Deck 2: International Flow of Funds

Question 1

5)An increase in the current account deficit will place ____ pressure on the home currency value, other things equal.

A) upward
B) downward
C) no
D) upward or downward (depending on the size of the deficit)

Answer 1

B

Question 2

7)The International Financial Corporation was established to:

A) enhance development solely in Asia through grants.
B) enhance economic development through non-subsidized loans (at market interest rates).
C) enhance economic development through low-interest rate loans (below-market rates).
D) enhance economic development of the private sector through investment in stock of corporations.

Answer 2

D

Question 3

17)Which of the following countries purchases the largest amount of exports by U.S. firms?

A) Mexico
B) Japan
C) Canada
D) France

Answer 3

C

Question 4

4)____ purchases more U.S. exports than the other countries listed here.

A) Italy
B) Spain
C) Mexico
D) Canada

Question 5

9)The International Development Association was established to:

A) enhance development solely in Asia through grants.
B) enhance economic development through non-subsidized loans (at market interest rates).
C) enhance economic development through low-interest rate loans (below-market rates).
D) enhance economic development of the private sector through investment in stock of corporations.

Question 6

19)As a result of the European Union, restrictions on exports between ____ were reduced or eliminated.

A) member countries and the U.S.
B) member countries
C) member countries and European non-members
D) none of the above

Question 7

11)The "J curve" effect describes:

A) the continuous long-term inverse relationship between a country's current account balance and the country's growth in gross national product.
B) the short-run tendency for a country's balance of trade to deteriorate even while its currency is depreciating.
C) the tendency for exporters to initially reduce the price of goods when their own currency appreciates.
D) the reaction of a country's currency to initially depreciate after the country's inflation rate declines.

Question 8

14)The North American Free Trade Agreement (NAFTA) increased restrictions on:

A) trade between Canada and Mexico.
B) trade between Canada and the U.S.
C) direct foreign investment in Mexico by U.S. firms.
D) none of the above.

Question 9

1)Recently, the U.S. experienced an annual balance of trade representing a ____.

A) large surplus (exceeding $100 billion)
B) small surplus
C) level of zero
D) deficit

Question 10

15)According to the text, international trade (exports plus imports combined) as a percentage of GDP is:

A) higher in the U.S. than in European countries.
B) lower in the U.S. than in European countries.
C) higher in the U.S. than in about half the European countries, and lower in the U.S. than the others.
D) about the same in the U.S. as in European countries.

Question 11

2)A high home inflation rate relative to other countries would ____ the home country's current account balance, other things equal. A high growth in the home income level relative to other countries would ____ the home country's current account balance, other things equal.

A) increase; increase
B) increase; decrease
C) decrease; decrease
D) decrease; increase

Question 12

20)Over the last several years, international trade has generally:

A) increased for most major countries.
B) decreased for most major countries.
C) stayed about constant for most major countries.
D) increased for about half the major countries and decreased for the others.

Question 13

12)An increase in the use of quotas is expected to:

A) reduce the country's current account balance, if other governments do not retaliate.
B) increase the country's current account balance, if other governments do not retaliate.
C) have no impact on the country's current account balance unless other governments retaliate.
D) increase the volume of a country's trade with other countries.

Question 14

6)If the home currency begins to appreciate against other currencies, this should ____ the current account balance, other things equal (assume that substitutes are readily available in the countries, and that the prices charged by firms remain the same).

A) increase
B) have no impact on
C) reduce
D) all of the above are equally possible

Question 15

16)The direct foreign investment positions by U.S. firms have generally ____ over time. Restrictions by governments on direct foreign investment have generally ___ over time.

A) increased; increased
B) increased; decreased
C) decreased; decreased
D) decreased; increased

Question 16

3)If a country's government imposes a tariff on imported goods, that country's current account balance will likely ____ (assuming no retaliation by other governments).

A) decrease
B) increase
C) remain unaffected
D) either A or C are possible

Question 17

18)The primary component of the current account is the:

A) balance of trade.
B) balance of money market flows.
C) balance of capital market flows.
D) unilateral transfers.

Question 18

13)The U.S. typically has a balance of trade surplus in its trade with ____.

A) China
B) Japan
C) A and B
D) none of the above

Question 19

8)The World Bank was established to:

A) enhance development solely in Asia through grants.
B) enhance economic development through non-subsidized loans (at market interest rates).
C) enhance economic development through low-interest rate loans (below-market rates).
D) enhance economic development of the private sector through investment in stock of corporations.

Question 20

10)Which of the following would likely have the least direct influence on a country's current account?

A) inflation.
B) national income.
C) exchange rates.
D) tariffs.
E) a tax on income earned from foreign stocks.

Question 21

27)A weak home currency may not be a perfect solution to correct a balance of trade deficit because:

A) it reduces the prices of imports paid by local companies.
B) it increases the prices of exports by local companies.
C) it prevents international trade transactions from being prearranged.
D) foreign companies may reduce the prices of their products to stay competitive.

Question 22

28)Intracompany trade makes up approximately ____ percent of all international trade.

