Deck 15: Balance of Payments and Exchange Rates

Question 1

When the sum of the balance on current account and the balance on capital and financial accounts are not zero, there is a:

A) trade surplus in the balance of payments
B) net error and omissions entry in the balance of payments
C) balance of payments surplus
D) trade deficit in the balance of payments

Answer 1

B

Question 2

Under a system of floating exchange rates, if the quantity of dollars demanded exceeds the quantity of dollars supplied:

A) the price of a dollar will not change
B) the price of a dollar will increase
C) the price of a dollar will decrease
D) the government will always increase the supply of money to eliminate this excess demand

Answer 2

B

Question 3

The record of a country's transactions in goods, services, and assets with the rest of the world is its:

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

Answer 3

B

Question 4

Which of the following is an item in Australia's financial account?

A) net transfer payments
B) net export of services
C) a change in the Reserve Bank's foreign currency reserves
D) net investment income

Question 5

If the European Central Bank raises interest rates in the Euro Zone area, then:

A) the Euro will appreciate and other currencies will depreciate
B) the Euro will depreciate and other currencies will appreciate
C) the Euro will depreciate and other currencies will also depreciate
D) the Euro will appreciate and other currencies will also appreciate

Question 6

If the inflation rate falls in Australia relative to the inflation rate in the United Kingdom, this will cause:

A) an increase in the demand for dollars and an increase in the supply of dollars
B) an increase in the demand for dollars and a decrease in the supply of dollars
C) a decrease in the demand for dollars and a decrease in the supply of dollars
D) a decrease in the demand for dollars and an increase in the supply of dollars

Question 7

Under a system of floating exchange rates, an excess supply of a currency will lead to:

A) a long- term shortage of that currency
B) a depreciation of that currency
C) an appreciation of that currency
D) a long- term surplus of that currency

Question 8

An Australian citizen buys stock in a Japanese company. This will be entered as a:

A) credit in Australia's financial account
B) debit in Australia's financial account
C) debit in Australia's current account
D) credit in Australia's current account

Question 9

Under a system of floating exchange rates, there is a general tendency for:

A) the currencies of relatively high- inflation countries to appreciate
B) the currencies of relatively low- inflation countries to depreciate
C) exchange rates to be insensitive to the differential rates of inflation between countries
D) the currencies of relatively high- inflation countries to depreciate

Question 10

The balance of payments is divided into three main accounts, the:

A) trade account, the financial account and the capital account
B) current account, the capital account and the reserve account
C) current account, the financial account and the capital account
D) current account, financial account and the trade account

Question 11

Which of the following would be a credit item in Australia's balance of payments?

A) an Australian citizen travels to the US for a two- week holiday
B) the Australian government lends Russia money
C) an Australian company sells computer software to a company in Spain
D) an Australian firm hires a non- Australian citizen

Question 12

Income increases in Australia. This will cause:

A) a decrease in the demand for dollars
B) an increase in the supply of dollars
C) a decrease in the supply of dollars
D) an increase in the demand for dollars

Question 13

Any transaction that results in an outflow of money from the domestic economy is a:

A) credit item in that country's balance of payments
B) credit item in that country's balance of trade
C) debit item in that country's balance of trade
D) debit item in that country's balance of payments

Question 14

Which of the following is an item in the Australian current account?

A) the change in foreign government assets in Australia
B) net investment income
C) the change in foreign private assets in Australia
D) the change in private Australian assets abroad

Question 15

Which of the following policy measures is intended to influence the value of the Australian dollar in the long term?

A) the Australian government negotiates a foreign currency loan
B) the Reserve Bank of Australia sells foreign reserves in foreign exchange markets
C) the Australian government implements a contractionary fiscal policy
D) the Reserve Bank of Australia buys foreign reserves in foreign exchange markets

Question 16

If more Australian citizens travel to France this year, then, assuming all else remains constant:

A) the supply of Euros will decrease
B) the supply of Euros will increase
C) the supply of dollars will increase
D) the supply of dollars will decrease

Question 17

A depreciation of a country's currency is likely to:

A) increase consumption, but decrease investment so that GDP remains unchanged
B) increase its GDP
C) decrease its GDP
D) leave GDP unaffected because it will cause an equal change in imports and exports

Question 18

Any transaction that results in receipts of money from abroad for a country is a:

A) credit item in that country's balance of trade
B) credit item in that country's balance of payments
C) debit item in that country's balance of trade
D) debit item in that country's balance of payments

Question 19

The difference between a country's exports and imports is the:

A) current account
B) balance of payments
C) capital account
D) balance on trade in goods

Question 20

A decision by the Reserve Bank to increase interest rates:

A) is made in secret to encourage currency speculation
B) is transparent and therefore likely to be preceded by an appreciation of the Australian dollar
C) is made in secret to prevent currency speculation
D) is transparent and therefore likely to be preceded by a depreciation of the Australian dollar

Question 21

Explain why exchange rates have become extremely volatile?

