Deck 4: The Balance of Payments

Question 1

The purchases of goods and assets by domestic residents from foreign residents are ________ because they cause an outflow of foreign exchange.________ increase the demand for the foreign money in the foreign exchange market.

A) credit transactions
B) current account transactions
C) debit transactions
D) capital account transactions

Answer 1

C

Question 2

In a freely floating exchange rate system,if the capital account is running a deficit

A) the balance of payments must run a deficit.
B) the balance of payments must be zero.
C) the current account must run a surplus.
D) both B and C.

Answer 2

D

Question 3

A balance of trade deficit results in a current account

A) deficit.
B) surplus.
C) IMF intervention.
D) World Bank loan.

Answer 3

A

Question 4

In a freely floating exchange rate system,the sale of Japanese cars to the United States will be offset by which item on the US balance of payments?

A) a credit on the current account
B) a credit on the capital account
C) a debit on the trade account
D) A or B

Question 5

Persistent,large current account deficits are often associated with currency crises for floating rate currencies in which the currency with the crisis ________ substantially.

A) appreciates
B) devaluates
C) depreciates
D) revaluates

Question 6

The U.S.Department of Commerce breaks the total net change in U.S.assets abroad into transactions.Which one of the following options is not part of the three categories?

A) transactions in "U.S. official reserve assets"
B) transactions in "other U.S. governmental assets"
C) transactions in "U.S. private assets"
D) transactions in "other U.S. public assets"

Question 7

The sale of American computers to the Spanish government shows up as

A) a debit on the official reserves account.
B) a credit on the official reserves account.
C) a credit on the trade account.
D) a debit on the current account.

Question 8

Tourism would show up on the

A) merchandise account.
B) current account.
C) capital account.
D) A and C.

Question 9

When the yen is selling at a premium in the forward market,the euro price of the yen in the forward market €/¥ would be ________ the spot price of €/¥.

A) smaller than
B) the same as
C) approximately the same as
D) larger than

Question 10

All of the following are the reasons why Gross National Income does not equal Gross Domestic Product in an open economy EXCEPT:

A) the capital and labor used to produce the goods in the domestic country do not need to be owned by domestic residents.
B) the country may receive transfer payments from abroad or may give transfer payments to other countries.
C) the country may receive unilateral transfers (gifts and grants) from abroad or may give unilateral transfers to other countries.
D) the capital and labor owned by the country can be located and used to produce goods in different countries.

Question 11

The three major accounts of the ________ are the current account,the capital account and the official settlements account.

A) balance of payments
B) balance of trade
C) trade surplus
D) trade deficit

Question 12

The accounting statement that summarizes all the economic transactions between residents of the home country and residents of all other countries is called the

A) balance of trade.
B) current account balance.
C) balance of payments.
D) capital account balance.

Question 13

Into what subcategory in the current account do you find the export and import of education,insurance,consulting,telecommunications,royalties on films,etc?

A) unilateral current transfers, net
B) balance on goods and services
C) balance on current account
D) services

Question 14

In a freely floating exchange rate system,if the capital account surplus for the U.S.rises,what will most likely happen to the real value of the dollar?

A) It will decline.
B) It will rise.
C) There is no impact on the dollar.
D) The IMF will step in to adjust rising exchange rates.

Question 15

Purchases and sales of foreign assets by domestic residents would appear in the ________ account of the balance of payments.

A) current
B) capital
C) trade merchandise
D) official settlement

Question 16

As the real value of the dollar rises,the balance on the current account is likely to ________.

A) increase
B) decrease
C) stay the same
D) move with the capital account adjustments factor

Question 17

The Japanese current account surplus can best be attributed to

A) the high rate of Japanese domestic investment.
B) Japanese protectionism.
C) the high rate of Japanese savings.
D) government budget deficits.

Question 18

Every ________ can be considered to have a corresponding flow of foreign money associated with it,and this flow of foreign money is recorded as a ________.

A) credit transaction
B) current account transaction
C) debit transaction
D) capital account transaction

Question 19

The purchases of goods and assets by foreign residents from domestic residents are ________ because they are a source of foreign exchange.________ increase the supply of foreign money in the foreign exchange market.

A) credit transactions
B) current account transactions
C) debit transactions
D) capital account transactions

Question 20

What is the subcategory in the current account that indicates that the government of a country and other residents gave more money to foreign countries and residents as gifts and grants than the country itself received from abroad?

A) unilateral current transfers, net
B) balance on goods and services
C) balance on current account
D) services

Question 21

Give an example of how the balance of payments provides information concerning exchange rate determination?

Question 22

If a U.S.non-profit makes a large gift to an Israeli agency,how is it handled in the balance of payments?

Question 23

In order to reduce its current account deficit,the United States must do which of the following?

A) reduce the federal budget deficit
B) raise national product relative to national spending
C) increase savings relative to domestic investment
D) all of the above

Question 24

A nation that is running a savings deficit

A) must spend more than it produces.
B) will invest domestically more than it saves.
C) must have a net capital outflow.
D) A and B only.

Question 25

What does it mean for a country to experience a capital inflow? Is this associated with a surplus or a deficit on the country's capital account?

Question 26

The most likely way for the Japanese to reduce a trade surplus is to

A) revalue the Japanese yen.
B) impose quotas on imports from Japan.
C) boost Japanese savings.
D) boost Japanese consumption abroad.

Question 27

Explain the double-entry system of the balance of payments.

Question 28

During the 1990s the countries of Mexico and Argentina went from economic paupers with huge foreign debts (capital account deficits)to countries posting strong economic growth and welcoming foreign investment.What would you expect these changes to do to their current account balances?

Question 29

What represents a credit to the investment income account of the balance of payments?

Question 30

If a nation's income exceeds its spending,then

A) savings will exceed domestic investment.
B) the nation must run a current account surplus.
C) the nation must run a capital account deficit.
D) all of the above.

Question 31

Suppose the U.S.imposes import restrictions on Japanese cars.What is likely to happen to the U.S.current-account deficit?

Question 32

Suppose Lufthansa buys 10 Boeing 747s for $150 million in 1991,financed by a five year loan from the US Export Import Bank.There is a one-year grace period on principal and interest payments.The net impact of this sale in 1991 is

A) a $150 million reduction in the U.S. trade deficit.
B) a $150 million reduction in the U.S. capital account surplus.
C) zero change in the U.S. balance of payments in 1991.
D) all of the above.