A) 50
B) 70
C) 25
D) 13
E) 5

Question 23

23)Which of the following is mentioned in the text as a possible means by which the government may attempt to improve its balance of trade position (increase its exports or reduce its imports).

A) It could attempt to reduce its home currency's value.
B) The government could require firms to engage in outsourcing.
C) The government could require that its local firms pursue outsourcing.
D) All of the above are mentioned.

Question 24

26)____ is (are) income received by investors on foreign investments in financial assets (securities).

A) Portfolio income
B) Direct foreign income
C) Unilateral transfers
D) Factor income

Question 25

25)"Dumping" is used in the text to represent the:

A) exporting of goods that do not meet quality standards.
B) sales of junk bonds to foreign countries.
C) removal of foreign subsidiaries by the host government.
D) exporting of goods at prices below cost.

Question 26

36.The World Bank frequently enters into cofinancing agreements. Under these agreements, financing is provided by the World Bank and/or official aid agencies, export credit agencies, or commercial banks.

Question 27

22)A General Agreement on Tariffs and Trade (GATT) accord in 1993 called for:

A) increased trade restrictions outside of North America.
B) lower trade restrictions around the world.
C) uniform environmental standards around the world.
D) uniform worker health laws.

Question 28

21)Which is not a concern about the North American Free Trade Agreement (NAFTA)?

A) its impact on U.S. inflation.
B) its impact on U.S. unemployment.
C) lower environmental standards in Mexico.
D) different health laws for workers in Mexico.

Question 29

29)Like the International Monetary Fund (IMF), the ____ is composed of a collection of nations as members. However, unlike the IMF, it uses the private rather than the government sector to achieve its objectives.

A) World Bank
B) International Financial Corporation (IFC)
C) World Trade Organization (WTO)
D) International Development Association (IDA)
E) Bank for International Settlements (BIS)

Question 30

31)Also known as the "central banks' central bank," the ____ attempts to facilitate cooperation among countries with regard to international transactions and provides assistance to countries experiencing a financial crisis.

A) World Bank
B) International Financial Corporation (IFC)
C) World Trade Organization
D) International Development Association (IDA)
E) Bank for International Settlements (BIS)

Question 31

38.Changes in country ownership of long-term and short-term assets are measured in the balance of payments with the capital account.

Question 32

40.The current account represents the investment in fixed assets in foreign countries that can be used to conduct business operations.

Question 33

24)The demand for U.S. exports tends to increase when:

A) economic growth in foreign countries decreases.
B) the currencies of foreign countries strengthen against the dollar.
C) U.S. inflation rises.
D) none of the above.

Question 34

32)Direct foreign investment into the U.S. represents a ____.

A) capital inflow
B) trade inflow
C) capital outflow
D) trade outflow

Question 35

35.The World Bank extends loans only to developed nations, while the International Development Association (IDA) extends loans only to developing nations.

Question 36

33.A balance of trade surplus indicates an excess of imports over exports.

Question 37

39.Portfolio investment represents transactions involving long-term financial assets (such as stocks and bonds) between countries that do not affect the transfer of control.

Question 38

30)The World Bank's Multilateral Investment Guarantee Agency (MIGA):

A) offers various forms of export insurance.
B) offers various forms of import insurance.
C) offers various forms of exchange rate risk insurance.
D) provides loans to developing countries.
E) offers various forms of political risk insurance.

Question 39

34.A weakening of the U.S. dollar with respect to the British pound would likely reduce the U.S. exports to Britain and increase U.S. imports from Britain over time.

Question 40

37.The balance of payments is a measurement of all transactions between domestic and foreign residents over a specified period of time.

Question 41

50.Regarding the U.S. balance of payments, capital account items are relatively minor compared to the financial account items.

Question 42

42.Direct foreign investment by U.S.-based MNCs occurs primarily in the Bahamas and Brazil.

Question 43

58.The primary component of the capital account is the balance of trade.

Question 44

41.Exporting of products by one country to other countries at prices below cost is called elasticity.

Question 45

48.The sale of patent rights by a U.S. firm to a Russian firm reflects a credit to the U.S. balance of payments account.

Question 46

45.Intracompany trade represents the exporting of products by one country to other countries below cost.

Question 47

43.The J curve effect is the initial worsening of the U.S. trade balance due to a weakening dollar because of established trade relationships that are not easily changed; as the dollar weakens, the dollar value of imports initially rises before the U.S. trade balance is improved.

Question 48

53.U.S. government officials would likely prefer that China devalue the yuan against the dollar.

Question 49

55)Assume the U.S. has a balance of trade surplus with the country of Thor. When individuals in Thor manufacture CDs and DVDs that look almost exactly like the original product produced in the U.S. and other countries, they ____ the U.S. balance of trade surplus with Thor. This activity is called ____.

A) reduce; flipping
B) reduce; pirating
C) increase; pirating
D) increase; flipping

Question 50

57)Without the international capital flows, there would be ____ funding available in the U.S. across all risk levels, and the cost of funding would be ____ regardless of the firm's risk level.

