Deck 18: International Finance

Question 1

A nation's merchandise trade balance reflects _____.

A)trade in tangible products
B)the value of exports of services
C)the value of imports of services
D)the same information as its balance of payments
E)trade in tangibles and intangibles

Answer 1

trade in tangible products

Question 2

The merchandise trade balance measures:

A)the value of goods and services exported.
B)the value of all goods and services exported minus the value of all goods and services imported.
C)the value of all goods and services exported minus the value of all goods and services imported,and the transactions to finance the difference.
D)the value of all tangible products exported minus the value of all tangible products imported.
E)the value of all tangible products exported minus the value of all tangible products imported,and the transactions to finance the difference.

Answer 2

the value of all tangible products exported minus the value of all tangible products imported.

Question 3

Which of the following is not considered a unilateral transfer?

A)Income earned from foreign investments
B)Foreign aid
C)Personal gifts to friends or family abroad
D)Institutional charitable donations
E)Government transfers to foreign residents

Answer 3

Income earned from foreign investments

Question 4

A nation has an unfavorable balance of trade when:

A)it has a surplus in its balance of payments.
B)it has a deficit in its balance of payments.
C)the value of its imports of goods is greater than the value of its exports of goods.
D)its current account is in surplus and its capital account is in deficit.
E)it has high tariffs.

Question 5

In 2014,the United States had the largest merchandise trade deficit with:

A)the European Union.
B)Canada.
C)China.
D)Mexico.
E)Brazil.

Question 6

A country's investment earnings from foreign assets minus foreigners' earnings from their assets in the country is called _____.

A)the merchandise trade balance
B)net unilateral transfers abroad
C)the balance on good and services
D)net investment income from abroad
E)the financial account balance

Question 7

The merchandise trade balance does not include:

A)exports of refrigerators.
B)imports of automobiles.
C)exports of agricultural products.
D)shipping and insurance services.
E)imports of food items with heavy tariffs.

Question 8

The balance of payments summarizes the transactions that occur during a given time period between:

A)the local governments of a country and the federal government of the country.
B)the producers and consumers of all goods and services within a country.
C)individuals,firms,and government of one country and individuals,firms,and governments of the other countries.
D)two firms that operate in two different states in a country.
E)the firms in a country and the government of the country.

Question 9

Which of the following is not true about the U.S.trade balance since 1979?

A)The balance of trade has been in deficit.
B)During recessions the balance has usually been flat.
C)The balance of trade has been in surplus.
D)When the economy expanded,the demand for imports increased.
E)When the economy expanded,the trade balance worsened.

Question 10

Which of the following is not considered a unilateral transfer?

A)Foreign aid from one government to another
B)Income earned from foreign investments
C)Personal gifts to friends in foreign countries
D)Donations to foreign countries from non-government domestic charities
E)Government transfers to foreign residents

Question 11

Which of the following is true concerning unilateral transfers in the U.S.balance of payments?

A)Unilateral transfers have been positive since World War II.
B)Unilateral transfers have been negative since World War II.
C)Unilateral transfers have been negative every year since World War II except during the war in Iraq.
D)The United States places tight restrictions on its currency being sent out of the country.
E)Developing countries ordinarily place no restrictions on its currency being sent out of their countries.

Question 12

Table 20.1 shows a current account.In the table below,_____ is the balance on current account.
Table 20.1
($)
?
$\begin{array}{lr}\text { Net exports of goods } & -2,000 \\\text { Net exports of services } & 500 \\\text { Net unilateral transfers } & -1,000 \\\text { Net investment } & 100 \\\text { Statistical discrepancy } & -20\end{array}$
?

A)?$1,500
B)?$2,000
C)?$2,400
D)?$2,420
E)?$2,500

Question 13

Which of the following is not classified as a service in the current account?

A)Transportation
B)Insurance
C)Tourist expenditures
D)Computer software development
E)Unilateral transfers

Question 14

The value of a country's exports is listed in its balance of payments account as a(n)_____.

A)credit
B)debit
C)payment
D)investment
E)unilateral transfer

Question 15

Which of the following events would not be recorded in the U.S.balance of payments?

