the
management of financial crises.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
17) Moral hazard arises when people behave recklessly without regard for the consequences.
Answer: FALSE
Explanation: Moral hazard arises when people behave recklessly because they know they will be
saved if things go wrong.
Difficulty: 1 Easy
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-05 Understand the debate surrounding the role of the IMF in the
management of financial crises.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
18) The current system of foreign exchange is a mixed system of government intervention and
speculative activity.
Answer: TRUE
Explanation: The current system of foreign exchange is a mixed system in which a combination
of government intervention and speculative activity can drive the foreign exchange market.
Difficulty: 1 Easy
Topic: Currency Management and Business Strategy in the Global Monetary System
Learning Objective: 11-06 Explain the implications of the global monetary system for
management practice.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
6
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
19) Firms cannot utilize the forward exchange market when they are faced with uncertainty about
the future value of currencies.
Answer: FALSE
Explanation: Faced with uncertainty about the future value of currencies, firms can utilize the
forward exchange market.
Difficulty: 2 Medium
Topic: Currency Management and Business Strategy in the Global Monetary System
Learning Objective: 11-06 Explain the implications of the global monetary system for
management practice.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
20) An effective business strategy to reduce economic exposure is to contract out
high-value-added manufacturing.
Answer: FALSE
Explanation: Another way of building strategic flexibility and reducing economic exposure
involves contracting out manufacturing. This allows a company to shift suppliers from country to
country. However, this kind of strategy may work only for low-value-added manufacturing (e.g.,
textiles) in which the individual manufacturers have few if any firm-specific skills that contribute
to the value of the product.
Difficulty: 1 Easy
Topic: Currency Management and Business Strategy in the Global Monetary System
Learning Objective: 11-06 Explain the implications of the global monetary system for
management practice.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
7
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
21) The ________ refers to the institutional arrangements that govern exchange rates.
A) World Bank
B) international monetary system
C) currency exchange
D) gold standard
Answer: B
Explanation: The international monetary system refers to the institutional arrangements that
govern exchange rates.
Difficulty: 1 Easy
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
22) A ________ means the value of a currency is fixed relative to a reference currency.
A) pegged exchange rate
B) floating exchange rate
C) managed float system
D) fixed exchange rate
Answer: A
Explanation: A pegged exchange rate means the value of the currency is fixed relative to a
reference currency, such as the U.S. dollar, and then the exchange rate between that currency and
other currencies is determined by the reference currency exchange rate.
Difficulty: 1 Easy
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
8
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
23) When a country tries to hold the value of its currency within some range against an important
reference currency such as the U.S. dollar without adopting a formal pegged rate, it is referred to as
a
A) gold standard.
B) pegged float.
C) dirty float.
D) currency peg.
Answer: C
Explanation: Countries, while not adopting a formal pegged rate, try to hold the value of their
currency within some range against an important reference currency such as the U.S. dollar, or a
"basket" of currencies. This is often referred to as a dirty float.
Difficulty: 1 Easy
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
24) The amount of a currency needed to purchase one ounce of gold was referred to as the
A) golden rule.
B) gold standard.
C) pegged gold value.
D) gold par value.
Answer: D
Explanation: Under the gold standard, the amount of a currency needed to purchase one ounce of
gold was referred to as the gold par value.
Difficulty: 1 Easy
Topic: The History of the Global Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
9
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
25) A country is said to be in balance-of-trade equilibrium when
A) the income its residents earn from exports is equal to the money its residents pay to other
countries for imports.
B) it produces all the goods needed for domestic consumption.
C) the income its residents earn from imports is equal to the money its residents pay to other
countries for exports.
D) it produces all the goods needed for exportation.
Answer: A
Explanation: A country is said to be in balance-of-trade equilibrium when the income its
residents earn from exports is equal to the money its residents pay to other countries for imports
(the current account of its balance of payments is in balance).
Difficulty: 2 Medium
Topic: The History of the Global Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
26) The world's four major trading currencies, the Japanese yen, the U.S. dollar, the British pound,
and the European Union's euro, are all free to float against each other. What is this an example of?
A) pegged exchange rate regime
B) floating exchange rate regime
C) managed-float system
D) fixed exchange rate regime
Answer: B
Explanation: When the foreign exchange market determines the relative value of a currency, the
country is adhering to a floating exchange rate system. The world's four major trading currencies,
the Japanese yen, the U.S. dollar, the British pound, and the European Union's euro, are all free to
float against each other. Consequently, their exchange rates are determined by market forces and
fluctuate against each other daily.
Difficulty: 2 Medium
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
10
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
27) Prior to the introduction of the euro, many EU countries participated in a ________ system, in
which the values of a set of currencies are fixed against each other at some mutually agreed upon
exchange rate.
A) floating exchange rate
B) currency board
C) fixed exchange rate
D) pegged exchange rate
Answer: C
Explanation: In a fixed exchange rate system, the values of a set of currencies are fixed against
each other at some mutually agreed upon exchange rate. Prior to the introduction of the euro, many
EU countries participated in a fixed exchange rate system.
Difficulty: 2 Medium
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
28) International Monetary Fund members were ________ in the Jamaica agreement.
A) not permitted to sell their own gold reserves
B) permitted to sell their own gold reserves, but only at the price set by IMF
C) required to hold their gold reserves in escrow
D) permitted to sell their own gold reserves at the market price
Answer: D
Explanation: In the Jamaica agreement, gold was abandoned as a reserve asset. IMF also
permitted its members to sell their own gold reserves at the market price.
Difficulty: 1 Easy
Topic: The History of the Global Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
11
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
29) The value of U.S. dollar increased between 1980 and 1985
A) despite running a growing trade deficit.
B) despite exporting substantially more than it imported.
C) because of a growing trade surplus.
D) because the country's status as a world financial leader was becoming apparent.
Answer: A
Explanation: The rise in the value of the dollar between 1980 and 1985 occurred when the United
States was running a large and growing trade deficit, importing substantially more than it exported.
A number of favorable factors overcame the unfavorable effect of a trade deficit.
Difficulty: 2 Medium
Topic: The History of the Global Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
30) Which of the following is a factor that initiated the collapse of the fixed exchange rate system?
A) worsening of Great Britain's balance of trade
B) recession in third world countries
C) price inflation in Europe
D) worsening of U.S. foreign trade position
Answer: D
Explanation: The U.S. dollar had a special role in the fixed exchange rate system as the only
currency that could be converted into gold. This meant that any pressure on the dollar would
devalue the system. The increase in inflation and the worsening of the U.S. foreign trade position
gave rise to speculation in the foreign exchange market that the dollar would be devalued. This
initiated the demise of the fixed exchange rate system.
Difficulty: 1 Easy
Topic: The History of the Global Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
12
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
31) Which of the following changes were made to the International Monetary Fund's Articles of
Agreement in the Jamaica agreement?
A) IMF members were permitted to use the U.S. dollar as the convertible currency.
B) Gold was declared as a formal reserve asset for IMF members.
C) IMF members were permitted to sell their gold reserves at the market price.
D) IMF members were restricted from entering the foreign exchange market.
Answer: C
Explanation: IMF members met in Jamaica in January 1976 and agreed to the rules for the
international monetary system that are in place today. In the meeting, gold was abandoned as a
reserve asset. IMF members were permitted to sell their own gold reserves at the market price.
Difficulty: 1 Easy
Topic: The History of the Global Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
32) ________ exchange rates were declared as acceptable in the Jamaica agreement of the
International Monetary Fund.
A) Pegged
B) Fixed
C) Floating
D) Gold standard
Answer: C
Explanation: Floating rates were declared acceptable in the Jamaica agreement. IMF members
were also permitted to enter the foreign exchange market to even out "unwarranted" speculative
fluctuations.
Difficulty: 1 Easy
Topic: The History of the Global Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
13
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
33) The United States had large and growing trade deficits between 1980 and 1985. Despite this,
the value of the U.S. dollar rose during this period. Which of the following is a factor that caused
this occurrence?
A) The United States attracted heavy inflows of capital from foreign investors during this period.
B) Banks in the United States offered low interest rates to investors during this period.
C) Markets across the world witnessed strong economies during this period.
D) Developed countries in Europe maintained trade equilibrium and supplied goods to
underdeveloped countries.
Answer: A
Explanation: A number of favorable factors overcame the unfavorable effect of a trade deficit.
Strong economic growth in the United States was one such factor. It attracted heavy inflows of
capital from foreign investors seeking high returns on capital assets.
Difficulty: 2 Medium
Topic: The History of the Global Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
34) Which of the following is the reason the current foreign exchange system is sometimes thought
of as a managed-float system?
A) The exchange rates of a currency are determined by market forces.
B) Governments intervene frequently in the foreign exchange market.
C) Major currencies are allowed to freely float against each other.
D) Countries use a reference currency to estimate the value of their currencies.
Answer: B
Explanation: The frequency of government intervention in the foreign exchange market explains
why the current system is sometimes thought of as a managed-float system or a dirty-float system.
Difficulty: 2 Medium
Topic: The History of the Global Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
14
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
35) The rise in the value of the dollar between 1985 and 1988
A) gave U.S. goods a competitive advantage over others.
B) made imports relatively cheap.
C) gave U.S. goods a comparative advantage over others.
D) made imports expensive.
Answer: B
Explanation: A rise in the dollar will make U.S. goods less competitive. The rise in the dollar
priced U.S. goods out of foreign markets and made imports relatively cheap.
Difficulty: 1 Easy
Topic: The History of the Global Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
36) The international monetary system refers to the institutional arrangements that govern
A) microeconomic parameters.
B) exchange rates.
C) gross domestic produce.
D) foreign direct investment.
Answer: B
Explanation: The international monetary system refers to the institutional arrangements that
govern exchange rates.
Difficulty: 1 Easy
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
15
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
37) When the foreign exchange market determines the relative value of a currency, we say that the
country is adhering to a ________ regime.
A) currency board exchange
B) pegged exchange rate
C) fixed exchange rate
D) floating exchange rate
Answer: D
Explanation: When the foreign exchange market determines the relative value of a currency, we
say that the country is adhering to a floating exchange rate regime. Four of the world's major
trading currencies—the U.S. dollar, the European Union's euro, the Japanese yen, and the British
pound—are all free to float against each other.
Difficulty: 1 Easy
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
38) Pegged exchange rate means that the value of a currency is
A) fixed against other currencies based on an agreement.
B) not determined by free market forces.
C) fixed relative to a reference currency.
D) independent of the valuations of other currencies.
Answer: C
Explanation: A pegged exchange rate means the value of the currency is fixed relative to a
reference currency, such as the U.S. dollar, and then the exchange rate between that currency and
other currencies is determined by the reference currency exchange rate.