A) more; lower
B) more; higher
C) less; lower
D) less; higher

Question 51

49.A U.S. purchase of patent rights from a firm in Mexico reflects a credit to the U.S. balance of payments account.

Question 52

52.The Central American Trade Agreement (CAFTA) is intended to raise tariffs and regulations between the U.S., the Dominican Republic, and Central American countries.

Question 53

47)A country's net outflow of funds ____ affect its interest rates, and ____ affect its economic conditions.

A) does; does
B) does; does not
C) does not; does not
D) does not; does

Question 54

46.A tariff is a maximum limit on imports.

Question 55

60.An American tourist visiting Germany and spending money there (for lodging, food, etc.) will reduce the U.S. current account deficit and reduce Germany's current account balance.

Question 56

54.Assume that some U.S. firms will purchase supplies from either China or from U.S. firms. If the Chinese yuan appreciates against the dollar, it should reduce the U.S. balance of trade deficit with China.

Question 57

59.A balance of trade surplus indicates an excess of merchandise imports over merchandise exports.

Question 58

51)In recent years, the U.S. has had a relatively (compared to other countries) ____ balance of trade ____ with China.

A) small; surplus
B) large; surplus
C) small; deficit
D) large; deficit

Question 59

44.Portfolio investments represent transactions involving long-term financial assets (such as stocks and bonds) between countries that do not affect the transfer of control.

Question 60

56)Japan's annual interest rate has been relatively ____ compared to other countries for several years, because the supply of funds in its credit market has been very ____.

A) low; small
B) high; small
C) low; large
D) high; large

Question 61

72)Which of the following would increase the current account of Country X? Country Y is Country X's sole trading partner.

A) Inflation increases in countries X and Y by comparable amounts.
B) Country X's and Country Y's currencies depreciate by the same amount.
C) Country X imposes tariffs on imports from Country Y, and Country Y retaliates by imposing an identical tax on X's exports.
D) The central banks of Country X and Country Y reduce the money supply to increase interest rates.
E) Country X imposes a quota on imports, and Country Y retaliates by imposing an identical quota on X's exports.

Question 62

64.A weakening of the U.S. dollar with respect to the British pound would likely reduce U.S. exports to the U.K. and increase U.S. imports from the U.K.

Question 63

74)Which of the following is not a goal of the International Monetary Fund (IMF)?

A) To promote cooperation among countries on international monetary issues
B) To promote stability in exchange rates
C) To enhance a country's long-term economic growth via the extension of structural adjustment loans
D) To promote free trade
E) To promote free mobility of capital funds across countries

Question 64

68)Which of the following factors probably does not directly affect a country's capital account and its components?

A) Inflation
B) Interest rates
C) Withholding taxes on foreign income
D) Exchange rate movements
E) All of the above will directly affect a country's capital account.

Question 65

66)The ____ is the difference between exports and imports.

A) balance of trade
B) balance on goods and services
C) balance of payments
D) current account
E) capital account

Question 66

65.The World Bank extends loans only to developed nations, while the International Development Association (IDA) extends loans only to developing nations.

Question 67

75)According to the "J curve effect," a weakening of the U.S. dollar relative to its trading partners' currencies would result in an initial ____ in the current account balance, followed by a subsequent ____ in the current account balance.

A) decrease; increase
B) increase; decrease
C) decrease; decrease
D) increase; increase

Question 68

70)Which of the following is not likely to represent a strategy by the government of Country X to reduce its balance of trade deficit with Country Y?

A) The government of Country X eliminates environmental restrictions.
B) The government of Country X subsidizes firms in its country to facilitate dumping.
C) The government of Country X provides tax breaks to firms in specific industries.
D) The government of Country X removes a tariff on goods imported from Country Y.

Question 69

62.The capital account reflects changes in country ownership of long-term (but not short-term) assets.

Question 70

73)____ represent aid, grants, and gifts from one country to another.

A) Transfer payments
B) Factor income
C) The balance of trade
D) The balance of payments
E) The capital account

Question 71

61.A balance of trade deficit indicates an excess of imports over exports.

Question 72

69)The ____, an accord among 117 nations, called for lower tariffs around the world.

A) General Agreement on Tariffs and Trade (GATT)
B) North American Free Trade Agreement (NAFTA)
C) Single European Act of 1987
D) European Union Accord
E) None of the above

Question 73

71)Which of the following statements is not true?

A) Exporters commonly complain that they are being mistreated because the currency of their country is too weak.
B) Outsourcing affects the balance of trade because it means that a service is purchased in another country.
C) Sometimes, trade policies are used to punish countries for various actions.
D) Tariffs imposed by the EU have caused some friction between EU countries that commonly import products and other EU countries.
E) All of the above are true.

Question 74

63.Outsourcing allows some MNCs to reduce costs but shifts jobs to other countries.

Question 75

67)Which of the following will probably not result in an increase in a country's current account balance (assuming everything else constant)?

A) A decrease in the country's rate of inflation
B) A decrease in the country's national income level
C) An increase in government restrictions in the form of tariffs or quotas
D) An appreciation of the country's currency
E) All of the above will result in an increased current account balance.