A)The increase in the money supply of a foreign nation
B)Oxfam America,a U.S.relief agency,sending rice to drought victims in sub-Saharan Africa
C)Oxfam America,a U.S.relief agency,sending wheat to drought victims in sub-Saharan Africa
D)The Pentagon stationing troops in Saudi Arabia
E)U.S.exporting computer software and imports oil from Iraq

Question 16

The debit side of the current account includes the imports of _____.

A)goods only
B)goods and services
C)services only
D)services and resources only
E)financial assets

Question 17

The current account reflects:

A)trade in only tangible products.
B)trade in goods as well as services.
C)trade in services only.
D)the purchase of securities from foreigners.
E)the sale of securities to foreigners.

Question 18

Which of the following statements defines trade balance?

A)The trade balance is the sum of the services balance,the current account balance,and the capital account balance.
B)The trade balance is merchandise exports minus merchandise imports.
C)The trade balance is the sum of the current account balance and the capital account balance.
D)The trade balance is foreign purchases of domestic assets minus domestic purchases of foreign assets.
E)The trade balance is the sum of the services balance and the capital account balance.

Question 19

The balance of goods and services is:

A)the same as the merchandise trade balance since services cannot be traded.
B)equivalent to the trade balance.
C)the value of all tangible and intangible products exported minus the value of all tangible and intangible products imported.
D)the value of all tangible products exported minus the value of all tangible products imported.
E)the value of all tangible products exported minus the value of all tangible products imported,and the transactions to finance the difference.

Question 20

The merchandise trade balance:

A)reflects trade in intangibles like insurance and tourism.
B)includes personal gifts to friends abroad.
C)records the flow of financial assets like stocks and bonds.
D)equals the value of imports in goods and services minus the value of exports in goods and services.
E)equals the value of tangible products exported minus the value of tangible products imported.

Question 21

The exchange rate is the:

A)opportunity cost of producing exportable goods in a country .
B)total monetary value of exports minus imports.
C)amount of a country's currency that can be exchanged for one ounce of gold.
D)sum of net unilateral transfers.
E)price of one country's currency in terms of another country's currency.

Question 22

The current account records:

A)last year's flows of funds into and out of the country.
B)the current flows of imports and exports of goods and services,net income earned by residents from foreign assets,and net transfer payments.
C)all the foreign direct investment received by a country in a year.
D)the purchase of financial assets,such as stocks and bonds,by the residents of a country in a year.
E)the purchase of all real assets,such as land and housing by the citizens of a country in a year.

Question 23

Which of the following is a credit item in the U.S.balance of payments?

A)Imports of cars from Japan
B)Purchase of an American car by a Japanese citizen
C)Purchase of Chinese assets by an American citizen
D)An American firm's purchase of steel from a European steel mill
E)An increase in American tourists abroad

Question 24

A country runs a deficit in its current account if:

A)it consumes less goods and services compared to what it produces.
B)the interest and dividends earned by its residents on foreign assets exceed the interest and dividends earned by foreigners who invest in domestic assets.
C)it follows the double-entry bookkeeping requirement that total debits must equal total credits.
D)foreign currency received from exports and transfers exceeds the foreign exchange needed to pay for imports and to make unilateral transfers.
E)foreign currency received from exports and transfers is less than the foreign exchange needed to pay for imports and to make unilateral transfers.

Question 25

An exchange rate is:

A)the rate at which goods are traded between countries.
B)the rate at which the central bank of a country gives loans to commercial banks.
C)the rate at which commercial banks give loans to individuals.
D)the price of one currency in terms of another.
E)the price at which one good trades for another.

Question 26

The foreign exchange rate is:

A)an entry in the current account.
B)the price of a foreign good in the world market.
C)an entry in the capital account.
D)an entry in the balance of trade.
E)the cost of one currency in terms of another.

Question 27

The trade balance of the country of Utopia would be in deficit only if:

A)its import of services exceed its export of services.
B)its merchandise exports exceed its merchandise imports.
C)its merchandise imports exceed its merchandise exports.
D)foreign investors invest in domestic assets.
E)the citizens of Utopia purchase foreign securities to earn a high return and diversify their investment.

Question 28

The exchange rate is the:

A)ratio of exports to imports.
B)interest rate the U.S.government charges on international loans.
C)percentage of domestic goods that are exported.
D)cost of one nation's currency in terms of another nation's currency.
E)rate that central banks charge each other for currency exchanges.