Difficulty: 1 Easy
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
16
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
39) A country wanted to hold its currency against an important reference currency without a
formal pegged rate. This is known as
A) a monetary run.
B) a currency flip.
C) an unpegged rate.
D) a dirty float.
Answer: D
Explanation: Countries, while not adopting a formal pegged rate, try to hold the value of their
currency within some range against an important reference currency such as the U.S. dollar, or a
"basket" of currencies. This is often referred to as a dirty float.
Difficulty: 2 Medium
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
40) After World War II, the world's major industrial nations arranged their currencies against each
other at a mutually agreed on exchange rate. This is an example of a ________ system.
A) fixed exchange rate
B) dirty float exchange
C) pegged exchange rate
D) floating exchange rate
Answer: A
Explanation: With a fixed exchange rate system, the values of a set of currencies are fixed against
each other at some mutually agreed on exchange rate.
Difficulty: 2 Medium
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
17
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
41) Which of the following statements is true of the gold standard?
A) The gold standard was adopted only by the smaller nations of the world.
B) Currencies were pegged to gold under the gold standard.
C) Convertibility to gold was not guaranteed under the gold standard.
D) The gold standard was not helpful in maintaining balance-of-trade equilibrium.
Answer: B
Explanation: Pegging currencies to gold and guaranteeing convertibility is known as the gold
standard. By 1880, most of the world's major trading nations, including Great Britain, Germany,
Japan, and the United States, had adopted the gold standard.
Difficulty: 1 Easy
Topic: The History of the Global Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
42) Gold par value refers to the
A) ratio of the price of gold in a currency to the price of gold in U.S. dollars.
B) amount of a currency needed to purchase one ounce of gold.
C) ratio of price of gold in a currency to the price of gold in euros.
D) amount of gold required to equal the reference currency that a nation is using.
Answer: B
Explanation: The amount of a currency needed to purchase one ounce of gold is referred to as the
gold par value.
Difficulty: 1 Easy
Topic: The History of the Global Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
18
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
43) A country is said to be in balance-of-trade equilibrium when
A) it has the potential to produce all goods that its residents want without engaging in foreign
trade.
B) the income its residents earn from exports is equal to the money its residents pay for imports.
C) the country imports all goods that its residents want by engaging in foreign trade.
D) it has the potential to balance the production and procurement of the basic amenities that it
needs.
Answer: B
Explanation: A country is said to be in balance-of-trade equilibrium when the income its
residents earn from exports is equal to the money its residents pay to other countries for imports
(the current account of its balance of payments is in balance).
Difficulty: 1 Easy
Topic: The History of the Global Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
44) A country's trade balance is in surplus when
A) its exports are more than its imports.
B) it experiences negative inflation.
C) its exports equal the imports.
D) the prices of commodities are low in the country.
Answer: A
Explanation: A country's trade balance is in surplus when it exports more than it imports.
Difficulty: 1 Easy
Topic: The History of the Global Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
19
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
45) Which of the following is an advantage of using the gold standard?
A) The standard makes sure that goods are not priced out from markets due to inflation.
B) The standard does not require a commitment from a nation to maintain its currency's value.
C) The standard effectively prevents the devaluation of currencies across the world.
D) The standard contains a powerful mechanism for achieving balance-of-trade equilibrium by all
countries.
Answer: D
Explanation: The great strength claimed for the gold standard was that it contained a powerful
mechanism for achieving balance-of-trade equilibrium by all countries.
Difficulty: 2 Medium
Topic: The History of the Global Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
46) International Development Association loans
A) receive direct funding from the World Bank.
B) must be countersigned by a partnering, wealthy country such as the United States, Japan, or
Germany.
C) are funded through subscriptions from wealthy members.
D) receive direct funding from the International Monetary Fund.
Answer: C
Explanation: One of the funding schemes of the World Bank is overseen by the International
Development Association (IDA), an arm of the bank created in 1960. Resources to fund IDA loans
are raised through subscriptions from wealthy members such as the United States, Japan, and
Germany. IDA loans go only to the poorest countries.
Difficulty: 1 Easy
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-02 Explain the role played by the World Bank and the IMF in the
international monetary system.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
20
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
47) The agreement reached at Bretton Woods established the
A) International Monetary Fund.
B) World Economic Forum.
C) United Nations.
D) International Atomic Energy Agency.
Answer: A
Explanation: The agreement reached at Bretton Woods established two multinational
institutions—the International Monetary Fund (IMF) and the World Bank.
Difficulty: 1 Easy
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-02 Explain the role played by the World Bank and the IMF in the
international monetary system.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
48) Which of the following statements is true of the Bretton Woods agreement?
A) All countries agreed to fix the value of their currency in terms of gold under the agreement.
B) The system accepted the British pound as the official reference currency against gold.
C) The agreement established a floating system of monetary exchange.
D) Two multinational institutions, the World Economic Forum and WTO, were formed under the
agreement.
Answer: A
Explanation: The Bretton Woods agreement called for a system of fixed exchange rates that
would be policed by the IMF. Under the agreement, all countries were to fix the value of their
currency in terms of gold but were not required to exchange their currencies for gold.
Difficulty: 2 Medium
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-02 Explain the role played by the World Bank and the IMF in the
international monetary system.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
21
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
49) The World Bank was established at the at Bretton Woods conference to
A) establish an international monetary system.
B) promote general economic development.
C) establish the gold standard across the world.
D) fund the initiatives of the United Nations.
Answer: B
Explanation: The agreement reached at Bretton Woods established the World Bank. The task of
the World Bank was to promote general economic development.
Difficulty: 1 Easy
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-02 Explain the role played by the World Bank and the IMF in the
international monetary system.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
50) Identify the currency that was convertible to gold under the Bretton Woods system.
A) pound
B) yen
C) euro
D) dollar
Answer: D
Explanation: Under the Bretton Woods agreement, all countries were to fix the value of their
currency in terms of gold but were not required to exchange their currencies for gold. Only the
dollar remained convertible into gold.
Difficulty: 1 Easy
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-02 Explain the role played by the World Bank and the IMF in the
international monetary system.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
22
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
51) What will happen if a country increases its money supply rapidly under a fixed exchange rate
regime?
A) Imports will become less attractive in that country.
B) The country will face negative inflation.
C) The trade deficit would widen in that country.
D) The country's products will become more attractive in world markets.
Answer: C
Explanation: A fixed exchange rate regime imposes monetary discipline on countries and curtails
price inflation. For example, if a country increases its money supply by printing more currency, the
increase in money supply would lead to price inflation. Given fixed exchange rates, inflation
would make the country's goods uncompetitive in world markets, while the prices of imports
would become more attractive in that country. The result would be a widening trade deficit in the
country, with the country importing more than it exports.
Difficulty: 2 Medium
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-02 Explain the role played by the World Bank and the IMF in the
international monetary system.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
52) Which of the following is a disadvantage of using a rigid policy of fixed exchange rates?
A) It is likely to create high unemployment in some cases.
B) It will lead to inflationary economies across the world.
C) It is likely to bring about trade wars between nations.
D) It will instigate competitive devaluations and intense competition.
Answer: A
Explanation: A rigid policy of fixed exchange rates would be too inflexible. In some cases, a
country's attempts to reduce its money supply growth and correct a persistent balance-of-payments
deficit could force the country into recession and create high unemployment.
Difficulty: 2 Medium
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-02 Explain the role played by the World Bank and the IMF in the
international monetary system.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
23
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
53) What was the World Bank's initial mission?
A) implementing a rigid fixed exchange rate regime
B) promoting the gold standard across the world
C) providing low-interest loans to help finance the building of Europe's economy
D) implementing a flexible fixed exchange rate regime
Answer: C
Explanation: The World Bank was established to reconstruct the war-torn economies of Europe
after World War II by providing low-interest loans.
Difficulty: 2 Medium
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-02 Explain the role played by the World Bank and the IMF in the
international monetary system.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
54) Which of the following arguments is in favor of floating exchange rates?
A) A country's ability to expand or contract its money supply should be limited by the need to
maintain exchange rate parity.
B) Maintaining balance of trade equilibrium is not in the best interest of a country.
C) Countries can isolate themselves from uncertainties when they trade using a mutually agreed on
exchange rate.
D) Governments can restore monetary control by removing the obligation to maintain exchange
rate parity.
Answer: D
Explanation: Advocates of a floating exchange rate regime argue that removal of the obligation
to maintain exchange rate parity would restore monetary control to a government. If a government
faced with unemployment wanted to increase its money supply to stimulate domestic demand and
reduce unemployment, it could do so unencumbered by the need to maintain its exchange rate.
Difficulty: 2 Medium
Topic: Fixed versus Floating Exchange Rate Systems
Learning Objective: 11-03 Compare and contrast the differences between a fixed and a floating
exchange rate system.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
24
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
55) Advocates of a ________ argue that removal of the obligation to maintain exchange rate parity
would restore monetary control to a government.
A) fixed exchange rate regime
B) dirty-float system
C) floating exchange rate regime
D) pegged exchange rate regime
Answer: C
Explanation: Advocates of a floating exchange rate regime argue that removal of the obligation
to maintain exchange rate parity would restore monetary control to a government.
Difficulty: 2 Medium
Topic: Fixed versus Floating Exchange Rate Systems
Learning Objective: 11-03 Compare and contrast the differences between a fixed and a floating
exchange rate system.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
56) The monetary autonomy argument is supported by the advocates of
A) a dirty-float system.
B) fixed exchange rates.
C) pegged exchange rates.
D) floating exchange rates.
Answer: D
Explanation: Advocates of floating rates argue that each country should be allowed to choose its
own inflation rate. This is called the monetary autonomy argument. Advocates of fixed rates argue
against this.
Difficulty: 1 Easy
Topic: Fixed versus Floating Exchange Rate Systems
Learning Objective: 11-03 Compare and contrast the differences between a fixed and a floating
exchange rate system.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
25
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
57) Supporters of floating exchange rates
A) argue that floating rates help adjust trade imbalances.
B) argue that floating rates lead to a more stable world monetary system.
C) claim that trade deficits are determined by the balance between savings and investment in a
country.
D) claim that trade deficits are not determined by the external value of currency.
Answer: A
Explanation: Those in favor of floating exchange rates argue that floating rates help adjust trade
imbalances. Critics of floating rates claim that trade deficits are determined by the balance
between savings and investment in a country, not by the external value of its currency.
Difficulty: 2 Medium
Topic: Fixed versus Floating Exchange Rate Systems
Learning Objective: 11-03 Compare and contrast the differences between a fixed and a floating
exchange rate system.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
58) The monetary autonomy argument holds that
A) each country should be allowed to choose its own inflation rate.
