Deck 41: The Balance of Payments, Exchange Rates, and Trade Deficits

Question 1

In 2015, the capital and financial account in the U.S.balance of payments was in

A)deficit, and smaller than the current account deficit.
B)surplus, and equal to the current account deficit.
C)balance, with no deficit or surplus.
D)surplus, and smaller than the current account deficit.

Answer 1

surplus, and equal to the current account deficit.

Question 2

Which one of the following will not directly affect the U.S.balance on current account?

A)an increase in U.S.goods imports
B)a decrease in U.S.net investment income
C)an increase in U.S.purchases of assets abroad
D)an increase in U.S.imports of services

Answer 2

an increase in U.S.purchases of assets abroad

Question 3

If a U.S.importer can purchase 10,000 British pounds for $20,000, the rate of exchange is

A)$1 = 2 British pounds in the United States.
B)$2 = 1 British pound in the United States.
C)$1 = 2 British pounds in Great Britain.
D)$0.5 = 1 British pound in Great Britain.

Answer 3

$2 = 1 British pound in the United States.

Question 4

In a nation's balance of payments, which one of the following items is always recorded as a positive entry?

A)goods imports
B)balance on capital account
C)U.S.purchases of assets abroad
D)exports of services

Question 5

It may be misleading to label a trade deficit as unfavorable or adverse, because

A)the multiplier does not apply to a trade deficit.
B)a trade deficit increases a nation's aggregate output and employment.
C)a nation's consumers benefit from a trade deficit during the period it occurs.
D)a trade deficit precludes inflation.

Question 6

In international financial transactions, what are the only two things that individuals and firms can exchange?

A)currency and real assets
B)services and manufactured goods
C)assets and currently produced goods and services
D)currency and currently produced goods and services

Question 7

In 2015, the capital account in the U.S.balance of payments was in

A)deficit, and larger than the current account deficit.
B)surplus, and larger than the current account surplus.
C)deficit, and smaller than the current account deficit.
D)balance, with no deficit or surplus.

Question 8

Which of the following is not included in the current account of a nation's balance of payments?

A)its goods exports
B)its goods imports
C)its net investment income
D)its purchases of real assets abroad.

Question 9

The financial account balance is a nation's

A)net investment income minus its net transfers.
B)exports of goods and services minus its imports of goods and services.
C)sale of real and financial assets to people living abroad minus its purchases of real and financial assets from foreigners.
D)domestic investment spending minus domestic saving.

Question 10

Suppose the balance on the financial account is +$200 billion and the balance on the capital account is +$2 billion.The size of the current account is

A)+$200 billion.
B)−$202 billion.
C)−$198 billion.
D)+$2 billion.

Question 11

Which of the following would call for inpayments to the United States?

A)Gold flows into the United States.
B)U.S.firms sell insurance to Brazilian shippers.
C)The United States sends foreign aid to developing countries.
D)The United States imports German automobiles.

Question 12

Which of the following combinations is plausible, as it relates to a nation's balance of payments?

A)Current account = +$40 billion; capital account = +$20 billion; financial account = −$50 billion.
B)Current account = −$50 billion; capital account = +$20 billion; financial account = +$30 billion.
C)Current account = +$10 billion; capital account = +$40 billion; financial account = +$50 billion.
D)Current account = +$30 billion; capital account = −$20 billion; financial account = −$50 billion.

Question 13

Which one of the following, other things equal, will directly alter the U.S.balance of trade?

A)an increase in the balance on capital account
B)a decrease in U.S.goods exports
C)an increase in net transfers
D)a decrease in U.S.purchases of assets abroad

Question 14

Which of the following combinations is plausible, as it relates to a nation's balance of payments?

A)Current account = +$40 billion; capital account = −$10 billion; financial account = −$50 billion.
B)Current account = +$50 billion; capital account = −$20 billion; financial account = +$30 billion.
C)Current account = +$10 billion; capital account = +$40 billion; financial account = +$50 billion.
D)Current account = +$30 billion; capital account = −$20 billion; financial account = −$10 billion.

Question 15

In the balance of payments of the United States, U.S.goods imports are recorded as a

A)positive entry.
B)capital account entry.
C)current account entry.
D)financial account entry.

Question 16

A nation's capital and financial account

A)contains inpayment items but not outpayment items.
B)includes service exports and service imports.
C)includes both inpayments and outpayments.
D)includes net investment income and net transfers.

Question 17

Which of the following would call for outpayments from the United States?

A)The United States exports computer software.
B)The United States purchases assets abroad.
C)Foreigners purchase assets in the United States.
D)Foreign tourists spend money in the United States.

