Deck 27: The Balance of Payments and Exchange Rates

Question 1

The current account of the balance of payments records

A) government incomes and expenditures in the current year.
B) a country's exports and imports of goods and services.
C) a country's exports and imports of capital.
D) A and B

Answer 1

a country's exports and imports of goods and services.

Question 2

An economy that trades and has financial dealings with the rest of the world is called _____economy.

A) a free trade
B) an autarkic
C) a mixed
D) an open

Answer 2

an open

Question 3

What is not a part of the balance of payments account?

A) Current account
B) Fiscal account
C) Financial account
D) Capital account

Answer 3

Fiscal account

Question 4

Which of the following would be a credit item in the UK balance of payments?

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

Question 5

The record of a country's transfers of shareholdings, property and bank deposits to and from abroad is called its

A) capital account of the balance of payments.
B) financial account of the balance of payments.
C) balance of payments on current account.
D) balance of payments.

Question 6

The record of a country's transfers of land, inter- governmental payments and money sent by migrants to and from abroad is called its

A) balance of payments.
B) balance of payments on current account.
C) capital account of the balance of payments.
D) financial account of the balance of payments.

Question 7

A UK firm builds a factory in Brazil. This transaction will be entered as

A) a debit in the UK current account.
B) a credit in the UK capital account.
C) a credit in the UK current account.
D) a debit in the UK capital account.

Question 8

Which of the following is an item in the UK financial account of the balance of payments?

A) Net export of services
B) Net transfer payments
C) Net investment income
D) The change in private UK assets abroad

Question 9

Which of the following statements is correct?

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

Question 10

When foreign assets in the UK increase

A) the UK is increasing its debt to the rest of the world.
B) the UK is increasing its stock of assets.
C) foreign debts to the UK also increase.
D) the UK is reducing its debt to the rest of the world.

Question 11

In the late 1980s and early 1990s, the UK consistently ran

A) deficits in both the current account and the capital account.
B) current account deficits and capital account surpluses.
C) surpluses in both the current account and the capital account.
D) current account surpluses and capital account deficits.

Question 12

The system under which the government allows the exchange rate to be determined is called the

A) Bretton Woods agreement.
B) fiscal stance.
C) exchange rate regime.
D) monetary policy.

Question 13

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

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

Question 14

We could have expected the 2012 Olympics to

A) lead to a depreciation of sterling.
B) reduce the supply of sterling on the foreign exchange markets.
C) reduce UK imports.
D) increase UK exports.
E) all of the above

Question 15

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

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

Question 16

All currencies other than the domestic currency of a given country are referred to as

A) hard currency.
B) near monies.
C) foreign currency.
D) reserve currency.

Question 17

The supply curve for sterling on the foreign exchange market could be increased by

A) higher demand for UK goods from overseas.
B) lower demand for imports by UK residents.
C) higher demand for imports by UK residents.
D) A and C

Question 18

Which of the following would not shift the demand curve for sterling on foreign exchange markets?

A) Rising overseas inflation rates
B) A fall in the supply curve that lowers the volume of market trade
C) A rise in domestic incomes
D) A fall in domestic interest rates

Question 19

When the exchange rate falls this is called_____, whereas when the exchange rate rises this is called___________.

A) depreciation; appreciation
B) fixing; floating
C) valuation; revaluation
D) inflation; deflation

Question 20

The following diagram shows the foreign exchange market for sterling.
At an exchange rate of $2.20 there is

A) a shortage of pounds of a- b.
B) an excess supply of pounds of a- b.
C) an overvalued exchange rate of 40 cents.
D) an excess demand for dollars of c- d.

Question 21

The following diagram shows the foreign exchange market for sterling.
If, being worried about the effect on exports and wishing to prevent the exchange rate from rising above $1.80, the Bank of England decides to intervene by using the reserves, which of the following would have the desired effect?

A) Buying pounds using reserves of an amount a- b
B) Selling dollars to a sterling value of a- b
C) Buying dollars into the reserves by selling pounds of an amount c- d
D) Selling dollars from the reserves of an amount c- d

Question 22

The demand for pounds in the foreign exchange market is downward- sloping because when the price of a pound (the exchange rate) falls

A) foreigners demand fewer UK goods because these goods have become more expensive.
B) Britons demand fewer foreign goods because these goods have become more expensive.
C) Britons demand more foreign goods because these goods have become less expensive.
D) foreigners demand more UK products because these products have become less expensive.

Question 23

If the inflation rate falls in the UK relative to the inflation rate in the US, this will cause

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

Question 24

If the UK receives larger than expected revenues from exports, then the exchange value of the pound sterling will

A) appreciate.
B) fluctuate more than usual.
C) not be affected.
D) depreciate.

Question 25

If there is a current account deficit of £2 billion, then

A) there must be a surplus of £2 billion on trade in services.
B) there must be a net errors and omissions item of + £2 billion.
C) there must be an equivalent deficit on the capital plus financial accounts.
D) the overall capital plus financial accounts (including net errors and omissions) must be in surplus by £2 billion.