B) inflation is beneficial to a country's economy and growth.
C) inflation is detrimental to a country's economy and growth.
D) countries should restrict inflation based on the global standards.
Answer: A
Explanation: Advocates of floating rates argue that each country should be allowed to choose its
own inflation rate. This is called the monetary autonomy argument.
Difficulty: 1 Easy
Topic: Fixed versus Floating Exchange Rate Systems
Learning Objective: 11-03 Compare and contrast the differences between a fixed and a floating
exchange rate system.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
26
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
59) Which of the following arguments is against the use of fixed exchange rates?
A) Monetary discipline is the most important determinant of a strong economy.
B) Each country has the freedom to choose its own inflation rate.
C) Market speculation can cause fluctuations in exchange rates.
D) Governments are likely to expand the monetary supply far too rapidly due to political pressures.
Answer: B
Explanation: Advocates of floating rates argue that each country should be allowed to choose its
own inflation rate. This is called the monetary autonomy argument.
Difficulty: 2 Medium
Topic: Fixed versus Floating Exchange Rate Systems
Learning Objective: 11-03 Compare and contrast the differences between a fixed and a floating
exchange rate system.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
60) Which of the following arguments strengthen the idea of floating exchange rates?
A) External agencies should not interfere in the monetary policies of a country.
B) Trade deficits can be corrected through changes in exchange rates.
C) Changes in exchange rates will not impact the trade balance in a country.
D) Governments should act in ways to minimize the uncertainty in monetary markets.
Answer: B
Explanation: The supporters of floating exchange rates argue that floating rates can correct trade
deficit by making a country's exports cheaper and its imports more expensive. They argue that
exchange rate depreciation should correct the trade deficit.
Difficulty: 2 Medium
Topic: Fixed versus Floating Exchange Rate Systems
Learning Objective: 11-03 Compare and contrast the differences between a fixed and a floating
exchange rate system.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
27
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
61) Which of the following is an exchange rate policy where the exchange rate is determined
completely by market forces?
A) managed float
B) fixed peg
C) free float
D) currency board
Answer: C
Explanation: Governments around the world pursue a number of different exchange rate policies.
One such policy is a pure "free float" where the exchange rate is determined by market forces.
Difficulty: 1 Easy
Topic: Different Exchange Rate Regimes
Learning Objective: 11-04 Identify exchange rate regimes used in the world today and why
countries adopt different exchange rate regimes.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
62) Which of the following is the exchange rate policy where the government intervenes in the
exchange rate system only in a limited way?
A) managed-float
B) fixed peg
C) free-float
D) currency board
Answer: A
Explanation: In a managed-float system governments intervene in only a limited way. About 23
percent of IMF's members use this system.
Difficulty: 1 Easy
Topic: Different Exchange Rate Regimes
Learning Objective: 11-04 Identify exchange rate regimes used in the world today and why
countries adopt different exchange rate regimes.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
28
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
63) Under a ________ exchange rate regime, a country will attach the value of its currency to that
of a major currency.
A) managed-float
B) pegged
C) free-float
D) currency board
Answer: B
Explanation: Under a pegged exchange rate regime, a country will attach the value of its currency
to that of a major currency so that, for example, as the U.S. dollar rises in value, its own currency
rises too.
Difficulty: 1 Easy
Topic: Different Exchange Rate Regimes
Learning Objective: 11-04 Identify exchange rate regimes used in the world today and why
countries adopt different exchange rate regimes.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
64) Which of the following statements is true of pegged exchange rates?
A) A pegged exchange rate allows a country's currency to be determined by market forces.
B) A pegged exchange rate weakens the monetary discipline of a country.
C) Pegged exchange rates are popular among many of the world's smaller nations.
D) Adopting a pegged exchange rate regime increases inflationary pressures in a country.
Answer: C
Explanation: Under a pegged exchange rate regime, a country will peg the value of its currency to
that of a major currency. Pegged exchange rates are popular among many of the world's smaller
nations.
Difficulty: 1 Easy
Topic: Different Exchange Rate Regimes
Learning Objective: 11-04 Identify exchange rate regimes used in the world today and why
countries adopt different exchange rate regimes.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
29
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
65) A country that introduces a currency board commits itself to converting its domestic currency
on demand into
A) another currency at a fixed exchange rate.
B) gold or silver at a fixed exchange rate.
C) gold or silver at a floating exchange rate.
D) another currency at a floating exchange rate.
Answer: A
Explanation: A country that introduces a currency board commits itself to converting its
domestic currency on demand into another currency at a fixed exchange rate. To make this
commitment credible, the currency board holds reserves of foreign currency equal at the fixed
exchange rate to at least 100 percent of the domestic currency issued.
Difficulty: 1 Easy
Topic: Different Exchange Rate Regimes
Learning Objective: 11-04 Identify exchange rate regimes used in the world today and why
countries adopt different exchange rate regimes.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
66) Under a currency board system
A) inflation rates are maintained at a high level.
B) countries issue domestic notes at will.
C) interest rates remain constant.
D) the government lacks the ability to set interest rates.
Answer: D
Explanation: Under a currency board system, the government lacks the ability to set interest
rates. Interest rates in Hong Kong, for example, are effectively set by the U.S. Federal Reserve.
Difficulty: 1 Easy
Topic: Different Exchange Rate Regimes
Learning Objective: 11-04 Identify exchange rate regimes used in the world today and why
countries adopt different exchange rate regimes.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
30
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
67) Exchange rates are ________ under a pure "free float" system.
A) completely balanced
B) determined by market forces
C) wildly variable and unpredictable
D) determined by the government
Answer: B
Explanation: Under a pure "free float" system, exchange rates are determined by market forces.
Difficulty: 1 Easy
Topic: Different Exchange Rate Regimes
Learning Objective: 11-04 Identify exchange rate regimes used in the world today and why
countries adopt different exchange rate regimes.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
68) The great virtue claimed for a ________ is that it imposes monetary discipline on a country
and leads to low inflation.
A) fixed exchange rate
B) managed-float system
C) pegged exchange rate
D) floating exchange rate
Answer: C
Explanation: As with a full fixed exchange rate regime, the great virtue claimed for a pegged
exchange rate is that it imposes monetary discipline on a country and leads to low inflation.
Difficulty: 1 Easy
Topic: Different Exchange Rate Regimes
Learning Objective: 11-04 Identify exchange rate regimes used in the world today and why
countries adopt different exchange rate regimes.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
31
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
69) ________ limits the ability of the government to print money and, thereby, create inflationary
pressures.
A) A dirty-float system
B) A managed-float system
C) The European Monetary System
D) A currency board system
Answer: D
Explanation: The currency board can issue additional domestic notes and coins only when there
are foreign exchange reserves to back it. This limits the ability of the government to print money
and, thereby, create inflationary pressures.
Difficulty: 1 Easy
Topic: Different Exchange Rate Regimes
Learning Objective: 11-04 Identify exchange rate regimes used in the world today and why
countries adopt different exchange rate regimes.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
70) Currencies of countries with currency boards will become uncompetitive and overvalued if
A) local inflation rates remain higher than the inflation rate in the country to which the currency is
pegged.
B) the country to which the currency is pegged experiences a trade deficit.
C) local inflation rates are lower than the inflation rate in the country to which the currency is
pegged.
D) the country to which the currency is pegged experiences a trade surplus.
Answer: A
Explanation: If local inflation rates remain higher than the inflation rate in the country to which
the currency is pegged, the currencies of countries with currency boards can become
uncompetitive and overvalued.
Difficulty: 2 Medium
Topic: Different Exchange Rate Regimes
Learning Objective: 11-04 Identify exchange rate regimes used in the world today and why
countries adopt different exchange rate regimes.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
32
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
71) The International Monetary Fund has been criticized for exacerbating moral hazard
A) with its rescue programs.
B) by increasing the probability of debt default.
C) making loans to countries that are trying to reduce national debt by "playing the market."
D) by refusing to bail out banks that made loans to overleveraged Asian companies during the
1990s.
Answer: A
Explanation: Moral hazard arises when people behave recklessly because they know they will be
saved if things go wrong. The IMF has been criticized for exacerbating moral hazard with its
rescue programs. According to critics, many Japanese and Western banks made loans to
overleveraged Asian companies during the 1990s, and should now be forced to pay the price for
their actions. Instead, the IMF, through its rescue package, is reducing the probability of debt
default and effectively bailing out the banks.
Difficulty: 2 Medium
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-05 Understand the debate surrounding the role of the IMF in the
management of financial crises.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
72) A currency crisis occurs due to
A) the loss of confidence in a country's banking system.
B) heavy foreign debt obligations.
C) high levels of trade deficit.
D) a speculative attack on the exchange value.
Answer: D
Explanation: A currency crisis occurs when a speculative attack on the exchange value of a
currency results in a sharp depreciation in the value of the currency or forces authorities to expend
large volumes of international currency reserves and sharply increase interest rates to defend the
prevailing exchange rate.
Difficulty: 1 Easy
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-05 Understand the debate surrounding the role of the IMF in the
management of financial crises.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
33
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
73) Moral hazard arises when people behave recklessly because
A) of the restrictions that exist in a country's monetary policy.
B) of the restrictions the IMF has imposed on them.
C) they know they will be saved if things go wrong.
D) they face financial difficulties arising out of external factors.
Answer: C
Explanation: Moral hazard arises when people behave recklessly because they know they will be
saved if things go wrong.
Difficulty: 1 Easy
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-05 Understand the debate surrounding the role of the IMF in the
management of financial crises.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
74) Which of the following is a common criticism against the powerful International Monetary
Fund?
A) IMF lacks any real mechanism for accountability.
B) It is hesitant to help banks when they are in crisis.
C) IMF has not intervened to resolve the Asian crisis.
D) It did not try to resolve the Mexican currency crisis.
Answer: A
Explanation: One criticism of the IMF is that it has become too powerful for an institution that
lacks any real mechanism for accountability.
Difficulty: 1 Easy
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-05 Understand the debate surrounding the role of the IMF in the
management of financial crises.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
34
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
75) A ________ is a situation in which a country cannot service its foreign debt obligations.
A) currency crisis
B) banking crisis
C) foreign debt crisis
D) moral crisis
Answer: C
Explanation: A foreign debt crisis is a situation in which a country cannot service its foreign debt
obligations, whether private-sector or government debt.
Difficulty: 1 Easy
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-05 Understand the debate surrounding the role of the IMF in the
management of financial crises.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
76) Loans issued by the IMF
A) are conditional loans.
B) are unconditional loans.
C) include a macroeconomic policy that calls for lower interest rates.
