Global Business Environment CRT 6001
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Questions and Answers

What happens to the price of a currency when its supply decreases?

  • The price decreases.
  • The price fluctuates randomly.
  • The price remains the same.
  • The price increases. (correct)

    • Which of the following is NOT a reason for the demand for foreign currency?

  • Purchase of assets in a foreign country.
  • Importing goods and services.
  • Tourism activities.
  • Repayment of local debts. (correct)

    • What primarily drives the supply of foreign exchange?

  • Domestic investments.
  • Export of goods and services. (correct)
  • Import of goods and services.
  • Local tourism.

    • Which factor does NOT impact future exchange rate movements?

    <p>Government spending within the country.</p> Signup and view all the answers

    According to the law of one price, if two identical goods are priced differently in two different countries, what is likely to happen?

    <p>Arbitrage will occur as traders exploit the price difference.</p> Signup and view all the answers

    What does the law of one price assert regarding identical products sold in different countries?

    <p>They must sell for the same price when expressed in the same currency.</p> Signup and view all the answers

    According to purchasing power parity (PPP), what should be roughly equivalent in different countries?

    <p>The prices of a standard 'basket of goods'.</p> Signup and view all the answers

    Which factor does NOT impact future exchange rate movements?

    <p>A country’s weather patterns.</p> Signup and view all the answers

    What does the International Fisher Effect state about spot exchange rate changes?

    <p>It should change in an opposite direction to the interest rate difference.</p> Signup and view all the answers

    Which outcome is predicted by the purchasing power parity theory (PPP)?

    <p>Changes in relative prices will result in a change in exchange rates.</p> Signup and view all the answers

    What is the primary function of the foreign exchange market?

    <p>To buy and sell currencies</p> Signup and view all the answers

    How is the exchange rate defined?

    <p>The price of one currency in terms of another</p> Signup and view all the answers

    What term is used to describe a firm protecting itself against foreign exchange risk?

    <p>Hedging</p> Signup and view all the answers

    What is a spot exchange rate?

    <p>The rate at which currencies are instantaneously converted</p> Signup and view all the answers

    What is a forward exchange rate?

    <p>The agreed rate for exchanging currencies at a future date</p> Signup and view all the answers

    Which of the following is NOT a function of the foreign exchange market?

    <p>Providing loans to countries</p> Signup and view all the answers

    Which market operates 24 hours a day for currency trading?

    <p>Foreign Exchange Market</p> Signup and view all the answers

    What does the term 'currency swaps' refer to?

    <p>Agreements to exchange principal and interest in different currencies</p> Signup and view all the answers

    What does the gold standard ensure regarding a country's currency?

    <p>It is pegged to gold and guaranteed for convertibility.</p> Signup and view all the answers

    What was a significant reason for the decline of the gold standard by 1939?

    <p>Countries began devaluing their currencies.</p> Signup and view all the answers

    Which currency was directly convertible to gold under the Bretton Woods agreement?

    <p>U.S. Dollar</p> Signup and view all the answers

    What was the primary purpose of establishing the International Monetary Fund (IMF)?

    <p>To maintain order in the international monetary system.</p> Signup and view all the answers

    Which of the following describes a drawback of the gold standard?

    <p>Large demand for gold can strain reserves.</p> Signup and view all the answers

    What restriction was placed on countries regarding currency devaluation under the Bretton Woods system?

    <p>Countries could not devalue their currency by more than 10% without IMF approval.</p> Signup and view all the answers

    What was the main strength attributed to the gold standard?

    <p>It controls inflation and balances trade.</p> Signup and view all the answers

    Which event marked the end of the gold standard as a dominant monetary system?

    <p>The outbreak of World War I.</p> Signup and view all the answers

    What is one of the primary purposes of the World Bank?

    <p>To promote general economic development</p> Signup and view all the answers

    Which organization is known for addressing balance-of-payments deficits?

    <p>International Monetary Fund</p> Signup and view all the answers

    Under which scheme does the World Bank raise money through bond sales?