Question 26

If the UK takes part in another war abroad, then the exchange value of its currency will

A) not be affected.
B) appreciate.
C) fluctuate more than usual.
D) depreciate.

Question 27

If currency dealers expect the value of the pound to fall, then it will

A) fluctuate more than usual.
B) depreciate.
C) appreciate.
D) not be affected.

Question 28

If a UK mobile phone company buys a German mobile phone company, then the exchange value of the pound will

A) depreciate.
B) fluctuate more than usual.
C) not be affected.
D) appreciate.

Question 29

Which one of the following would cause an appreciation of the exchange rate (in each case assume that nothing else changes)?

A) A reduction in the rate of interest
B) Speculation that the rate of interest will fall
C) An increase in domestic incomes
D) A reduction in the current account deficit (and no change in the other parts of the balance of payments)
E) Inflation increases relative to inflation rates abroad

Question 30

A depreciation is caused by______and/or_________.

A) an increase in the supply of sterling; a reduction in the demand for sterling
B) a reduction in the supply of sterling; an increase in the demand for sterling
C) a reduction in the supply of sterling; a reduction in the demand for sterling
D) an increase in the supply of sterling; an increase in the demand for sterling

Question 31

If an exchange rate falls but is expected to rise again later, there will be______ speculation.

A) stabilising
B) no
C) destabilising
D) neutral

Question 32

If the economy is in the expansionary phase of the business cycle, aggregate demand ______, unemployment _____, inflation _____, and the current account of the balance of payments is likely to move towards_____.

A) rises; falls; rises; deficit
B) falls; rises; falls; surplus
C) is static; is low; rises; deficit
D) falls; falls; falls; surplus

Question 33

The government believes that the current exchange rate is its long- term equilibrium. However, short- term leftward shifts in demand and rightward shifts in supply are causing the exchange rate to fall below this level. Which of the following are actions the government could take?

A) Borrow from abroad
B) Use reserves
C) Lower interest rates
D) Raise interest rates
E) A, B and D F) B, C and D

Question 34

If countries attempt to achieve similar rates of economic growth through demand management policy, for which of the following reasons may the equilibrium rate of exchange change over the longer term?
(i) The marginal propensity to import differs from one country to another.
(ii) The relative income elasticities of demand for imports and exports differ from one country to another.
(iii) The rate of growth of productivity differs from one country to another.

A) (i) and (iii)
B) (ii)
C) (i) and (ii)
D) (ii) and (iii)
E) (i), (ii) and (iii)

Question 35

Which of the following policies could a government or central bank pursue to prevent the exchange rate from depreciating?

A) Raise interest rates
B) Increase the money supply through open- market operations
C) Raise taxes
D) Buy foreign currencies on the foreign exchange market

Question 36

If neither changes in interest rates nor central bank intervention from the reserves can halt a depreciation/appreciation of a currency that is perceived to be not at its equilibrium exchange rate, then which of the following exchange rate regimes are viable over the longer term?

A) Free floating exchange rate
B) Fixed with an independent monetary policy
C) Adjustable peg system (with just occasional adjustments)
D) Adopting the dollar or the euro or some other international currency as the domestic currency
E) A and D
F) A, B and D
G) B and C

Question 37

Under fixed exchange rates, balance of payments deficits will not be caused by

A) the income elasticity of demand for imports being higher than the income elasticity of demand for exports.
B) inflation in this country being higher than that in the economies with which it trades.
C) a deterioration in the terms of trade.
D) faster growth.

Question 38

Assume that there is an internal shock under fixed exchange rates. According to new classical economists, if the government does not intervene, which of the following will occur?
(i) Internal balance will be restored.
(ii) Current account balance will be restored.
(iii) Overall external balance will be restored.

A) (i)
B) Nothing will happen
C) (i) and (iii)
D) (ii) and (iii)

Question 39

Which one of the following is likely to lead to persistent balance of payments deficits under fixed exchange rates?

A) A higher rate of inflation abroad than in the domestic economy
B) The long- term development of import substitutes at home
C) A lower income elasticity of demand for the country's exports than for its imports
D) A lower rate of growth at home than abroad

Question 40

A central bank can attempt to manipulate the exchange rate by

A) buying more exports or imports.
B) changing the interest rate.
C) changing tax rates.
D) A and B

Question 41

Which of the following is not an advantage of floating exchange rates?

A) Governments are free to choose their own domestic economic policy.
B) Balance of payments disequilibria are self- correcting.
C) There is no problem of inadequate foreign exchange reserves.
D) Speculation will stabilise exchange rates.

Question 42

Which of the following is not a disadvantage of floating exchange rates?

A) Speculation can be destabilising.
B) It is impossible for businesses to buy or sell currencies in the short- to medium- term at a fixed rate.
C) Long- term investment may be discouraged.
D) It is difficult for importers and exporters to predict their costs and revenues.

Question 43

Which of the following is not a reason for exchange rate volatility?