D) include a macroeconomic policy that calls for increases in public spending to improve
infrastructure in a country.
Answer: A
Explanation: All IMF loan packages come with conditions attached. Until very recently, the IMF
has insisted on a combination of tight macroeconomic policies, including cuts in public spending,
higher interest rates, and tight monetary policy.
Difficulty: 2 Medium
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-05 Understand the debate surrounding the role of the IMF in the
management of financial crises.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
35
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
77) The Asian economic crisis and the global financial crisis of 2008–2009 were caused by
A) high inflation rates.
B) excessive debt.
C) low inflation rates.
D) a huge trade surplus.
Answer: B
Explanation: The Asian economic crisis and the global financial crisis of 2008–2009 were caused
not by high inflation rates, but by excessive debt.
Difficulty: 1 Easy
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-05 Understand the debate surrounding the role of the IMF in the
management of financial crises.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
78) Which of the following is a common underlying cause of financial crises?
A) a narrowing current account deficit
B) excessive expansion of domestic borrowing
C) low relative price inflation rates
D) asset price deflation
Answer: B
Explanation: A number of broad types of financial crises have occurred over the past 30 years,
many of which have required IMF involvement. These crises tend to have common underlying
macroeconomic causes: high relative price inflation rates, a widening current account deficit,
excessive expansion of domestic borrowing, high government deficits, and asset price inflation
(such as sharp increases in stock and property prices).
Difficulty: 1 Easy
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-05 Understand the debate surrounding the role of the IMF in the
management of financial crises.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
36
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
79) 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.
A) currency
B) banking
C) foreign debt
D) domestic debt
Answer: B
Explanation: A currency crisis occurs when a speculative attack on the exchange value of a
currency results in a sharp depreciation in the value of the currency or forces authorities to expend
large volumes of international currency reserves and sharply increase interest rates to defend the
prevailing exchange rate. In contrast, a banking 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. Finally,
a foreign debt crisis is a situation in which a country cannot service its foreign debt obligations,
whether private sector or government debt.
These crises tend to have common underlying macroeconomic causes: high relative price inflation
rates, a widening current account deficit, excessive expansion of domestic borrowing, and asset
price inflation (such as sharp increases in stock and property prices).
Difficulty: 1 Easy
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-05 Understand the debate surrounding the role of the IMF in the
management of financial crises.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
80) Which of the following observations is true of the current system of the foreign exchange
market?
A) Most of the currencies can be converted to gold in the current system of foreign exchange.
B) The current system is driven by fixed exchange rates.
C) Currencies float freely against others in the current system.
D) The current system is a combination of government intervention and speculative activity.
Answer: D
Explanation: The current system of foreign exchange is a mixed system in which a combination
of government intervention and speculative activity can drive the foreign exchange market.
Difficulty: 2 Medium
Topic: Currency Management and Business Strategy in the Global Monetary System
Learning Objective: 11-06 Explain the implications of the global monetary system for
management practice.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
37
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
81) Which of the following will help a company hedge against currency fluctuations?
A) finding a large supplier to supply all the raw materials
B) manufacturing raw materials in-house
C) basing business in a single country
D) dispersing production to different geographic locations
Answer: D
Explanation: Maintaining strategic flexibility can take the form of dispersing production to
different locations around the globe as a real hedge against currency fluctuations.
Difficulty: 2 Medium
Topic: Currency Management and Business Strategy in the Global Monetary System
Learning Objective: 11-06 Explain the implications of the global monetary system for
management practice.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
82) Contracting out manufacturing allows companies to reduce economic exposure because
A) multiple suppliers attract subsidies from government.
B) it reduces the pressure on them to maintain a trade surplus.
C) it allows companies to shift suppliers from country to country.
D) quality issues are insignificant when manufacturing is contracted to others.
Answer: C
Explanation: One way of building strategic flexibility and reducing economic exposure involves
contracting out manufacturing. This allows a company to shift suppliers from country to country in
response to changes in relative costs brought about by exchange rate movements.
Difficulty: 2 Medium
Topic: Currency Management and Business Strategy in the Global Monetary System
Learning Objective: 11-06 Explain the implications of the global monetary system for
management practice.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
38
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
83) Increasingly the ________ has been acting as macroeconomic police of the world economy,
insisting that countries seeking significant borrowings adopt certain macroeconomic policies.
A) Economic and Social Council (ECOSOC)
B) International Monetary Fund (IMF)
C) United Nations (UN)
D) World Bank
Answer: B
Explanation: Increasingly the IMF has been acting as macroeconomic police of the world
economy, insisting that countries seeking significant borrowings adopt IMF-mandated
macroeconomic policies.
Difficulty: 1 Easy
Topic: Currency Management and Business Strategy in the Global Monetary System
Learning Objective: 11-06 Explain the implications of the global monetary system for
management practice.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
84) Countries that require substantial loans from the International Monetary Fund to survive will
________ due to IMF-mandated economic policies.
A) benefit from a sharp expansion of demand in the long term
B) endure a sharp contraction of demand in the long term
C) benefit from a sharp expansion of demand in the short term
D) endure a sharp contraction of demand in the short term
Answer: D
Explanation: Increasingly, the IMF has been acting as the macroeconomic police of the world
economy, insisting that countries seeking significant borrowings adopt IMF-mandated
macroeconomic policies. These policies typically include anti-inflationary monetary policies and
reductions in government spending. In the short run, such policies usually result in a sharp
contraction of demand.
Difficulty: 2 Medium
Topic: Currency Management and Business Strategy in the Global Monetary System
Learning Objective: 11-06 Explain the implications of the global monetary system for
management practice.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
39
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
85) In the face of unpredictable movements in exchange rates, businesses should
A) pursue strategies that will reduce their economic exposure.
B) pursue strategies that will decrease their strategic flexibility.
C) pursue strategies that will reduce their foreign market exposure.
D) sell off investments in foreign subsidiaries and consolidate domestic facilities.
Answer: A
Explanation: It makes sense for businesses to pursue strategies that will increase their strategic
flexibility in the face of unpredictable exchange rate movements—that is, to pursue strategies that
reduce the economic exposure of the firm.
Difficulty: 2 Medium
Topic: Currency Management and Business Strategy in the Global Monetary System
Learning Objective: 11-06 Explain the implications of the global monetary system for
management practice.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
86) It is difficult if not impossible to get adequate insurance coverage for exchange rate changes
that
A) will occur in the next few weeks.
B) might occur in the next few months.
C) might occur several years in the future.
D) might occur in the coming days.
Answer: C
Explanation: It is difficult if not impossible to get adequate insurance coverage for exchange
rates that might occur several years in the future. The forward market tends to offer coverage for
exchange rate changes a few months—not years—ahead.
Difficulty: 1 Easy
Topic: Currency Management and Business Strategy in the Global Monetary System
Learning Objective: 11-06 Explain the implications of the global monetary system for
management practice.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
40
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
87) What is the international monetary system? What are the major trading currencies?
Answer: The international monetary system refers to the institutional arrangements that govern
exchange rates. The four major trading currencies are the U.S. dollar, the European Union's euro,
the Japanese yen, and the British pound.
Difficulty: 3 Hard
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Remember
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
41
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
88) Explain the events that led to the failure of the Bretton Woods system of fixed exchange rates.
Answer: The Bretton Woods system started to fall apart in the late 1960s and finally collapsed in
1973. The system fell apart because the U.S. dollar, which played a central role in the regime, was
being pressured to devalue. To finance both the Vietnam conflict and his welfare programs,
President Lyndon Johnson backed an increase in U.S. government spending that was not financed
by an increase in taxes. Instead, it was financed by an increase in the money supply, which led to a
rise in price inflation from less than 4 percent in 1966 to close to 9 percent by 1968. At the same
time, the rise in government spending had stimulated the economy. With more money in their
pockets, people spent more—particularly on imports—and the U.S. trade balance began to
deteriorate.
The increase in inflation and the worsening of the U.S. foreign trade position gave rise to
speculation in the foreign exchange market that the dollar would be devalued. Things came to a
head in the spring of 1971 when U.S. trade figures showed that for the first time since 1945, the
United States was importing more than it was exporting.
President Richard Nixon announced in 1971 that the dollar was no longer convertible into gold,
and that a 10 percent tax on imports would remain in effect until U.S. trading partners agreed to
revalue their currencies against the dollar. Even after this move and a subsequent revaluation of
currencies relative to the dollar, speculation continued that the dollar would be further devalued
until at last, currencies were allowed to float, and the fixed exchange rate system ended. At that
time, the switch to a floating system was viewed as a temporary response to unmanageable
speculation in the foreign exchange market. But it is now more than 40 years since the Bretton
Woods system of fixed exchange rates collapsed, and the temporary solution looks permanent.
Difficulty: 3 Hard
Topic: The History of the Global Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
42
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
89) Discuss the significance of the Jamaica Agreement.
Answer: The 1976 Jamaica Agreement formalized the floating exchange rate regime that
followed the collapse of Bretton Woods. The agreement established the rules for the international
monetary system that are in place today. Under the agreement, floating rates were declared to be
acceptable, gold was abandoned as a reserve asset, and total annual IMF quotas were increased.
Under the Jamaica Agreement, the IMF continued in its role of helping countries cope with
macroeconomic and exchange rate problems.
Difficulty: 3 Hard
Topic: The History of the Global Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
90) Compare and contrast a pegged exchange system with a dirty-float system of exchange rates.
Answer: A pegged exchange rate means the value of the currency is fixed relative to a reference
currency, such as the U.S. dollar, and then the exchange rate between that currency and other
currencies is determined by the reference currency exchange rate. Some countries, while not
adopting a formal pegged rate, try to hold the value of their currency within some range against an
important reference currency such as the U.S. dollar, or a "basket" of currencies. This is referred to
as a managed-float system or a dirty-float system. It is a float because, in theory, the value of the
currency is determined by market forces, but it is a managed (or dirty) float (as opposed to a clean
float) because the central bank of a country will intervene in the foreign exchange market to try to
maintain the value of its currency if it depreciates too rapidly against an important reference
currency.
Difficulty: 3 Hard
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
43
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
91) What is the gold standard? What was the major advantage of the system?
Answer: Pegging currencies to gold and guaranteeing convertibility is known as the gold
standard. By 1880, most of the world's major trading nations, including Great Britain, Germany,
Japan, and the United States, had adopted the gold standard. Because each currency was linked to
gold under the system, it was easy to determine the value of any currency in units of any other
currency (the exchange rate).
The great strength claimed for the gold standard was that it contained a powerful mechanism for
achieving balance-of-trade equilibrium by all countries.