Question 29

If foreigners increase their ownership of U.S.assets,this would help to offset:

A)a deficit in the U.S.current account.
B)a deficit in the U.S.capital account.
C)a surplus in the U.S.current account.
D)a surplus in the U.S.capital account.
E)a surplus in the overall balance of payments.

Question 30

When net unilateral transfers are added to the net exports of goods and services,the result is called the:

A)merchandise trade balance.
B)official reserve transactions account.
C)balance of payments.
D)balance on capital account.
E)balance on current account.

Question 31

If the U.S.dollar appreciates,it implies that:

A)the value of the U.S.dollar has decreased.
B)the value of foreign currency in terms of U.S.dollars has increased.
C)fewer U.S.dollars are required to purchase foreign exchange.
D)more U.S.dollars are required to purchase foreign exchange.
E)exports will rise immediately.

Question 32

In order for the balance of payments to balance,the:

A)current account balance must equal the capital account balance.
B)sum of the current account balance,the capital account balance,the net flow of international reserves,and the statistical discrepancy must have a negative value.
C)sum of the current account balance,the capital account balance,the net flow of international reserves,and the statistical discrepancy must have a positive value.
D)sum of the current account balance,the capital account balance,the net flow of international reserves,and the statistical discrepancy must equal zero.
E)the sum of the current account balance,the capital account balance,and the net flow of international reserves must be greater than the statistical discrepancy.

Question 33

Net unilateral transfers in the United States have been:

A)positive every year since 1950.
B)negative every year since 1950.
C)positive every year since 1950 except in 1991 during the Persian Gulf War.
D)negative every year since 1950 except in 1991 during the Persian Gulf War.
E)positive about half the time and negative about half the time since 1950.

Question 34

In the balance of payments accounts,there will be a surplus in the financial account of a country if:

A)it sells more goods to foreign countries than it imports.
B)it buys more goods from foreign countries than it exports.
C)it sells more assets to individuals in other countries than the assets it buys from them.
D)it buys more assets from individuals in other countries than the assets it sells to them.
E)it imports less machinery than it exports.

Question 35

The statistical discrepancy:

A)is always positive but less than 1.
B)is always negative and greater than −1.
C)must be reduced to zero and eliminated from the balance of payments before the records become official.
D)is a residual factor that indicates the net error in the balance of payments data.
E)is a record of all transactions between residents of two countries over a specified period.

Question 36

A German national who exchanges euros for dollars at a U.S.airport is:

A)contributing to U.S.exports of merchandise.
B)lending dollars to Germany.
C)participating in the foreign exchange market.
D)engaging in speculative activities.
E)engaging in illegal activities.

Question 37

Which of the following is a credit item in the U.S.balance of payments?

A)U.S.companies selling merchandise abroad
B)Foreign companies selling merchandise to U.S.consumers
C)U.S.consumers sending money to foreign companies
D)Immigrants to the United States sending money back to their families in their native countries
E)Immigrants to the United States sending gifts back to their families in their native countries

Question 38

Which of the following would be represented as a debit in the U.S.balance of payments?

A)U.S.purchase of cars from Italy
B)U.S.sale of beef to Israel
C)Transfers received by the U.S.government from foreign governments
D)Gifts received by U.S.residents from friends abroad
E)Income received by U.S.residents from overseas investments

Question 39

The statistical discrepancy in the balance of payments is:

A)always positive.
B)always negative.
C)always zero.
D)positive,negative,or zero.
E)indeterminate.

Question 40

If $1 equals 2 euros,then 1 euro equals _____.

A)$4.00
B)$2.00
C)$0.50
D)$1.00
E)$0.25

Question 41

The demand for U.S.dollars by foreign nations increases as:

A)more Americans travel abroad.
B)foreigners increase their purchase of American goods.
C)Americans increase their purchase of foreign goods.
D)Americans increase their investments in foreign stocks or bonds.
E)Americans send more gifts abroad.

Question 42

When supply and demand analysis is used to study the exchange rate,foreign exchange is treated just like _____.

A)a normal good
B)a debt
C)fiat money
D)commodity money
E)an investment

Question 43

The exchange rate is:

A)the price of foreign exchange determined by the interaction of supply and demand.
B)an interest rate for foreign loans determined by the interaction of supply and demand.
C)fixed by each government separately.
D)always fixed for any two currencies by the two nations involved,regardless of any agreements made with other nations.
E)fixed by GATT.