Question 22

If a nation's interest rates are relatively low compared to those of other countries, then the exchange value of its currency will tend to:

A) remain unchanged as interest rates do not affect currency values
B) depreciate under a system of floating exchange rates
C) appreciate under a system of floating exchange rates
D) possibly depreciate or appreciate, but more information is needed to determine this

Question 23

The price of one country's currency in terms of another country's currency is the:

A) balance of trade
B) exchange rate
C) currency valuation
D) terms of trade

Question 24

The rise in value of one currency relative to another is:

A) a depreciation of the currency
B) a weakening of the currency
C) an appreciation of the currency
D) a debasement of the currency

Question 25

The supply curve for Australian dollars in the foreign exchange market is likely to be upward sloping because as the price of a dollar (the exchange rate) rises:

A) foreigners demand more Australian goods because these goods have become more expensive to foreign consumers
B) foreigners demand more Australian goods because these goods have become less expensive to foreign consumers
C) Australians demand more foreign goods because these goods have become less expensive to Australian consumers
D) Australians demand fewer foreign goods because these goods have become more expensive to Australian consumers

Question 26

Which of the following statements is CORRECT?

A) If the current account is in deficit, then the sum of the financial and capital accounts must also be in deficit.
B) The overall sum of all the entries in the balance of payments must be positive.
C) If the current account is in surplus, then the sum of the financial and capital accounts must also be in surplus.
D) The overall sum of all the entries in the balance of payments must be zero.

Question 27

Exchange rates that are determined by the unregulated forces of supply and demand are:

A) managed exchange rates
B) fixed exchange rates
C) pegged exchange rates
D) floating exchange rates

Question 28

Which of the following are the two main ways in which global forces act on an individual country?

A) international agreements and financial markets
B) exports and imports
C) trade and financial markets
D) trade and international agreements

Question 29

Which of the following will NOT generate a demand for dollars?

A) Australian firms want to invest in the US
B) US citizens travel in Australia
C) US citizens want to import Australian goods and services
D) US citizens buy Australian bonds

Question 30

Under a system of floating exchange rates, if the quantity of dollars demanded is less than the quantity of dollars supplied:

A) the price of a dollar will not change
B) the price of a dollar will decrease
C) the price of a dollar will increase
D) the government will always decrease the supply of money to eliminate the excess supply

Question 31

Which of the following would be a debit item in Australia's balance of payments?

A) Mercedes- Benz builds a car manufacturing factory in Australia
B) American tourists fly with Qantas when flying to Australia
C) a Japanese pension fund buys shares in an Australian mining company
D) an Australian wine merchant purchases wine from France

Question 32

When a country's exports of goods are less than its imports of goods in a given period, it has a:

A) positive trade balance
B) trade deficit
C) zero balance of trade
D) trade surplus

Question 33

The fall in value of one currency relative to another is:

A) a strengthening of the currency
B) a floating of the currency
C) an appreciation of the currency
D) a depreciation of the currency

Question 34

A German citizen buys shares in an Australian company. This transaction will be entered as:

A) a debit in Australia's financial account
B) a debit in Australia's current account
C) a credit in Australia's current account
D) a credit in Australia's financial account

Question 35

An increase in Australia's interest rates relative to other countries' interest rates will:

A) increase the supply of dollars and decrease the demand for dollars
B) decrease the supply of dollars and leave the demand for dollars unaffected
C) decrease the demand for dollars and leave the supply of dollars unaffected
D) decrease the supply of dollars and increase the demand for dollars

Question 36

Which of the following is NOT a cause of volatile exchange rates?