Difficulty: 3 Hard
Topic: The History of the Global Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
92) With the help of an example, explain how balance-of-trade equilibrium is maintained under the
gold standard.
Answer: A country is in balance-of-trade equilibrium when the income its residents earn from
exports is equal to the money its residents pay to other countries for imports (the current account of
its balance of payments is in balance). Under the gold standard, when Japan has a trade surplus,
there will be a net flow of gold from the United States to Japan. These gold flows automatically
reduce the U.S. money supply and swell Japan's money supply. An increase in money supply will
raise prices in Japan, while a decrease in the U.S. money supply will push U.S. prices downward.
The rise in the price of Japanese goods will decrease demand for these goods, while the fall in the
prices of U.S. goods will increase demand for these goods. Thus, Japan will start to buy more from
the United States, and the United States will buy less from Japan, until a balance-of-trade
equilibrium is achieved.
Examples will vary.
Difficulty: 3 Hard
Topic: The History of the Global Monetary System
Learning Objective: 11-01 Describe the historical development of the modern global monetary
system.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
44
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
93) What is the Bretton Woods agreement? How was it different from the gold standard?
Answer: The Bretton Woods agreement, signed in 1944, called for a system of fixed exchange
rates whereby countries would fix the value of their currency to gold. Unlike the gold standard,
countries were not required to exchange their currencies for gold. Instead, only the dollar remained
convertible to gold, and each country decided what its exchange rate relative to the dollar was to be
and then calculated the gold par value of the currency based on that selected dollar exchange rate.
All participating countries agreed to try to maintain the value of their currencies within 1 percent
of the par value by buying or selling currencies (or gold) as needed. Another aspect of the Bretton
Woods agreement was a commitment not to use devaluation as a weapon of competitive trade
policy.
Difficulty: 3 Hard
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-02 Explain the role played by the World Bank and the IMF in the
international monetary system.
Bloom's: Understand
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
94) Identify the multinational institutions that were established at the Bretton Woods agreement.
What were their roles in the international monetary system?
Answer: At the Bretton Woods meeting in 1944, two multinational institutions, the International
Monetary Fund (IMF) and the World Bank, were established. The IMF was established to
maintain order in the international monetary system. The IMF sought to achieve this goal through
a combination of discipline and flexibility. The World Bank, also known as the International Bank
for Reconstruction and Development, was established to help the war-torn economies of Europe
rebuild. However, the World Bank soon turned its attention to providing assistance to other
countries, particularly third world countries.
Difficulty: 3 Hard
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-02 Explain the role played by the World Bank and the IMF in the
international monetary system.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
45
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
95) Discuss the arguments that favor a floating exchange rate system against a fixed exchange rate
system.
Answer: There are three main elements in the case for supporting floating exchange rates:
monetary policy autonomy, automatic trade balance adjustments, and economic recovery
following a severe economic crisis. Under a fixed exchange rate system, a country's ability to
expand or contract its money supply is limited by the need to maintain exchange rate parity. Under
a floating exchange rate system, however, monetary control is restored to the government enabling
a government to pursue domestic policies that involve expanding or contracting the money supply
without worrying about maintaining exchange rate parity. Similarly, in a floating exchange rate
system a country can correct a trade imbalance through currency adjustments, a practice that is
impossible under a fixed rate system. Those in favor of floating exchange rates argue that floating
rates can assist with economic recovery after a crisis.
Difficulty: 3 Hard
Topic: Fixed versus Floating Exchange Rate Systems
Learning Objective: 11-03 Compare and contrast the differences between a fixed and a floating
exchange rate system.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
46
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
96) Present the common arguments that favor fixed exchange rates.
Answer: The case for fixed exchange rates revolves around arguments about monetary
discipline, speculation, uncertainty, and the lack of connection between the trade balance and
exchange rates. Supporters of a fixed exchange rate system suggest that the monetary discipline
required by a fixed exchange rate system allows a government to ignore political pressures that
might result in a rapid expansion of the money supply and high inflation.
Advocates of fixed exchange rates argue that the system limits the destabilizing effects of
speculation. Similarly, because the fixed rate system is more predictable, according to supporters,
international trade and investment will be encouraged. Finally, advocates of fixed exchange rates
suggest that trade deficits are determined by the balance between savings and investment in a
country, not by the external value of its currency. Therefore, the need for floating exchange rates to
correct trade imbalances is not valid.
The unpredictability of exchange rate movements in the post—Bretton Woods era has made
business planning difficult, and it adds risk to exporting, importing, and foreign investment
activities. Given a volatile exchange rate, international businesses do not know how to react to the
changes—and often they do not react. Why change plans for exporting, importing, or foreign
investment after a 6 percent fall in the dollar this month, when the dollar may rise 6 percent next
month? This uncertainty, according to the critics, dampens the growth of international trade and
investment. They argue that a fixed exchange rate, by eliminating such uncertainty, promotes the
growth of international trade and investment.
Those who favor fixed exchange rates argue that depreciation in a currency will lead to inflation
(due to the resulting increase in import prices). This inflation, they state, will wipe out any
apparent gains in cost competitiveness that arise from currency depreciation. In other words, a
depreciating exchange rate will not boost exports and reduce imports, as advocates of floating rates
claim; it will simply boost price inflation. In support of this argument, those who favor fixed rates
point out that the 40 percent drop in the value of the dollar between 1985 and 1988 did not correct
the U.S. trade deficit.
Difficulty: 3 Hard
Topic: Fixed versus Floating Exchange Rate Systems
Learning Objective: 11-03 Compare and contrast the differences between a fixed and a floating
exchange rate system.
Bloom's: Apply
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
47
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
97) Describe the different exchange rate policies that are in practice today.
Answer: Governments around the world pursue a number of different exchange rate policies.
These range from a pure "free float" where the exchange rate is determined by market forces to a
pegged system that has some aspects of the pre-1973 Bretton Woods system of fixed exchange
rates. Some 21 percent of the IMF's members allow their currency to float freely. Another 23
percent intervene in only a limited way (the so-called managed float). A further 5 percent of IMF
members now have no separate legal tender of their own. The remaining countries use more
inflexible systems, including a fixed peg arrangement (43 percent) under which they peg their
currencies to other currencies, such as the U.S. dollar or the euro, or to a basket of currencies.
Other countries have adopted a system under which their exchange rate is allowed to fluctuate
against other currencies within a target zone (an adjustable peg system).
Difficulty: 3 Hard
Topic: Different Exchange Rate Regimes
Learning Objective: 11-04 Identify exchange rate regimes used in the world today and why
countries adopt different exchange rate regimes.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
98) What is a currency board? Why do countries choose this type of system? What are the
disadvantages of this type of arrangement?
Answer: A country that introduces a currency board commits itself to converting its domestic
currency on demand into another currency at a fixed exchange rate. To make the commitment
credible, the currency board holds reserves of foreign currency equal at the fixed exchange rate to
at least 100 percent of the domestic currency issued. The system is attractive because it limits the
ability of the government to print money, and thereby create inflationary pressure. Under a strict
currency board, interest rates will adjust automatically. However, critics point out that if local
inflation rates remain higher than the inflation rate in the country to which the currency is pegged,
the currencies of countries with currency boards can become noncompetitive and overvalued.
Also, the system does not permit governments to set interest rates.
Difficulty: 3 Hard
Topic: Different Exchange Rate Regimes
Learning Objective: 11-04 Identify exchange rate regimes used in the world today and why
countries adopt different exchange rate regimes.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
48
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
99) Recent policies of the International Monetary Fund have drawn a lot of criticism. Discuss these
criticisms.
Answer: The IMF's policies designed to cool overheated economies by reining in inflation and
reducing government spending have been highly criticized. One criticism is that the IMF's
"one-size-fits-all" approach to macroeconomic policy is inappropriate for many countries. The
IMF has also been accused of intensifying moral hazard through its rescue packages. Finally, it has
been suggested that the IMF has become too powerful for an institution that lacks any real
mechanism for accountability.
Difficulty: 3 Hard
Topic: The Role of the World Bank and the International Monetary Fund in the International
Monetary System
Learning Objective: 11-05 Understand the debate surrounding the role of the IMF in the
management of financial crises.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
100) How can international companies reduce their economic exposure in a world of constantly
fluctuating exchange rates?
Answer: For companies operating in a world of volatile exchange rates, it is important to pursue
strategies that reduce the economic exposure of the firm. One way to maintain strategic flexibility
is to disperse production to different locations around the globe. This strategy allows companies to
hedge currency fluctuations. Companies can also build strategic flexibility by contracting out their
manufacturing. This strategy allows a company to shift suppliers from country to country in
response to changes in relative costs brought about by exchange rate movements. Finally,
companies should be aware of IMF macroeconomic policies that might affect their operations.
IMF policies often result in a sharp contraction in demand in the short run, and an expansion of
demand in the long run. Companies need to follow the IMF policies and adjust their strategies
accordingly.
Difficulty: 3 Hard
Topic: Currency Management and Business Strategy in the Global Monetary System
Learning Objective: 11-06 Explain the implications of the global monetary system for
management practice.
Bloom's: Apply
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
49
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
101) Do you think businesses can influence government policies? Explain your answer.
Answer: As major players in the international trade and investment environment, businesses can
influence government policy toward the international monetary system. For example, intense
government lobbying by U.S. exporters helped convince the U.S. government that intervention in
the foreign exchange market was necessary. With this in mind, business can and should use its
influence to promote an international monetary system that facilitates the growth of international
trade and investment.
Student answers will vary for this question.
Difficulty: 3 Hard
Topic: Currency Management and Business Strategy in the Global Monetary System
Learning Objective: 11-06 Explain the implications of the global monetary system for
management practice.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
50
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
International Business, 12e (Hill)
Chapter 12
The Global Capital Market
1) A capital market brings together those who want to invest money and those who want to borrow
money.
Answer: TRUE
Explanation: Capital markets bring together those who want to invest money and those who want
to borrow money.
Difficulty: 1 Easy
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
2) Debt loans include cash loans from banks and funds raised from the sale of corporate bonds to
investors.
Answer: TRUE
Explanation: A debt loan requires the corporation to repay a predetermined portion of the loan
amount (the sum of the principal plus the specified interest) at regular intervals regardless of how
much profit it is making. Debt loans include cash loans from banks and funds raised from the sale
of corporate bonds to investors.
Difficulty: 1 Easy
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
3) The cost of capital is the difference between cost of inputs and outputs.
Answer: FALSE
Explanation: The cost of capital is the price of borrowing money, which is the rate of return that
borrowers must pay investors. This is the interest rate on debt loans and the dividend yield and
expected capital gains on equity loans.