    <p>IBRD scheme</p> Signup and view all the answers

    What contributed to the collapse of the Bretton Woods system in the late 1960s?

    <p>High inflation and welfare financing</p> Signup and view all the answers

    Who is the President of the World Bank as noted in the content?

    <p>Ajay Banga</p> Signup and view all the answers

    What was a key feature of the International Monetary Fund's operations?

    <p>Imposing monetary discipline on countries</p> Signup and view all the answers

    Which factor put significant strain on the Bretton Woods system?

    <p>High trade deficits and printing of money by the U.S.</p> Signup and view all the answers

    What is the primary function of the International Development Association of the World Bank?

    <p>To offer assistance to developing countries</p> Signup and view all the answers

    Study Notes

    Global Business Environment Overview

    • The global monetary system consists of the foreign exchange market, international monetary system, and global capital markets.

    Foreign Exchange Market

    • A network of banks, brokers, and dealers that facilitates the buying and selling of currencies 24/7.
    • Currency conversion and insurance against foreign exchange risk are primary functions.

    Exchange Rate

    • The price at which one currency is exchanged for another.
    • Exchange rates can be quoted in direct or indirect formats.

    Insurance Against Foreign Exchange Risk

    • Companies hedge against foreign exchange risk by purchasing insurance within the forex market.

    Exchange Rate Market Mechanisms

    • Spot exchange rate: The current rate for currency conversion on a specific day.
    • Forward exchange rate: The agreed-upon rate for currency exchange at a future date.
    • Currency swaps facilitate the exchange of cash flows in different currencies.

    Demand for Foreign Currency

    • Key sources include import payments, tourism, unilateral transfers, foreign asset purchases, and speculation.

    Supply of Foreign Currency

    • Generated from exports, foreign investments, remittances, and speculative activities.

    Equilibrium Exchange Rate

    • Achieved when the supply of and demand for foreign currency balance each other.

    Currency Depreciation and Appreciation Factors

    • Influenced by a country's inflation rates, interest rates, and market psychology.

    Pricing and Exchange Rates

    • Law of One Price: Identical products in different countries must have the same price when expressed in the same currency.
    • Purchasing Power Parity (PPP) theory: A "basket of goods" should cost the same in different countries if markets are efficient.

    Inflation and Exchange Rates

    • Hyperinflation experiences impact how exchange rates adjust over time.

    International Fisher Effect

    • Indicates that exchange rate changes will be in the opposite direction to differences in nominal interest rates between two countries.

    Exchange Rate Systems

    • Types include Gold Standard, Fixed Exchange Rate, Floating Exchange Rate, and Managed Float.

    Gold Standard

    • A monetary system where currencies are pegged to gold, ensuring currency convertibility.
    • Strengths include inflation control, stability in value, and trade balance management.
    • System failed due to loss of confidence and demand for gold, leading to its collapse by 1939.

    Bretton Woods System

    • Established in 1944, set a fixed exchange rate system with currencies pegged to gold; only the U.S. dollar was directly convertible.
    • Instituted the International Monetary Fund (IMF) and the World Bank to maintain monetary stability and promote economic development.

    International Monetary Fund (IMF)

    • Aim: To prevent competitive devaluations and stabilize international trade.
    • Provides monetary discipline to member countries and support during balance-of-payments deficits.
    • Located in Washington, D.C., with membership of 189 countries.

    The World Bank

    • Focuses on economic development and poverty reduction by providing loans to developing nations.
    • Raises funds through bond sales (IBRD) and via the International Development Association.
    • Led by President Ajay Banga and headquartered in Washington, D.C.

    Collapse of Bretton Woods

    • The system faltered in the late 1960s due to inflation from U.S. welfare programs and the Vietnam War, leading to excessive money supply and trade deficits.

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    Description

    This quiz focuses on the Global Business Environment, specifically covering topics like the foreign exchange market, international monetary system, and global capital markets. Test your understanding of how these elements interact within the global economy.

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