International Finance Chapter 1

If furniture produced in China was exported to the U.S., what factor would likely increase the price of that furniture in the importing countries?

• China would impose export charges on furniture exported and those charges would be passed along to the importing countries.

• Importing countries would impose tariffs on the imported furniture and those tariffs be passed along by exporting companies to importing countries.

• Furniture from China would have to be transported in specially-designed ships to the U.S., so transportation costs would increase the price of the imported furniture in the U.S.

• Exporters in China would arbitrarily inflate the costs of production so that the importing countries would pay higher prices.

Answer explanation

Exporters in China may inflate production costs, leading to higher prices for importing countries. This choice highlights how pricing strategies can directly affect the cost of imported goods.

“Job-seeking immigration brings net economic benefits not only to the immigrants, but also to the receiving country overall.” But there are winners and losers within the receiving country. Who among the following can be considered as a winner within the receiving country?

• The workers who compete with the immigrants for jobs

• The government of the receiving country

• The consumers who buy the products that the immigrants help to produce

• None of these options are correct.

Answer explanation

Consumers benefit from job-seeking immigrants as they help produce goods and services, often leading to lower prices and greater variety. This makes consumers winners in the economic landscape created by immigration.

Which of following is most likely to happen when the Chinese yuan appreciates against the dollar?

• There will be a huge inflow of “hot money” to the U.S.

• The prices of Chinese goods in the U.S. will decline.

• The prices of American goods in the Chinese market will decline.

• The rate of inflation in China will increase.

Answer explanation

When the yuan appreciates, American goods become cheaper for Chinese consumers, leading to a decline in their prices in the Chinese market. This makes U.S. products more attractive, increasing their demand in China.

Since the late 1990s, to prevent the yuan from appreciating against the U.S. dollar, the Chinese central bank

• has been trying to hold euros and British pounds as foreign assets.

• has been buying dollars and selling yuan in the foreign exchange market.

• has purchased Chinese government bonds.

• has been selling foreign assets to replenish it dollar reserves.

Answer explanation

To prevent the yuan from appreciating against the U.S. dollar, the Chinese central bank has been buying dollars and selling yuan in the foreign exchange market, which helps maintain the yuan's value relative to the dollar.

The People's Bank of China continued to intervene in the foreign exchange market to prevent its currency from appreciating against the US dollar. Which of the following is the most probable consequence of this intervention by the central bank?

• The money supply in China will decline.

• The rate of inflation in China will increase.

• China’s exports will decline in the near future.

• China is likely to have a trade deficit with the United States.

Answer explanation

The People's Bank of China's intervention to prevent currency appreciation increases the money supply, leading to higher inflation. Thus, the most probable consequence is an increase in the rate of inflation in China.

_____ is considered to be the least mobile factor internationally.

• Labor

• Capital

• Entrepreneurship

• Land

Answer explanation

Land is considered the least mobile factor internationally because it is fixed in location and cannot be moved, unlike labor, capital, and entrepreneurship, which can be relocated more easily across borders.

Which of the following is NOT a tool of fiscal policy?

• Government spending

• Interest rate

• Subsidies to exports

• Taxation

Answer explanation

Interest rates are a tool of monetary policy, not fiscal policy. Fiscal policy involves government spending, taxation, and subsidies, which directly affect the economy's overall demand.

National sovereignty means that no one person or group is in charge of the international economy.

Under a fixed exchange rate system, the revaluation of the local currency against the dollar would result in an improvement in the country’s trade balance with the United States.

Monetary policies adopted by a country do not affect its trading partners as long as the partner countries use different currencies.