Question 44

If the exchange rate changes from 20 cents per franc to 18 cents per franc,the U.S.dollar has:

A)appreciated,since its value has increased.
B)appreciated,since its value has declined.
C)depreciated,making French goods more expensive in the U.S.
D)depreciated,since its value has declined.
E)depreciated,since its value has increased.

Question 45

If the exchange rate changes from 1 euro per U.S.dollar to 1.2 euros per U.S.dollar,the Euro has:

A)appreciated,since its value has increased.
B)appreciated,since the price of U.S.dollars has increased.
C)appreciated,making U.S.goods cheaper in European countries.
D)depreciated,since its value has declined.
E)depreciated,since its value has increased.

Question 46

If the dollar per pound exchange rate falls from $1.50 per pound to $1.25 per pound,______.

A)U.S.imports of British goods will increase
B)U.S.exports of goods to Great Britain will increase
C)U.S.exports of services to Great Britain will fall because the price of the pound has increased
D)British demand for American goods will remain unchanged,but American demand for British goods will fall
E)U.S.demand for British goods will remain unchanged,but British demand for American goods will increase

Question 47

The demand curve for euros shows:

A)a direct relationship between the dollar price of euro and the quantity of euros demanded.
B)an inverse relation between the dollar price of euro and the quantity of euros demanded.
C)that the higher the dollar price of euro,the greater the quantity of euros demanded.
D)that the more expensive it is to buy euros,the larger the quantity of European goods demanded by Americans.
E)that the dollar price of euro is being fixed by the European Union.

Question 48

A drop in the dollar price of British pounds implies that:

A)fewer U.S.dollars are needed to buy British pounds.
B)more dollars are needed to buy British pounds.
C)the pound has appreciated.
D)the dollar has depreciated.
E)British goods are now more expensive to Americans.

Question 49

As the price of foreign exchange decreases relative to the U.S.dollar,the:

A)products made in the U.S.become cheaper for foreigners.
B)goods made in foreign countries become cheaper for Americans.
C)amount of foreign currency required to purchase a unit of U.S.dollar increases.
D)U.S.demand curve for foreign exchange shifts to the right.
E)supply curve of foreign exchange to U.S.markets decreases.

Question 50

If the U.S.dollar depreciates in the foreign exchange market,American exports will _____ and American imports will _____.

A)be more expensive;be more expensive
B)be more expensive;be less expensive
C)be less expensive;be less expensive
D)be less expensive;be more expensive
E)decrease;increase

Question 51

If the U.S.dollar appreciates in the foreign exchange market,then:

A)American goods will become more expensive for foreign buyers and foreign goods will be cheaper for Americans.
B)American goods will become less expensive for foreign buyers and foreign goods will be more expensive for Americans.
C)more U.S.dollars will be required to buy a foreign currency.
D)U.S.exports will increase.
E)neither the price of U.S.exports nor the price of U.S.imports will change.

Question 52

If the U.S.dollar depreciates relative to the Swiss franc,then:

A)Swiss goods become more expensive in the U.S.
B)U.S.goods become more expensive in Switzerland.
C)Swiss investors will pay more Swiss francs to buy one unit of U.S.dollar.
D)the U.S.import of Swiss goods will increase.
E)the U.S.dollar per Swiss franc exchange rate will decrease.

Question 53

The demand curve for foreign exchange:

A)slopes downward.
B)slopes upward.
C)is horizontal,because no individual country can influence the price of foreign exchange.
D)is vertical,because no individual country can influence the price of foreign exchange.
E)may slope downward or upward depending on the volume of imports and exports of the trading countries.

Question 54

If the U.S.dollar depreciates,it means that:

A)the value of the U.S.dollar has increased.
B)the value of foreign exchange has decreased.
C)fewer U.S.dollars are required to purchase foreign exchange.
D)more U.S.dollars are required to purchase foreign exchange.
E)exports will fall.

Question 55

If the U.S.dollar appreciates relative to the Brazilian real,then:

A)the U.S.dollar per real exchange rate will increase.
B)U.S.goods become less expensive in Brazil.
C)Brazilian goods become more expensive in the U.S.
D)Brazilian investors will pay fewer reals to buy one unit of U.S.dollar.
E)the U.S.will import more goods and services from Brazil.