Difficulty: 1 Easy
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
1
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
4) By using the global capital market, investors have a much wider range of investment
opportunities than in a purely domestic capital market.
Answer: TRUE
Explanation: By using the global capital market, investors have a much wider range of
investment opportunities than in a purely domestic capital market.
Difficulty: 1 Easy
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
5) Investors can reduce the level of risk by diversifying a portfolio internationally.
Answer: TRUE
Explanation: A portfolio's risk declines as the investor increases the number of stocks in the
portfolio. By diversifying a portfolio internationally, an investor can reduce the level of risk even
further because the movements of stock market prices across countries are not perfectly correlated.
Difficulty: 1 Easy
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
6) The relatively low correlation between the movements of stock markets in different countries
indicates that countries face different economic conditions.
Answer: TRUE
Explanation: The relatively low correlation between the movements of stock markets in different
countries indicates that countries pursue different macroeconomic policies and face different
economic conditions.
Difficulty: 1 Easy
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
2
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
7) Using floating exchange rates will help countries reduce the risk of investing in foreign assets.
Answer: FALSE
Explanation: The risk-reducing effects of international portfolio diversification would be greater
were it not for the volatile exchange rates associated with the current floating exchange rate
regime. Floating exchange rates introduce an additional element of risk into investing in foreign
assets.
Difficulty: 2 Medium
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
8) Financial services is an information-intensive industry.
Answer: TRUE
Explanation: Financial services is an information-intensive industry. It draws on large volumes
of information about markets, risks, exchange rates, interest rates, creditworthiness, and so on.
Difficulty: 1 Easy
Topic: Growth of Global Capital Markets
Learning Objective: 12-02 Identify why the global capital market has grown so rapidly.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
9) The cost of recording, transmitting, and processing information has doubled with advancements
in technology since 1964.
Answer: FALSE
Explanation: According to one study, because of these technological developments, the real cost
of recording, transmitting, and processing information fell by 95 percent between 1964 and 1990.
It seems likely that the cost of recording, transmitting, and processing information has fallen by a
similar amount since 1990 and is now trivial.
Difficulty: 1 Easy
Topic: Growth of Global Capital Markets
Learning Objective: 12-02 Identify why the global capital market has grown so rapidly.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
3
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
10) Financial services has historically been the most tightly regulated of all industries.
Answer: TRUE
Explanation: In country after country, financial services has historically been the most tightly
regulated of all industries.
Difficulty: 1 Easy
Topic: Growth of Global Capital Markets
Learning Objective: 12-02 Identify why the global capital market has grown so rapidly.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
11) The Eurocurrency market has been one cause of a decrease in global financial regulations.
Answer: TRUE
Explanation: In part, this has been a response to the development of the Eurocurrency market,
which from the beginning was outside national control. Increasing acceptance of the free market
ideology associated with an individualistic political philosophy also has a lot to do with the global
trend toward the deregulation of financial markets.
Difficulty: 1 Easy
Topic: The Eurocurrency Market
Learning Objective: 12-02 Identify why the global capital market has grown so rapidly.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
12) The globalization of capital has been universally seen as a positive development.
Answer: FALSE
Explanation: While most commentators see the globalization of capital as a positive
development, some believe it holds inherent serious risks.
Difficulty: 1 Easy
Topic: Growth of Global Capital Markets
Learning Objective: 12-02 Identify why the global capital market has grown so rapidly.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
4
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
13) Economist Martin Feldstein has coined the term "hot money" to pertain to long-term capital
flows.
Answer: FALSE
Explanation: Harvard economist Martin Feldstein has argued that most of the capital that moves
internationally is pursuing temporary gains, and it shifts in and out of countries as quickly as
conditions change. He distinguishes between this short-term capital, or "hot money," and "patient
money" that would support long-term cross-border capital flows.
Difficulty: 1 Easy
Topic: Risks Associated with Global Capital Markets
Learning Objective: 12-03 Understand the risks associated with the globalization of capital
markets.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
14) The global capital market often lacks information about the fundamental quality of foreign
investments.
Answer: TRUE
Explanation: A lack of information about the fundamental quality of foreign investments may
encourage speculative flows in the global capital market. Faced with a lack of quality information,
investors may react to dramatic news events in foreign nations and pull their money out too
quickly.
Difficulty: 1 Easy
Topic: Risks Associated with Global Capital Markets
Learning Objective: 12-03 Understand the risks associated with the globalization of capital
markets.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
5
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
15) If the international capital market continues to grow, financial intermediaries likely will
provide less quality information about foreign investment opportunities.
Answer: FALSE
Explanation: Many investors have yet to venture into the world of cross-border investing, and
those that do are prone to reverse their decision on the basis of limited (and perhaps inaccurate)
information. However, if the international capital market continues to grow, financial
intermediaries likely will increasingly provide quality information about foreign investment
opportunities.
Difficulty: 1 Easy
Topic: Risks Associated with Global Capital Markets
Learning Objective: 12-03 Understand the risks associated with the globalization of capital
markets.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
16) Eurocurrency can be created anywhere in the world.
Answer: TRUE
Explanation: Eurocurrency can be created anywhere in the world. The persistent Euro- prefix
reflects the European origin of the market.
Difficulty: 1 Easy
Topic: The Eurocurrency Market
Learning Objective: 12-04 Compare and contrast the benefits and risks associated with the
Eurocurrency market, the global bond market, and the global equity market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
17) Banks charge borrowers a lower interest rate on Eurocurrency borrowings than for borrowings
in the home currency.
Answer: TRUE
Explanation: The Eurocurrency market lacks government regulation. The lack of regulation
allows banks to charge borrowers a lower interest rate for Eurocurrency borrowings than for
borrowings in the home currency.
Difficulty: 1 Easy
Topic: The Eurocurrency Market
Learning Objective: 12-04 Compare and contrast the benefits and risks associated with the
Eurocurrency market, the global bond market, and the global equity market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
6
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
18) The spread between the Eurocurrency deposit rate and the Eurocurrency lending rate is more
than the spread between the domestic deposit and lending rates.
Answer: FALSE
Explanation: Banks offer higher interest rates on Eurocurrency deposits than on deposits made in
the home currency. The lack of regulation also allows banks to charge borrowers a lower interest
rate for Eurocurrency borrowings than for borrowings in the home currency. This makes the
spread between the Eurocurrency deposit rate and the Eurocurrency lending rate less than the
spread between the domestic deposit and lending rates.
Difficulty: 2 Medium
Topic: The Eurocurrency Market
Learning Objective: 12-04 Compare and contrast the benefits and risks associated with the
Eurocurrency market, the global bond market, and the global equity market.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
19) Governments give banks less freedom when they deal in foreign currencies.
Answer: FALSE
Explanation: Banks are given much more freedom in their dealings in foreign currencies.
Difficulty: 1 Easy
Topic: The Eurocurrency Market
Learning Objective: 12-04 Compare and contrast the benefits and risks associated with the
Eurocurrency market, the global bond market, and the global equity market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
20) Depositors are not protected against bank failures in the Eurocurrency market.
Answer: TRUE
Explanation: When depositors use a regulated banking system, the probability of a bank failure
that would cause them to lose their deposits is very low. In an unregulated system such as the
Eurocurrency market, the probability of a bank failure that would cause depositors to lose their
money is greater (although, in absolute terms, still low).
Difficulty: 1 Easy
Topic: The Eurocurrency Market
Learning Objective: 12-04 Compare and contrast the benefits and risks associated with the
Eurocurrency market, the global bond market, and the global equity market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
7
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
21) Foreign bonds are sold within the borrower's country and are denominated in the currency of
the country in which they are issued.
Answer: FALSE
Explanation: Foreign bonds are sold outside of the borrower's country and are denominated in the
currency of the country in which they are issued.
Difficulty: 1 Easy
Topic: Currency Management and Business Strategy in the Global Monetary System
Learning Objective: 12-04 Compare and contrast the benefits and risks associated with the
Eurocurrency market, the global bond market, and the global equity market.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
22) Eurobonds are usually offered to residents of the country in whose currency they are
denominated.
Answer: FALSE
Explanation: Eurobonds are usually offered simultaneously in several national capital markets,
but neither in the capital market of the country, nor to residents of the country, in whose currency
they are denominated.
Difficulty: 1 Easy
Topic: The Eurocurrency Market
Learning Objective: 12-04 Compare and contrast the benefits and risks associated with the
Eurocurrency market, the global bond market, and the global equity market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
23) Government limitations are more severe for securities denominated in foreign currencies than
for domestic securities.
Answer: FALSE
Explanation: Government limitations are generally less stringent for securities denominated in
foreign currencies and sold to holders of those foreign currencies.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 12-04 Compare and contrast the benefits and risks associated with the
Eurocurrency market, the global bond market, and the global equity market.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
8
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
24) Eurobonds fall within the regulatory domain of the European Economic Community.
Answer: FALSE
Explanation: Eurobonds fall outside of the regulatory domain of any single nation. As such, they
can often be issued at a lower cost to the issuer.
Difficulty: 1 Easy
Topic: The Eurocurrency Market
Learning Objective: 12-04 Compare and contrast the benefits and risks associated with the
Eurocurrency market, the global bond market, and the global equity market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
25) Historically, regulatory barriers have made national equity markets work together.
Answer: FALSE
Explanation: Historically, substantial regulatory barriers separated national equity markets from
each other.
Difficulty: 1 Easy
Topic: Trade Policy and Government Intervention in International Trade
Learning Objective: 12-04 Compare and contrast the benefits and risks associated with the
Eurocurrency market, the global bond market, and the global equity market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
26) A Chinese firm borrows 1 million U.S. dollars from an American bank. The cost of this loan
will be less if the U.S. dollar appreciates against the Chinese currency.
Answer: FALSE
Explanation: Movements in foreign exchange rates can substantially increase the cost of foreign
currency loans. In this case, the value of the loan increases as the U.S. dollar appreciates.
Difficulty: 2 Medium
Topic: Foreign Exchange Risk and the Cost of Capital
Learning Objective: 12-05 Understand how foreign exchange risks affect the cost of capital.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
9
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
27) The forward exchange market does not provide adequate coverage for long-term borrowings.
Answer: TRUE
Explanation: Although using forward exchange markets may lower foreign exchange risk with
short-term borrowings, it cannot remove the risk. Most important, the forward exchange market
does not provide adequate coverage for long-term borrowings.
Difficulty: 1 Easy
Topic: Foreign Exchange Risk and the Cost of Capital
Learning Objective: 12-05 Understand how foreign exchange risks affect the cost of capital.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
28) Market makers are the financial service companies that connect investors and borrowers.
Those who want to borrow money typically include
A) governments.