Question 18

In the U.S.balance of payments, foreign purchases of assets in the United States are a

A)foreign currency outflow.
B)foreign currency inflow.
C)current account item.
D)debit, or outpayment.

Question 19

There must always be a balance of a nation's

A)goods exports and gold imports.
B)total international payments.
C)imports and exports of goods and services.
D)net transfers and net investment income.

Question 20

International transactions fall into what two broad categories?

A)manufacturing trade and services trade
B)international trade and international asset transactions
C)currency transactions and services trade
D)newly created assets and preexisting assets

Question 21

The following are hypothetical exchange rates: $1 = 140 yen; 1 Swiss franc = $0.10.We can conclude that

A)1 yen = 280 Swiss francs.
B)1 yen = 14 Swiss francs.
C)1 Swiss franc = 28 yen.
D)1 Swiss franc = 14 yen.

Question 22

Which of the following will generate a demand for country X's currency in the foreign exchange market?

A)travel by citizens of country X in other countries
B)the desire of foreigners to buy stocks and bonds of firms in country X
C)the imports of country X
D)charitable contributions by country X's citizens to citizens of developing nations

Question 23

Appreciation of the Canadian dollar will

A)intensify an existing disequilibrium in Canada's balance of payments.
B)make Canada's exports less expensive and its imports more expensive.
C)make Canada's exports more expensive and its imports less expensive.
D)make Canada's exports and imports both more expensive.

Question 24

Depreciation of the dollar will

A)decrease the prices of both U.S.imports and exports.
B)increase the prices of both U.S.imports and exports.
C)decrease the prices of U.S.imports but increase the prices to foreigners of U.S.exports.
D)increase the prices of U.S.imports but decrease the prices to foreigners of U.S.exports.

Question 25

Suppose the balance on the financial account is −$300 billion and the balance on the capital account is +$5 billion.The size of the current account is

A)+$295 billion.
B)−$295 billion.
C)+$305 billion.
D)+$5 billion.

Question 26

In a system of fixed exchange rates, if the dollar price of euros is above the market equilibrium level,

A)gold will flow from the United States to Europe.
B)there will be a surplus of euros.
C)the U.S.government will have to ration euros to U.S.importers.
D)there will be a shortage of euros.

Question 27

A market in which the money of one nation is exchanged for the money of another nation is a

A)resource market.
B)bond market.
C)stock market.
D)foreign exchange market.

Question 28

Under a system of freely flexible (floating) exchange rates, a U.S.trade deficit with Mexico will tend to cause

A)the U.S.government to ration pesos to U.S.importers.
B)a flow of gold from the United States to Mexico.
C)an increase in the peso price of dollars.
D)an increase in the dollar price of pesos.

Question 29

If the equilibrium exchange rate changes so that fewer dollars are needed to buy a South Korean won, then

A)Americans will buy fewer Korean goods and services.
B)the won has appreciated in value.
C)fewer U.S.goods and services will be demanded by the South Koreans.
D)the dollar has depreciated in value.

Question 30

Which of the following have substantially equivalent effects on a nation's volume of exports and imports?

A)exchange rate appreciation and a decrease in the domestic supply of money
B)exchange rate appreciation and domestic deflation
C)exchange rate depreciation and domestic deflation
D)exchange rate depreciation and domestic inflation

Question 31

If the exchange rate between the U.S.dollar and the Japanese yen is $1 = 200 yen, then the dollar price of yen is

A)$0.005.
B)$0.05.
C)$0.50.
D)$5.

Question 32

The U.S.supply of Japanese yen is

A)downsloping because a lower dollar price of yen means U.S.goods are cheaper to the Japanese.
B)upsloping because a higher dollar price of yen means U.S.goods are cheaper to the Japanese.
C)upsloping because a lower dollar price of yen means U.S.goods are cheaper to the Japanese.
D)downsloping because a higher dollar price of yen means U.S.goods are cheaper to the Japanese.

Question 33

With which of the following countries does the United States have its largest goods and services deficit?

A)Canada
B)Germany
C)Japan
D)China

Question 34

If the exchange rate changes so that more Mexican pesos are required to buy a dollar, then

A)the peso has appreciated in value.
B)Americans will buy more Mexican goods and services.
C)more U.S.goods and services will be demanded by the Mexicans.
D)the dollar has depreciated in value.

Question 35

In considering euros and dollars, the rates of exchange for the euro and the dollar

A)are directly related.
B)are inversely related.
C)are unrelated.
D)move in the same direction.