Question 56

Which of the following statements is true?

A)The demand for foreign currency in the United States increases as the volume of imports increases.
B)The demand for foreign currency in the United States increases as the volume of exports increases.
C)The demand for foreign currency in the United States decreases with a decrease in the inflation rate abroad.
D)The demand for foreign currency in the United States decreases as foreign interest rates rise.
E)The demand for foreign currency in the United States is unaffected by U.S.demand for foreign goods and services.

Question 57

If the exchange rate changes from 75 cents per euro to $1 per euro,the euro has:

A)appreciated,since its value has increased.
B)appreciated,since the price of U.S.dollars has increased.
C)appreciated,making U.S.goods more expensive in European nations.
D)depreciated,since its value has declined.
E)depreciated,since its value has increased.

Question 58

Suppose U.S.consumers start buying more English shoes and fewer American shoes.Which of the following will be a likely impact on the foreign exchange market?

A)U.S.demand for British pounds will increase.
B)U.S.demand for British pounds will decrease.
C)U.S.demand for British pounds will increase,but the demand for foreign exchange will decrease.
D)U.S.demand for British pounds will decrease,but the demand for foreign exchange will increase.
E)There would be no effect on the demand for foreign exchange in the U.S.

Question 59

Imagine that there are only two nations in the world,the United States and Mexico.If Americans buy more goods made in Mexico,other things constant,the:

A)U.S.demand curve for Mexican pesos will shift rightward.
B)U.S.demand curve for Mexican pesos will shift leftward.
C)U.S.supply curve of Mexican pesos will shift leftward.
D)U.S.supply curve of Mexican pesos will shift rightward.
E)U.S.supply curve of Mexican pesos will become perfectly inelastic.

Question 60

For the U.S. ,a drop in the price of foreign exchange means that:

A)fewer U.S.dollars are needed to purchase foreign currency.
B)more U.S.dollars are needed to purchase foreign currency.
C)imports will become more expensive worldwide.
D)exports will become cheaper worldwide.
E)transaction costs in international markets will decrease.

Question 61

Those who simultaneously buy and sell currency to take advantage of exchange rate differences are called _____.

A)speculators
B)hedgers
C)entrepreneurs
D)arbitrageurs
E)underwriters

Question 62

An arbitrageur in foreign exchange is a person who:

A)buys foreign currency,hoping to profit by selling it at a higher exchange rate at some later date.
B)earns illegal profit by manipulating foreign exchange.
C)causes differences in exchange rates in different geographic markets.
D)simultaneously buys large amounts of a currency in one market and sells it in another market.
E)mediates disputes when there is no agreement on exchange rates in international currency markets.

Question 63

Foreign exchange rates tend toward equality around the world because of the actions of _____.

A)central banks
B)stock markets
C)commodity markets
D)the World Bank
E)arbitrageurs

Question 64

A speculator in foreign exchange is a person who:

A)buys foreign currency,hoping to profit by selling it at a higher exchange rate at some later date.
B)earns illegal profit by manipulating foreign exchange.
C)causes differences in exchange rates in different geographic markets.
D)simultaneously buys large amounts of a currency in one market and sells it in another market.
E)takes no risks in foreign currency exchanges.

Question 65

A rightward shift of the Mexican demand curve for U.S.dollars will:

A)decrease the price of dollars in terms of pesos.
B)increase the value of pesos relative to dollars.
C)make American goods less expensive in terms of pesos.
D)make American goods more expensive in terms of pesos.
E)make Mexican goods more expensive in terms of dollars.

Question 66

Which of the following would increase the U.S.demand for foreign currency?

A)An increase in the U.S.demand for foreign goods
B)An increase in incomes abroad
C)A decrease in U.S.income
D)A decrease in the U.S.demand for foreign goods
E)An increase in U.S.real interest rate

Question 67

According to the purchasing power parity theory,in the long run:

A)the exchange rate between any two currencies should be equal all over the world.
B)the value of the U.S.dollar should equal the value of the pound which should equal the value of the yen.
C)inflation rates should equalize around the world.
D)interest rates should equalize around the world.
E)the exchange rate between the currencies of two countries should reflect the differences in price levels in the two countries.