B) corporations with surplus cash.
C) pension funds.
D) insurance companies.
Answer: A
Explanation: Market makers are the financial service companies that connect investors and
borrowers. Those who want to invest money include corporations with surplus cash, individuals,
and nonbank financial institutions. Those who want to borrow money include individuals,
companies, and governments.
Difficulty: 1 Easy
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
10
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
29) ________ perform a direct connection function in capital markets.
A) Insurance brokers
B) Investment banks
C) Pension fund managers
D) Commercial banks
Answer: B
Explanation: Market makers are the financial service companies that connect investors and
borrowers. They include commercial banks and investment banks. Commercial banks perform an
indirect connection function.
Difficulty: 1 Easy
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
30) ________ requires a corporation to repay a predetermined portion of the loan amount at
regular intervals regardless of how much profit it is making.
A) An equity loan
B) A stock loan
C) A debt loan
D) A bonded loan
Answer: C
Explanation: A debt loan requires the corporation to repay a predetermined portion of the loan
amount (the sum of the principal plus the specified interest) at regular intervals regardless of how
much profit it is making.
Difficulty: 1 Easy
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
11
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
31) The liquidity of the market is ________ in a purely domestic capital market.
A) held in reserves
B) unlimited
C) based upon the stock market
D) limited
Answer: D
Explanation: In a purely domestic capital market, the pool of investors is limited to residents of
the country. This places an upper limit on the supply of funds available to borrowers. In other
words, the liquidity of the market is limited.
Difficulty: 2 Medium
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
32) The cost of capital is
A) higher in a purely domestic capital market than in a global market.
B) lower in a domestic capital market than in an international market.
C) higher in a global market than in a purely domestic capital market.
D) the same in either a global market or a purely domestic capital market.
Answer: A
Explanation: One of the drawbacks of the limited liquidity of a purely domestic capital market is
that the cost of capital tends to be higher than it is in a global market.
Difficulty: 2 Medium
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
12
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
33) The risk associated with a portfolio
A) declines exponentially as the number of stocks purchased increases and continues to decline
until a point of zero risk is reached.
B) decreases as the investor increases the number of stocks in her portfolio.
C) grows exponentially with the number of stocks purchased.
D) increases as the investor increases the number of stocks in her portfolio.
Answer: B
Explanation: As an investor increases the number of stocks in her portfolio, the portfolio's risk
declines. At first this decline is rapid. Soon, however, the rate of decline falls off and
asymptotically approaches the systematic risk of the market.
Difficulty: 2 Medium
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
34) The systematic risk of the stock market is the
A) movement in a stock portfolio's value that is attributable to the individual selections made for
that portfolio.
B) level of diversifiable risk in an economy.
C) movement of the economy of a country.
D) level of nondiversifiable risk in an economy.
Answer: D
Explanation: Systematic risk refers to movements in a stock portfolio's value that are attributable
to macroeconomic forces affecting all firms in an economy, rather than factors specific to an
individual firm. The systematic risk is the level of nondiversifiable risk in an economy.
Difficulty: 1 Easy
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
13
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
35) A ________ brings together those who want to invest money and those who want to borrow
money.
A) consumer market
B) value chain
C) supply chain
D) capital market
Answer: D
Explanation: Capital markets bring together those who want to invest money and those who want
to borrow money. Those who want to invest money include corporations with surplus cash,
individuals, and nonbank financial institutions. Those who want to borrow money include
individuals, companies, and governments.
Difficulty: 1 Easy
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
36) Market makers are
A) financial service companies that connect investors and borrowers.
B) nonbank financial institutions who want to invest money.
C) high net worth individuals with surplus cash to reinvest.
D) those who want to borrow money including individuals, companies, and governments.
Answer: A
Explanation: Market makers are the financial service companies that connect investors and
borrowers, either directly or indirectly.
Difficulty: 1 Easy
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
14
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
37) Which of the following statements is true of market makers?
A) Commercial banks are not allowed to function as market makers.
B) Market makers are large investors who drive an economy.
C) Market makers facilitate only equity-based loans.
D) Market makers connect investors and borrowers in a capital market.
Answer: D
Explanation: Market makers are the financial service companies that connect investors and
borrowers, either directly or indirectly.
Difficulty: 1 Easy
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
38) An equity loan is made when
A) a corporation pledge equities or other assets to borrow money.
B) corporations avail cash loans from individuals.
C) a corporation sells stock to investors.
D) corporations issue bonds to individual investors.
Answer: C
Explanation: An equity loan is made when a corporation sells stock to investors. The money the
corporation receives in return for its stock can be used to purchase plants and equipment, fund
R&D projects, pay wages, and so on.
Difficulty: 1 Easy
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
15
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
39) Which of the following statements is true of debt loans?
A) Management has the discretion in paying the amount to investors.
B) Debt loans should be repaid at regular intervals.
C) Returns from debt loans are variable in nature.
D) Corporations need not pay back the debt loans if they incur losses.
Answer: B
Explanation: A debt loan requires the corporation to repay a predetermined portion of the loan
amount (the sum of the principal plus the specified interest) at regular intervals regardless of how
much profit it is making.
Difficulty: 1 Easy
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
40) When an investor purchases a corporate bond, he purchases the right to receive a
A) share of the overall revenues that the company generates.
B) part of the title for the assets that the corporate holds.
C) specified fixed stream of income from the corporation.
D) share of the profits that the company generates through operations.
Answer: C
Explanation: When an investor purchases a corporate bond, he purchases the right to receive a
specified fixed stream of income from the corporation for a specified number of years (i.e., until
the bond maturity date).
Difficulty: 1 Easy
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
16
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
41) An important drawback of a purely domestic capital market is that the
A) investment does not receive protection from governments.
B) investments are riskier than in global capital markets.
C) market lacks a strong regulatory mechanism.
D) cost of capital tends to be higher than it is in a global market.
Answer: D
Explanation: Perhaps the most important drawback of the limited liquidity of a purely domestic
capital market is that the cost of capital tends to be higher than it is in a global market.
Difficulty: 1 Easy
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
42) A purely domestic capital market faces the problem of
A) foreign exchange risk.
B) limited liquidity.
C) lack of regulation.
D) deregulated markets.
Answer: B
Explanation: In a purely domestic capital market, the pool of investors is limited to residents of
the country. This places an upper limit on the supply of funds available to borrowers. In other
words, the liquidity of the market is limited.
Difficulty: 2 Medium
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
17
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
43) The cost of capital is the
A) interest received on investments made by the company.
B) price of borrowing money.
C) difference between cost of inputs and outputs.
D) total value of raw materials that a company uses.
Answer: B
Explanation: The cost of capital is the price of borrowing money, which is the rate of return that
borrowers must pay investors. This is the interest rate on debt loans and the dividend yield and
expected capital gains on equity loans.
Difficulty: 1 Easy
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
44) As investors increase the number of stocks in their portfolio, the portfolio's risk
A) increases initially and declines later.
B) declines slowly and steadily.
C) increases exponentially.
D) declines rapidly in the beginning.
Answer: D
Explanation: As an investor increases the number of stocks in her portfolio, the portfolio's risk
declines. At first this decline is rapid. Soon, however, the rate of decline falls off and
asymptotically approaches the systematic risk of the market.
Difficulty: 2 Medium
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
18
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
45) Systematic risk refers to movements in a stock portfolio's value that are
A) attributable to macroeconomic forces affecting an economy.
B) specific to the firm or individuals who invest in a portfolio.
C) attributable to factors pertaining to an individual firm.
D) specific to the company that facilitates the investment portfolio.
Answer: A
Explanation: Systematic risk refers to movements in a stock portfolio's value that are attributable
to macroeconomic forces affecting all firms in an economy, rather than factors specific to an
individual firm.
Difficulty: 1 Easy
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
46) The relatively low correlation between the movement of stock markets in different countries
indicates that
A) diversifying a portfolio will increase the risk of investing.
B) most countries face similar economic conditions.
C) countries pursue different macroeconomic policies.
D) most stock markets are highly segmented from each other.
Answer: C
Explanation: The relatively low correlation between the movement of stock markets in different
countries reflects that countries pursue different macroeconomic policies and face different
economic conditions. Also, some stock markets are still somewhat segmented from each other by
capital controls—that is, by restrictions on cross-border capital flows.
Difficulty: 2 Medium
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
19
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
47) The element of risk into investing in foreign assets is greater with ________ exchange rates.
A) floating
B) pegged
C) fixed
D) managed
Answer: A
Explanation: Floating exchange rates introduce an additional element of risk into investing in
foreign assets. Adverse exchange rate movements that floating rates create can transform
otherwise profitable investments into unprofitable investments.
Difficulty: 1 Easy
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
48) ________ is made when a corporation sells stock to investors.
A) A corporate bond sale
B) A debt loan
C) A Eurobond investment
D) An equity loan
Answer: D
Explanation: Capital market loans to corporations are either equity loans or debt loans. An equity
loan is made when a corporation sells stock to investors. The money the corporation receives in
return for its stock can be used to purchase plants and equipment, fund R&D projects, pay wages,
and so on.
Difficulty: 1 Easy
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
20
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
49) In ________, the limited pool of investors implies that borrowers must pay more to persuade
investors to lend them their money.
A) a purely domestic market
B) a mixed market
C) an international market
D) a purely Euro market
Answer: A
Explanation: In a purely domestic market, the limited pool of investors implies that borrowers
must pay more to persuade investors to lend them their money. The larger pool of investors in an
international market implies that borrowers will be able to pay less.
Difficulty: 1 Easy
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
50) Investors are able to reduce risks by diversifying an investment portfolio internationally, and
the risk reduction effects would be greater if not for
A) volatile exchange rates associated with the current floating exchange risk regime.
B) the different kinds of tax regimes in different countries.
C) the inaccessibility of foreign stock exchanges to most investors.
D) the poor quality of many stocks in international start-up firms.
Answer: A
Explanation: Investors are able to reduce risks by diversifying an investment portfolio
internationally, and the risk reduction effects would be greater if not for volatile exchange rates
associated with the current floating exchange risk regime.
Difficulty: 2 Medium
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
21
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
51) A ________ market benefits investors by providing a wider range of investment opportunities,
thereby allowing them to build portfolios of international investments that diversify their risks.
A) foreign exchange
B) global capital
C) domestic exchange
D) domestic capital
Answer: B
Explanation: A global capital market benefits investors by providing a wider range of investment
opportunities, thereby allowing them to build portfolios of international investments that diversify
their risks. Investors can diversify their portfolios internationally, thereby reducing their risk to
below what could be achieved in a purely domestic capital market.