A) speculation by firms engaged in exporting and importing
B) reluctance of governments to change interest rates
C) speculation by specialist currency traders
D) abolition of exchange controls

Question 37

More Japanese companies start to invest in Australia. This will lead to:

A) an increase in the demand for dollars and an increase in the supply of yen
B) a decrease in the demand for dollars and an increase in the demand for yen
C) an increase in the supply of dollars and a decrease in the demand for yen
D) an increase in the demand for dollars and a decrease in the supply of yen

Question 38

Which of the following items would not appear in the financial account of the balance of payments?

A) foreign direct investment in Australia
B) portfolio investment
C) income earned from property owned overseas
D) the purchase of Australian assets by non- Australian residents

Question 39

Describe the four components of the financial account.

Question 40

Which of the following statements is TRUE?

A) A country runs a capital account deficit if it imports more than it exports.
B) The overall sum of all the entries in the balance of payments must be positive.
C) A country runs a current account surplus if it sells more of its assets abroad than it buys abroad.
D) If the current account is in surplus, then the sum of the financial and capital accounts must be in deficit.

Question 41

Interest and profit flows are measured in the financial account component of the balance of payments.

Question 42

A rise in domestic interest rates is likely to cause an exchange rate depreciation.

Question 43

A free floating exchange rate will always lead to an equilibrium exchange rate.

Question 44

The overall sum of all the entries in the balance of payments must be zero.

Question 45

Changes in the holdings of property are measured in the financial account component of the balance of payments.

Question 46

Describe the four components of the current account.

Question 47

Speculation is reduced under floating exchange rates.

Question 48

Short- term changes in the value of a freely floating currency are largely caused by trade in exports and imports.

Question 49

Between October 2008 and October 2009, the Australian dollar depreciated by more than 50 percent against the US dollar.

Question 50

Suppose interest rates in Australia are high relative to those in the rest of the world. How will this affect the value of the Australian dollar?

Question 51

How is the value of one currency against another determined in a freely floating exchange rate system?

Question 52

Frequent changes in the value of one currency against others allow exporters and importers opportunities for currency speculation and so are good for trade.

Question 53

Correctly complete the following sentences from the options below. In a country's balance of payments account:
Statement
a() Profits and dividends are recorded in the:
b() The purchase of shares in foreign companies by domestic residents is recorded in the:
c() The financing of capital projects in developing countries is recorded in the:
Answer

Question 54

What are the two main ways in which changes elsewhere in the world have an impact on a country?

Question 55

If the Reserve Bank of Australia sells Australian dollars in foreign exchange markets, how will this affect the value of the Australian dollar?

Question 56

If GDP increases in Australia relative to that in Australia's major trading partners, what will happen to the value of the Australian dollar?

Question 57

Explain why Australia's current account was in deficit for most of the 20th Century.

Question 58

If the current account is in deficit, there must also be a deficit in the sum of the financial and capital accounts.

Question 59

What methods does the RBA use to manage Australia's exchange rate?

Question 60

In a floating exchange rate system, the balance of payments will automatically balance.

Question 61

The Reserve Bank of Australia can sell foreign currencies in exchange for Australian dollars to increase the value of the dollar in the short term.

Question 62

Describe how a contractionary fiscal policy can increase the value of the Australian dollar over the long term.

Question 63

The record of a country's transactions in goods, services and assets with the rest of the world is its balance of trade.

Question 64

Identify whether each of the following would lead to an appreciation or depreciation of the dollar. In each case, explain why the currency either appreciates or depreciates.
a. Australian citizens switch from buying stock in Asian companies to buying stock in Australian companies.
b. The inflation rate in Australia increases relative to the inflation rate in neighbouring Asian countries.
c. Income in Australia increases relative to that in neighbouring Asian countries.

Question 65

Discuss the factors that could lead to an appreciation of the Australian dollar.

Question 66

The Australian government can implement an expansionary monetary policy to increase the value of the dollar in the long term.

Question 67

Differences in growth rates between countries can cause changes in exchange rates.

Question 68

Assume that the government wishes to pursue a deflationary policy.
a. What will happen to the exchange rate if it uses deflationary monetary policy?
b. What effect will this exchange rate movement have on aggregate demand?
c. What will happen to the exchange rate if it uses deflationary fiscal policy?
d. What effect will this exchange rate movement have on aggregate demand?

Question 69

In a globalised world, problems with one country's economy can spread to the rest of the world mainly through the effects on trade.

Question 70

In 2008 the Icelandic government implemented controls on foreign currency exchanges to protect its currency.

Question 71

An excess supply of dollars will cause an appreciation of the dollar.