Question 36

If the dollar price of yen rises, then

A)the yen price of dollars also rises.
B)the dollar depreciates relative to the yen.
C)the yen depreciates relative to the dollar.
D)the dollar will buy fewer U.S.goods.

Question 37

Suppose the balance on the current account is +$100 billion and the balance on the capital account is −$1 billion.The balance on the financial account is

A)+$101 billion.
B)−$100 billion.
C)−$99 billion.
D)−$101 billion.

Question 38

In the U.S.balance of payments account for a certain year, a positive number in the financial account means a

A)net buildup of assets held by the U.S.
B)net reduction in the ownership of assets by U.S.interests.
C)buildup of total foreign debt.
D)reduction of total foreign debt.

Question 39

If the U.S.dollar depreciates relative to the Russian ruble, the ruble

A)will be less expensive to Americans.
B)mayeither appreciate or depreciate relative to the dollar.
C)will appreciate relative to the dollar.
D)will depreciate relative to the dollar.

Question 40

The U.S.demand for British pounds is

A)downsloping because a higher dollar price of pounds means British goods are cheaper to Americans.
B)downsloping because a lower dollar price of pounds means British goods are more expensive to Americans.
C)upsloping because a lower dollar price of pounds means British goods are cheaper to Americans.
D)downsloping because a lower dollar price of pounds means British goods are cheaper to Americans.

Question 41

Assume that Japan and South Korea have flexible exchange rates.Other things equal, if economic growth is more rapid in Japan than in South Korea,

A)gold bullion will flow out of Japan.
B)the Japanese yen will depreciate.
C)the South Korean won will depreciate.
D)the yen and won exchange rate will stay constant.

Question 42

Suppose that the United States fixes the dollar-pound exchange rate.In the process of maintaining the fixed exchange rate, the U.S.central bank regularly finds itself in a position of having to increase its reserves of pounds.Based on this, we could conclude that

A)the fixed dollar-pound exchange rate is consistently below the equilibrium exchange rate that would be produced by a private foreign exchange market.
B)the fixed dollar-pound exchange rate consistently exceeds the equilibrium exchange rate that would be produced by a private foreign exchange market.
C)the fixed dollar-pound exchange rate is a good approximation of the exchange rate that would be produced by a private foreign exchange market.
D)the U.S.central bank is regularly having to reduce the domestic money supply.

Question 43

Suppose that a central bank that fixes its exchange rate against other currencies is facing a regular increase of foreign exchange reserves.To offset unwanted changes in the domestic money supply, the central bank could

A)reset the peg to a higher level.
B)reduce domestic interest rates.
C)use a sterilization policy of buying bonds or decreasing banking system reserve requirements.
D)use a sterilization policy of selling bonds or increasing banking system reserve requirements.

Question 44

Assume that, under a system of floating exchange rates, Mexicans decide to increase their investments in the United States.As a result,

A)the peso and the dollar will both depreciate.
B)the peso and the dollar will both appreciate.
C)the peso will depreciate and the dollar will appreciate.
D)the peso will appreciate and the dollar will depreciate.

Question 45

Assume that Switzerland and Britain have floating exchange rates.Other things unchanged, if a tight money policy raises interest rates in Britain as compared to Switzerland,

A)gold bullion will flow into Switzerland.
B)the Swiss franc will depreciate.
C)the pound will depreciate.
D)the Swiss franc will appreciate.

Question 46

The current system of exchange rates can best be described as

A)freely fluctuating exchange rates.
B)managed floating exchange rates.
C)rigidly fixed exchange rates.
D)an adjustable peg system.

Question 47

A central bank engaging in sterilization is attempting to

A)counteract the efforts of foreign central banks that fix exchange rates to gain an advantage in international trade.
B)depreciate its currency relative to foreign currencies.
C)appreciate its currency relative to foreign currencies.
D)offset domestic money supply changes that result from fixing its exchange rate against other currencies.

Question 48

The exchange rate system currently used by the industrially advanced nations is

A)the gold standard.
B)the Bretton Woods system.
C)the managed float.
D)a fixed rate system.

Question 49

Suppose that the United States fixes the dollar-pound exchange rate.In the process of maintaining the fixed exchange rate, if the U.S.central bank starts to realize reduced reserves of pounds, this suggests that

A)the quantity supplied of pounds has exceeded the quantity demanded of pounds.
B)the quantity demanded of pounds has exceeded the quantity supplied of pounds.
C)the exchange rate will rise.
D)the U.S.supply of dollars has increased.