Difficulty: 1 Easy
Topic: Benefits of the Global Capital Market
Learning Objective: 12-01 Describe the benefits of the global capital market.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
52) Which of the following statements is true of the use of information technology in financial
services?
A) Information technology prevents the spread of financial crises.
B) Financial services are an information-intensive industry.
C) Financial services do not use decision-making systems.
D) It does not require the processing of large volumes of information.
Answer: B
Explanation: Financial services are an information-intensive industry. It draws on large volumes
of information about markets, risks, exchange rates, interest rates, creditworthiness, and so on.
Difficulty: 2 Medium
Topic: Growth of Global Capital Markets
Learning Objective: 12-02 Identify why the global capital market has grown so rapidly.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
22
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
53) What is a disadvantage of the integration of the international capital market facilitated by
technology?
A) Segregated international capital markets will emerge as a result of technology.
B) Complexity in processing large volumes of data will increase.
C) Shocks that occur in one financial center will spread globally.
D) Systems integration hinders real-time data transfer across different countries.
Answer: C
Explanation: The integration facilitated by technology has a dark side. Shocks that occur in one
financial center now spread around the globe very quickly.
Difficulty: 2 Medium
Topic: Growth of Global Capital Markets
Learning Objective: 12-02 Identify why the global capital market has grown so rapidly.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
54) Hedge funds position themselves to make ________ bets on assets that they think will
________.
A) long; weather a volatile market
B) long; increase in value
C) short; weather a volatile market
D) short; increase in value
Answer: B
Explanation: Hedge funds are private investment funds that position themselves to make "long
bets" on assets that they think will increase in value and "short bets" on assets that they think will
decline in value.
Difficulty: 2 Medium
Topic: Growth of Global Capital Markets
Learning Objective: 12-02 Identify why the global capital market has grown so rapidly.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
23
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
55) Which of the following statements is true of the deregulation of the financial industry?
A) Countries can strengthen the global capital market by encouraging strict regulations.
B) Financial services have historically been the most deregulated of all industries.
C) Deregulation helped the development of an international capital market.
D) Deregulation compels financial services companies to remain as domestic companies.
Answer: C
Explanation: Financial services companies across the world have transformed and are
increasingly deregulated. This has enabled financial services companies to shift from primarily
domestic companies into global operations with major offices around the world. Hence,
deregulation helped the development of a truly international capital market.
Difficulty: 2 Medium
Topic: Growth of Global Capital Markets
Learning Objective: 12-02 Identify why the global capital market has grown so rapidly.
Bloom's: Analyze
AACSB: Analytical Thinking
Accessibility: Keyboard Navigation
56) Hedge funds
A) are public investment funds that invest in corporate bonds and shares.
B) make long bets rather than short bets.
C) are investment funds managed by the government.
D) make short bets on assets that they think will decline in value.
Answer: D
Explanation: Hedge funds are private investment funds that position themselves to make "long
bets" on assets that they think will increase in value and "short bets" on assets that they think will
decline in value.
Difficulty: 1 Easy
Topic: Growth of Global Capital Markets
Learning Objective: 12-02 Identify why the global capital market has grown so rapidly.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
24
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
57) Analysts who believe globalization of capital has serious risks argue that
A) capital does not shift in and out of countries as quickly as conditions change.
B) individual nations are becoming more vulnerable to speculative capital flows.
C) deregulation of trade is helpful for the economic growth in a country.
D) most of the capital that moves internationally is pursuing long-term gains.
Answer: B
Explanation: Some analysts are concerned that due to deregulation and reduced controls on
cross-border capital flows, individual nations are becoming more vulnerable to speculative capital
flows. They see this as having a destabilizing effect on national economies.
Difficulty: 2 Medium
Topic: Risks Associated with Global Capital Markets
Learning Objective: 12-03 Understand the risks associated with the globalization of capital
markets.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
58) What is a disadvantage of the global capital market?
A) Foreign investments may be driven by speculative flows in the market.
B) A truly global market reduces the liquidity of investments.
C) The availability of capital is low in a global capital market.
D) The cost of capital is more in a global market than a domestic market.
Answer: A
Explanation: A lack of information about the fundamental quality of foreign investments may
encourage speculative flows in the global capital market. Faced with a lack of quality information,
investors may react to dramatic news events in foreign nations and pull their money out too
quickly.
Difficulty: 2 Medium
Topic: Risks Associated with Global Capital Markets
Learning Objective: 12-03 Understand the risks associated with the globalization of capital
markets.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
25
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
59) According to some analysts, deregulation and reduced controls on cross-border capital flows
are
A) having a stabilizing effect on national economies.
B) making individual nations more vulnerable to speculative capital flows.
C) making investors nervous and causing them to pull their money out of foreign nations.
D) allowing undeveloped nations to enter the global market.
Answer: B
Explanation: According to some analysts, deregulation and reduced controls on cross-border
capital flows are making individual nations more vulnerable to speculative capital flows. This is
seen as having a destabilizing effect on national economies. The capital that moves internationally
may be pursuing temporary gains, and it shifts in and out of countries as quickly as conditions
change. A lack of information about the fundamental quality of foreign investments is often seen
as encouraging speculative flows in the global capital market. Faced with a lack of quality
information, investors may react to dramatic news events in foreign nations and pull their money
out too quickly. With better information about foreign assets, the global capital market would
work more efficiently and be less subject to short-term speculative capital flows.
Difficulty: 2 Medium
Topic: Benefits of the Global Capital Market
Learning Objective: 12-03 Understand the risks associated with the globalization of capital
markets.
Bloom's: Understand
AACSB: Reflective Thinking
Accessibility: Keyboard Navigation
26
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
60) Harvard economist Martin Feldstein argues that the lack of patient money is due to
A) the flood of information, due to the Internet, that investors receive about current events in other
countries.
B) money owners and managers preferring to keep their money "home."
C) the relative scarcity of information that investors have about foreign investments.
D) money owners and managers preferring to place their money in foreign investments.
Answer: C
Explanation: Harvard economist Martin Feldstein has argued that most of the capital that moves
internationally is pursuing temporary gains, and it shifts in and out of countries as quickly as
conditions change. He distinguishes between this short-term capital, or "hot money," and "patient
money" that would support long-term cross-border capital flows. To Feldstein, patient money is
still relatively rare, primarily because although capital is free to move internationally, its owners
and managers still prefer to keep most of it at home. Feldstein argues that the lack of patient money
is due to the relative paucity of information that investors have about foreign investments.
Difficulty: 2 Medium
Topic: Risks Associated with Global Capital Markets
Learning Objective: 12-03 Understand the risks associated with the globalization of capital
markets.
Bloom's: Apply
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
61) A Eurocurrency is any currency
A) banked outside of its country of origin.
B) that is traded in European countries.
C) that originates in European countries.
D) used to buy gold and related commodities.
Answer: A
Explanation: A Eurocurrency is any currency banked outside of its country of origin.
Eurodollars, which account for about two-thirds of all Eurocurrencies, are dollars banked outside
of the United States.
Difficulty: 1 Easy
Topic: The Eurocurrency Market
Learning Objective: 12-04 Compare and contrast the benefits and risks associated with the
Eurocurrency market, the global bond market, and the global equity market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
27
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
62) A Eurocurrency is
A) the currency used by the countries of the European Union.
B) the currency formerly used in many European countries before the formation of the European
Union and the institution of the euro.
C) any currency banked outside of its country of origin.
D) any currency banked within a European country.
Answer: C
Explanation: A Eurocurrency is any currency banked outside of its country of origin. The
Eurocurrency market has been an important and relatively low-cost source of funds for
international businesses.
Difficulty: 1 Easy
Topic: The Eurocurrency Market
Learning Objective: 12-04 Compare and contrast the benefits and risks associated with the
Eurocurrency market, the global bond market, and the global equity market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
63) The Eurocurrency market is attractive to both depositors and borrowers because
A) it allows fair trade within the European Union.
B) it has strong government regulations and safeguards.
C) of its commitment to economic growth in underdeveloped nations.
D) of its lack of government regulation.
Answer: D
Explanation: The main factor that makes the Eurocurrency market attractive to both depositors
and borrowers is its lack of government regulation.
Difficulty: 2 Medium
Topic: The Eurocurrency Market
Learning Objective: 12-04 Compare and contrast the benefits and risks associated with the
Eurocurrency market, the global bond market, and the global equity market.
Bloom's: Understand
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
28
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
64) ________ is characterized by a lack of government regulation.
A) The Eurocurrency market
B) A money market fund
C) The New Your Stock Exchange
D) A hedge fund
Answer: A
Explanation: The main factor that makes the Eurocurrency market attractive to both depositors
and borrowers is its lack of government regulation.
Difficulty: 1 Easy
Topic: The Eurocurrency Market
Learning Objective: 12-04 Compare and contrast the benefits and risks associated with the
Eurocurrency market, the global bond market, and the global equity market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
65) ________ deposits are regulated in all industrialized countries.
A) U.S. currency
B) Domestic currency
C) Foreign currency
D) Eurocurrency
Answer: B
Explanation: Domestic currency deposits are regulated in all industrialized countries. Such
regulations ensure that banks have enough liquid funds to satisfy demand if large numbers of
domestic depositors should suddenly decide to withdraw their money.
Difficulty: 1 Easy
Topic: The Eurocurrency Market
Learning Objective: 12-04 Compare and contrast the benefits and risks associated with the
Eurocurrency market, the global bond market, and the global equity market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
29
Copyright 2019 © McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior
written consent of McGraw-Hill Education.
66) Companies receive ________ when using the Eurocurrency market.
A) a lower interest rate on deposits and pay more for loans
B) tax incentives
C) a higher interest rate on deposits and pay less for loans
D) liquid asset reserve waiver
Answer: C
Explanation: There are strong financial motivations for companies to use the Eurocurrency
market. By doing so, they receive a higher interest rate on deposits and pay less for loans.
Difficulty: 1 Easy
Topic: The Eurocurrency Market
Learning Objective: 12-04 Compare and contrast the benefits and risks associated with the
Eurocurrency market, the global bond market, and the global equity market.
Bloom's: Remember
AACSB: Knowledge Application
Accessibility: Keyboard Navigation
67) Investors who purchase a fixed-rate bond receive
A) incremental payouts until the bonded money runs out.
B) cash payoffs only at maturity.
C) a full cash payoff on demand.
D) a fixed set of cash payoffs.
Answer: D
Explanation: The investor who purchases a fixed-rate bond receives a fixed set of cash payoffs.
Each year until the bond matures, the investor gets an interest payment and then at maturity he gets
back the face value of the bond.
Difficulty: 1 Easy
Topic: Currency Management and Business Strategy i