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BA 178 Midterm Exam A
Summer 2007
Student: _____________________________________
Section: _____am _____pm
Instructions: Answer all of the questions in Part A, 2 questions in Part B, and 1 question each in Parts C and D.
One page of notes is allowed; no other materials may be used. Any instance of cheating will result in failure of
the exam.
Part A
Answer all the questions in this part selecting the best answer for each question. Write your answer on the
Scantron form. (2 points each, 40 points total)
1. 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 Monetary Fund
B. World Bank
C. United Nations
D. World Trade Organization
2. _________ argued that development should be assessed less by material output measures and more by the
capabilities and opportunities that people enjoy.
A. Adam Smith
B. Aristotle
C. Amartya Sen
D. John Dunning
3. Two major trends that have emerged since the late 1980s in the political economies of many of the world's
national states are
A. the wave of communist revolutions that have swept the world and the strong move away from free market
economies toward more centrally planned economies.
B. the wave of socialistic revolutions that have swept the world and the strong move away from free market
economies toward more centrally planned and mixed economies.
C. the wave of democratic revolutions across the world and the strong move away from centrally planned and
mixed economies toward more free market economies.
D. the wave of totalitarian revolutions across the world and the strong move away from centrally planned and
mixed economies toward more free market economies.
4. The U.S. has a highly skilled labor force and cutting edge technology. China has a relatively cheap labor
force. According to Ricardo, the U.S. should produce and export ________, while China should produce and
export _______.
A. textiles, oil
B. crawfish, jet aircraft
C. crawfish, oil
D. jet aircraft, textiles
5. Domestic demand, domestic rivalry, and factor endowments are factors in _______ theory of why nations
achieve success in particular industries.
A. Krugman's
B. Vernon's
C. Porter's
D. Bertham's
6. In practice, many countries have adopted neither a radical policy nor a free market policy toward FDI, but
instead a policy that can best be described as:
A. pragmatic nationalism
B. utilitarian nationalism
C. inward protectionism
D. utilitarian protectionism
7. In recent decades, tariff barriers have been _____ while non tariff barriers have been ______.
A. falling, rising
B. rising, falling
C. leveling, rising
D. falling, leveling
8. Advocates of strategic trade policy favor the use of __________ to help domestic firms achieve a dominant
position in those industries where economies of scale are important and the world market is not large enough to
profitably support more than a few firms (e.g. aerospace, semiconductors).
A. duties
B. tariffs
C. quotas
D. subsidies
9. If a company expects the ____ relative to the Japanese yen, the company might invest $10 million and
receive ¥1.2billion. ($1=¥120 now, $1=¥100 in 90 days)
A. dollar to appreciate
B. dollar to depreciate
C. the to be undervalued
D. the yen to be overvalued
10. Rates for currency exchange quoted for 30, 90, or 180 days into the future are referred to as _____.
A. forward exchange rates
B. foreign exchange quotes
C. united trade rates
D. generic exchange quotes
11. According to PPP, a country with _____ inflation will see its currency ________.
A. high, appreciate
B. high, depreciate
C. low, stabilize
D. stabilize, appreciate
12. When the dollar buys more euros on the spot market than the 30-day forward market, we say the dollars is
selling at a ______. Conversely, when the dollars buys fewer euros on the spot market than the 30-day forward
market, we say the dollar is selling at a ______.
A. premium; discount
B. handicap; bonus
C. discount; premium
D. subsidy; handicap
13. If the demand for dollars outstrips the supply of them and if the supply of Japanese yen is greater than the
demand for them, 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. Not enough information is provided to reach a conclusion
14. The __________ school 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 school
B. efficient market school
C. Fisher Effect
D. International Fisher Effect
15. _____ uses price and volume data to determine past trends, which are expected to continue into the future.
A. technical analysis
B. fundamental analysis
C. the Fisher Effect
D. the International Fisher Effect
16. A firm that attempts to collect foreign currency receivables early when a foreign currency is expected to
depreciate and pay foreign currency payables before they are due when a currency is expected to appreciate is
following a ______ strategy.
A. FIFO
B. LIFO
C. lead
D. lag
17. _______ is concerned with the long run effect of changes in exchange rates on future prices, sales, and
costs.
A. translation exposure
B. financial exposure
C. economic exposure
D. transaction exposure
18. When the central bank of a country intervenes in the foreign exchange market to try to maintain the value of
its currency if it depreciates too rapidly against an important reference currency, the country is said to be
following a ______ system.
A. pegged exchange rate
B. clean float
C. floating exchange rate
D. dirty float
19. The Bretton Woods agreement established the value of most currencies in terms of _____ was fixed for
long periods and was allowed to change only under a specific set of circumstances.
A. British pounds
B. Japanese yen
C. U.S. dollars
D. German deutsche marks
20. Under a ______ regime, countries are limited in their ability to use monetary policy to expand or contract
their economies.
A. managed float
B. dirty float
C. fixed exchange rate
D. floating exchange rate
Part B
Answer two of the three questions in this part (10 points each, 20 points total).
1. The current round of global trade talks under the auspices of the WTO is called the Doha Round. Discuss the
four major issues that the Doha Round is negotiating.
2. The environment has become the topic of much debate when it comes to globalization. Discuss why critics
of globalization are concerned about Foreign Direct Investment (FDI) as it pertains to the environment.
3. Do you think the Chinese currency (the yuan) is correctly priced against the U.S. dollar, the euro and the yen?
Justify your answer with sound economic arguments.
Part C
Answer one of the two questions in this part (15 points).
1. The article “Look Who’s Pumping Out Engineers” explains how Mexico is rapidly increasing its output of
graduates with engineering degrees. Why is the Mexican government pursuing this policy? What will be the
effect on the competitiveness of the Mexican economy do you think? Are there any downsides to this strategy?
2. Starbucks Corporation is rapidly expanding the number of stores it has in China as explained in the article
“Eyeing a Billion Tea Drinkers, Starbucks Pours It On In China.” Discuss the elements of the strategy that
Starbucks is pursuing to be achieve their goal of making this one of its largest national markets. Do you think
they will succeed?
Part D
Read the attached case and answer the following questions: (25 points)
1. What advantages does China have over India as an outsourcing hub?
2. What advantages does India have over China as an outsourcing hub?
3. What criteria are the most important for clients in selecting an outsourcing firm for business processes (BP)
and information technology (IT)?
4. How do you see the BP and IT outsourcing models evolving in the next five years? What types of services
may be outsourced that currently are not? What other countries might become competitors to India and China?
How will the existing dominant firms such as Wipro and Infosys need to change to keep growing?