Question 68

If the U.S.demand for British pounds increases,then:​

A)the dollar price of British pounds will increase.
B)the dollar price of British pounds will decrease.
C)the exchange rate between dollars and pounds will be less than the equilibrium exchange rate.
D)the pound will fall in value vis-à-vis the dollar.
E)there will be no change in either the value of the dollar or the pound.

Question 69

A rightward shift of a country's demand curve for foreign exchange will:

A)decrease the price of foreign exchange in the country.
B)decrease the value of its currency.
C)increase the value of its currency.
D)make foreign goods less expensive in the domestic market.
E)make its goods more expensive in foreign markets.

Question 70

Which of the following statements is true of speculators?

A)There is no risk involved in speculative activity.
B)They simultaneously buy and sell a currency in different markets.
C)They hope to profit by trading a currency at a different exchange rate later.
D)Their actions do not affect exchange rates.
E)Their actions are exactly like those of arbitrageurs.

Question 71

Which of the following will happen if country A's currency declines in value against other major currencies?

A)Country A's trade deficit will increase.
B)Country A's trade deficit will be unaffected.
C)Country A's trade deficit will decrease.
D)Country A's products will become more expensive in foreign markets.
E)Foreign goods will become cheaper in country A.

Question 72

A leftward shift of a country's demand curve for foreign exchange will:

A)decrease the price of foreign exchange in the country.
B)increase the price of foreign exchange in the country.
C)decrease the value of its currency.
D)make foreign goods more expensive in the country.
E)make its goods cheaper in the foreign market.

Question 73

The U.S.dollar will appreciate if:

A)the U.S.demand for foreign exchange decreases.
B)the U.S.demand for foreign exchange increases.
C)the supply of foreign exchange increases in the foreign exchange market.
D)Americans want to buy more foreign goods.
E)foreigners want fewer American goods.

Question 74

Suppose the exchange rate is such that 1 U.S.dollar equals 1 euro in New York and 0.9 euros in Paris.An arbitrageur would sell euros:

A)in New York and buy U.S.dollars in Paris.
B)in both Paris and New York at different prices.
C)in New York while buying them in Paris.
D)in Paris while buying them in New York.
E)at the same price in both cities.

Question 75

A leftward shift of a country's demand curve for foreign exchange will:

A)increase the price of foreign exchange in the country.
B)decrease the value of its currency.
C)make foreign goods more expensive in the domestic market.
D)make foreign goods less expensive in the domestic market.
E)make its goods less expensive in the foreign market.

Question 76

The purchasing power parity theory:

A)is more a predictor of a long-run tendency than of the day-to-day relationship between changes in the price level and the exchange rate.
B)predicts that exchange rates between two currencies will adjust in the short run so that the price level is equal to the exchange rate between two countries.
C)is more a predictor of a short-run phenomenon than of a long-run relationship between the price level and the exchange rate between two countries.
D)is helpful in explaining long-run trends,even though trade barriers and central bank intervention may hinder the usefulness of the theory.
E)tells us that a country's currency generally will appreciate if its inflation rate is higher than that of the rest of the world.

Question 77

The fact that exchange rates are nearly identical in different markets around the world is due to:

A)the actions of speculators.
B)official action by central banks around the world.
C)the actions of arbitrageurs.
D)the agreement by the policy makers of major industrial countries.
E)the actions of currency converters.

Question 78

Exchange rates:

A)are always fixed between the currencies of two countries.
B)fluctuate to equate the quantity of foreign exchange demanded with the quantity supplied.
C)fluctuate to equate imports and exports.
D)fluctuate to equate interest rates in various countries.
E)fluctuate according to agreements between the governments of various countries.

Question 79

The actions of the arbitrageurs in the foreign exchange markets:

A)destabilize foreign exchange markets.
B)are highly risky.
C)have no effect on exchange rates.
D)help ensure that exchange rates are equalized across all markets.
E)are the same as those undertaken by speculators.

Question 80

One difference between arbitrageurs and speculators is that:

A)arbitrageurs buy and sell foreign exchange;speculators do not.
B)speculators only buy foreign exchange but do not sell it.
C)arbitrageurs take more risks than do speculators.
D)speculators take more risks than do arbitrageurs.
E)arbitrageurs buy foreign exchange in the hope that its value will increase.