Question 50

The idea that freely floating exchange rates equate the buying power of national currencies is called

A)the equation of exchange.
B)the balance of payments.
C)Say's Law.
D)the purchasing power parity theory.

Question 51

Assume that Brazil and Mexico have floating exchange rates.Other things unchanged, if the price level is stable in Mexico, but Brazil experiences rapid inflation,

A)gold bullion will flow into Brazil.
B)the Brazilian real will depreciate.
C)the Mexican peso will depreciate.
D)the Brazilian real will appreciate.

Question 52

If the United States experiences an increase in foreign exchange reserves,

A)the net transfers line in the balance of payments statement will increase.
B)it will also realize a decrease in the domestic supply of dollars.
C)this will appear as a positive item in the U.S.balance of payments statement.
D)this will appear as a negative item in the U.S.balance of payments statement.

Question 53

In 1985, the exchange rate between the U.S.dollar and the Japanese yen was $1 = 262 yen; in 2003, the rate was $1 = 110 yen.Between 1985 and 2003, the

A)dollar appreciated in value relative to the yen.
B)yen appreciated in value relative to the dollar.
C)dollar price of yen fell.
D)yen price of dollars rose.

Question 54

Suppose interest rates fall sharply in the United States but are unchanged in Great Britain.Other things equal, under a system of freely floating exchange rates, we can expect the demand for pounds in the United States to

A)decrease, the supply of pounds to increase, and the dollar to appreciate relative to the pound.
B)increase, the supply of pounds to increase, and the dollar may either appreciate or depreciate relative to the pound.
C)increase, the supply of pounds to decrease, and the dollar to depreciate relative to the pound.
D)decrease, the supply of pounds to increase, and the dollar to depreciate relative to the pound.

Question 55

Suppose that the United States decides to fix the dollar-euro exchange rate.If the U.S.central bank observes that the quantity supplied of euros exceeds the quantity demanded of euros at the fixed exchange rate, to maintain the exchange rate, the U.S.central bank will

A)need to reduce the domestic supply of dollars.
B)need to appreciate the dollar.
C)realize an increase in its reserves of euros.
D)realize a decrease in its reserves of euros.

Question 56

Under the managed floating system of exchange rates,

A)all exchange rates vary with changes in the free-market prices of gold.
B)industrialized nations meet once each year to negotiate readjustments in their exchange rates.
C)exchange rates are essentially flexible, but governments intervene to offset disorderly fluctuations in rates.
D)exchange rates are adjusted at the discretion of the IMF.

Question 57

Under a system of flexible exchange rates, an increase in the international value of a nation's currency will

A)cause an international surplus of its currency.
B)contribute to disequilibrium in its balance of payments.
C)cause gold to flow into that country.
D)cause its imports to rise.

Question 58

If the United States decided to fix its exchange rate with Japan, this would

A)require the U.S.to fix its exchange rate with all other currencies.
B)ensure that the U.S.dollar would always appreciate against the yen.
C)prevent the U.S.from having a trade deficit with Japan.
D)cause the U.S.government to become the dollar-yen foreign exchange market.

Question 59

In saying that the present system of floating exchange rates is managed, we mean that

A)countries that allow their exchange rate to move freely will lose their borrowing privileges with the IMF.
B)the value of any IMF member's currency can only vary 2 percent from its par value.
C)IMF officials determine exchange rates on a day-to-day basis.
D)the central banks of various countries sometimes buy and sell foreign exchange to alter undesirable trends in exchange rates.

Question 60

If the United States has full employment and the dollar dramatically depreciates in value, we can expect (other things equal)

A)both U.S.imports and U.S.exports to rise.
B)both U.S.imports and U.S.exports to fall.
C)U.S.exports to fall and U.S.imports to increase.
D)inflation to occur.

Question 61

Relatively rapid U.S.growth between 2002 and 2006 contributed to large U.S.trade deficits by

A)increasing U.S.national income, which decreased U.S.exports.
B)reducing real interest rates in the United States.
C)increasing U.S.tax revenues and reducing the federal budget deficit.
D)increasing U.S.national income, which increased U.S.imports.

Question 62

When it is reported that a nation is experiencing a "balance of payments deficit," this is best interpreted to mean that the nation is experiencing

A)an increase in foreign exchange reserves.
B)a decrease in foreign exchange reserves.
C)an imbalance between its current account and its capital and financial account.
D)a situation where it is importing more goods than it is exporting.

Question 63

Suppose that the economically largest nations collectively decided that the dollar is too strong (high in value) relative to the yen.These nations might

A)use foreign exchange reserves of yen to buy dollars.
B)use foreign exchange reserves of dollars to buy yen.
C)encourage Japan to print more yen.
D)encourage the United States to increase interest rates.