A) Inflation targets
B) A high level of capital mobility
C) The absence of exchange controls
D) Money supply targets
E) A high level of international liquidity

Question 44

With floating exchange rates, fiscal policy is_____ it is under fixed exchange rates.

A) not as effective as
B) much more effective than
C) equally as effective as
D) more effective than

Question 45

With floating exchange rates monetary policy is_____it is under fixed exchange rates.

A) equally as effective as
B) more effective than
C) much more effective than
D) not as effective as

Question 46

Which of the following options were possible under the Bretton Woods system if a country was experiencing a balance of payments deficit?
(i) Devaluation
(ii) Borrowing from the IMF
(iii) Deflationary fiscal policy
(iv) Deflationary monetary policy
(v) Using reserves

A) (i), (ii), (iii), (iv) and (v)
B) (i), (iii) and (iv)
C) (i)
D) (ii), (iii) and (v)
E) (ii) and (iii)

Question 47

Which of the following options would help to correct a balance of payments deficit?
(i) Devaluation
(ii) Borrowing from the IMF
(iii) Deflationary fiscal policy
(iv) Deflationary monetary policy
(v) Using reserves

A) (ii), (iii) and (v)
B) (i), (ii), (iii), (iv) and (v)
C) (i)
D) (i), (iii) and (iv)
E) (ii) and (iii)

Question 48

The Bretton Woods system was abandoned in 1972 and replaced by floating exchange rates. The reason this occurred was not due to

A) floating exchange rates being obviously better for all countries outside the Soviet bloc.
B) insufficient reserves to cope with balance of payments deficits.
C) the reluctance of countries to revalue, thus putting more pressure on deficit countries.
D) the Vietnam war causing large US deficits which in turn caused excess liquidity.

Question 49

An exchange rate regime where rates are fixed but are changed if deficits or surpluses persist is usually called

A) adjustable peg.
B) fixed exchange rate.
C) revaluation system.
D) joint float.

Question 50

When a currency is allowed to float between upper and lower rates but not allowed to move outside this band, it is called

A) crawling peg.
B) exchange rate band.
C) dirty floating.
D) adjustable peg.

Question 51

When, under a pegged exchange rate system, the government or central bank raises the exchange rate, this is called

A) revaluation.
B) renegotiation.
C) reflation.
D) appreciation.

Question 52

All accounts within the balance of payments account must be without deficit.

Question 53

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

Question 54

The UK has been a net exporter of services for most of the past 100 years.

Question 55

If the current account is in deficit, there must also be a deficit in the capital account.

Question 56

When the UK acquires assets abroad, it is in essence borrowing money and foreign debts to the UK decrease.

Question 57

The current account includes the receipt of EU money for capital projects.

Question 58

The balance of payments is made up of just two main accounts: the current account and the capital account.

Question 59

The current account includes current transfers of money.

Question 60

Net errors in the balance of payments record the costs of repairs to the fishing fleet.

Question 61

The UK has been a net importer of goods for most of the last 100 years.

Question 62

The exchange rate index is a weighted average of the exchange rates of the pound sterling with a variety of other currencies.

Question 63

Under a floating exchange rate, a rise in interest rates leads to an appreciation.

Question 64

The sterling exchange rate index is a weighted average of the exchange rates of the pound sterling with a variety of other currencies.

Question 65

An exchange rate regime is the way in which the government lets the exchange rate be decided.

Question 66

Under a floating exchange rate, an excess supply of a currency leads to an appreciation.

Question 67

In a free foreign exchange market the balance of payments will automatically balance.

Question 68

Under a floating exchange rate, contractionary monetary policies are likely to increase the competitiveness of a country's exports.

Question 69

Under a floating exchange rate, contractionary fiscal policies are likely to increase the competitiveness of a country's exports.

Question 70

Exchange rate movements will reinforce monetary policy but will dampen fiscal policy.

Question 71

Other things being equal, central bank intervention in the foreign exchange market to prevent a deficit leading to a depreciation in the exchange rate will increase the money supply.

Question 72

In the long run under fixed exchange rates, wage and price flexibility leads to flexibility in the real exchange rate and helps to restore internal and external balance.

Question 73

If the UK's usual net import of goods is not balanced by a similar net export of services then, under a floating exchange rate, the exchange rate must change.

Question 74

The currencies which are commonly used for world trade and investment are called international liquidity.

Question 75

If two countries have fixed their exchange rates, then they must have similar fiscal policies.

Question 76

If two countries have fixed their exchange rates, then they must have similar monetary policies.

Question 77

One advantage of a pegged exchange rate is that it prevents speculation.

Question 78

One advantage of a fixed exchange rate is that it prevents speculation.

Question 79

Under fixed exchange rates, interest rates are determined by the balance of payments.

Question 80

Are the following shocks internal or external?
(a) An increase in the marginal propensity to save
(b) A fall in the demand for exports
(c) An increase in the rate of income tax
(d) A recovery in the world economy