Question 64

In terms of individual nations, the largest U.S.trade deficit is with

A)Japan.
B)Mexico.
C)China.
D)Canada.

Question 65

Present consumption supported by large trade deficits may come at the expense of

A)permanent debt to foreign interests.
B)permanent foreign ownership of formerly U.S.-owned assets.
C)large sacrifices of future consumption.
D)all of these.

Question 66

When a government buys or sells foreign exchange in the foreign exchange market in order to alter the supply or demand for currency and push the exchange rate in a desired direction, this is known as

A)monetary policy.
B)an inflationary peg.
C)sterilization.
D)a currency intervention.

Question 67

(Last Word) Which of the following is a disadvantage of belonging to a common currency?

A)exchange-rate risk
B)difficulty in comparing costs between trading partners
C)deadweight loss from currency conversions
D)the loss of monetary policy independence

Question 68

Which of the following statements is most accurate about the U.S.current account since the Great Recession (the period covering 2009-2015)?

A)The current account has remained the same in absolute terms, but fallen as a percentage of GDP.
B)The current account has gone from a deficit to a surplus.
C)The current account deficit has grown in absolute terms, but remained relatively constant as a percentage of GDP.
D)The current account deficit has grown in both absolute terms, and as a percentage of GDP.

Question 69

(Consider This) Which of the following has been a consequence of China pegging its currency against the U.S.dollar throughout the 2000s?

A)China has experienced a loss of dollar reserves.
B)China has experienced strong inflationary pressure, despite sterilization efforts.
C)China has experienced a large trade deficit in goods with the United States.
D)The United States has actively intervened in the foreign exchange market to bring the yuan to a free exchange market equilibrium value.

Question 70

The United States' current account deficit reached a new high in

A)2006.
B)2007.
C)2009.
D)2015.

Question 71

The large trade deficit that the United States has with China persists in part because

A)the U.S.economy has grown slowly in recent years.
B)China has fixed its exchange rate to a basket of currencies that includes the dollar, and has not allowed the yuan to appreciate relative to the U.S.dollar.
C)China has experienced rapid economic growth over the past decade.
D)China has recently imposed or increased tariffs on most goods imported from the United States.

Question 72

Which of the following lists of exchange-rate systems is arranged in proper historical order, from earliest to most current?

A)Bretton Woods system, gold standard, managed float
B)gold standard, managed float, Bretton Woods system
C)managed float, Bretton Woods system, gold standard
D)gold standard, Bretton Woods system, managed float

Question 73

As a result of the 2007-2009 recession,

A)declining imports created a trade surplus for the United States.
B)the U.S.trade deficit grew significantly.
C)declining imports reduced the size of the U.S.trade deficit.
D)roughly equivalent declines in both exports and imports left the U.S.trade balance unchanged.

Question 74

(Consider This) Which of the following statements is most accurate about China's pegging of its currency against the U.S.dollar in the 2000s?

A)China has consistently kept the yuan price of a dollar lower than what the free market equilibrium exchange rate would be.
B)China has consistently kept the yuan price of a dollar higher than what the free market equilibrium exchange rate would be.
C)China has regularly adjusted the peg so as to sometimes set the yuan price of a dollar too high and other times set it too low.
D)China has seen a rapid decline in its reserves of dollars.

Question 75

In recent years, the United States has had large

A)current account surpluses.
B)capital and financial account deficits.
C)balance of trade deficits.
D)balance of payments surpluses.

Question 76

In recent years, the United States has had large

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

Question 77

The world's largest debtor nation in terms of debt owed to foreign citizens and governments is

A)Russia.
B)Argentina.
C)Japan.
D)the United States.

Question 78

Mainly because of large current account deficits, the United States

A)is the leading exporting nation in the world.
B)has the world's largest external debt.
C)has the world's highest saving rate.
D)is experiencing an increase in its net inflow of investment income.

Question 79

One of the consequences of the U.S.trade deficit is that

A)domestic inflation has resulted.
B)the accumulation of American dollars in foreign hands has enabled foreign firms to build factories in America.
C)the distribution of income in the United States has become less unequal.
D)the system of flexible exchange rates has been abandoned in favor of a new gold standard.

Question 80

Two of the implications of large U.S.trade deficits for the United States are

A)decreased current consumption and decreased indebtedness to foreigners.
B)reduced budget deficits and decreased indebtedness to foreigners.
C)reduced current consumption and higher saving.
D)increased current consumption and increased indebtedness to foreigners.