Deck 9: Trade and the Balance of Payments

Question 1

Which of the following transactions would be recorded in the current account?

A)U)S. investors purchase bonds from Germany.
B)A person living in the United States sends money home to her family in Cuba.
C)The Fed increases its holdings of yen.
D)The U.S. transfers a military base to another country.

Answer 1

B

Question 2

The current account balance of the United States began to deteriorate in

A)the early 1970s.
B)the early 1980s.
C)the late 1980s.
D)the early 1990s.

Answer 2

B

Question 3

Which of the following transactions would be recorded in the capital account?

A)U)S. investors purchase bonds from Germany.
B)The Fed increases its holdings of yen.
C)The U.S. transfers a military base to another country.
D)A U.S. firm sells a machine to a business in another country.

Answer 3

C

Question 4

If the residents of a country receive income from their foreign investments,it is counted as a

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

Question 5

People sometimes worry that American trade with other countries will lead to large U.S.trade deficits and the movement of massive amounts of American capital out of the country.This worry is unfounded because countries cannot

A)increase savings at the same time that a trade deficit grows.
B)spend more than they earn.
C)invest more than they save.
D)have both current account and financial account deficits at the same time.

Question 6

Which of the following is FALSE?

A)In 2002, the United States imported more goods and services from foreign suppliers than it exported to foreign purchasers.
B)Services are almost one-third of total exports and are a growing part of U.S. and world trade.
C)The U.S. trade balance in services is in deficit.
D)With the exception of the Gulf War period in 1991, the U.S. current account has been in deficit since the 1980s.

Question 7

If there is a trade deficit,which of the following is true?

A)The current account balance could be positive, negative, or zero.
B)There will be a current account deficit.
C)There will be a current account surplus.
D)There will be a financial account surplus.

Question 8

If the trade balance is negative,the current account balance will be negative.

Question 9

How do recent current account deficits compare to GNP and to past ratios?

Question 10

Which of the following transactions would be recorded as a CREDIT in the current account?

A)A U.S. citizen purchases goods from Ireland.
B)A U.S. company pays dividends on its stock. Some of the dividends go to foreign owners of the stock.
C)The U.S. sells wheat to Mexico.
D)A person living in the United States sends money home to her family in Cuba.

Question 11

Table 9.1

Based on Table 9.1,the balance on the current account is

A)+100.
B)+200.
C)-100.
D)-200.

Question 12

A current account deficit implies that

A)the financial account is negative.
B)the financial account is in surplus.
C)exports of goods and services exceed imports of goods and services.
D)secondary income is positive.

Question 13

Which of the following transactions would be recorded in the financial account?

A)U)S. investors purchase bonds from Germany.
B)A person living in the United States sends money home to her family in Cuba.
C)The Fed increases its holdings of yen.
D)The U.S. transfers a military base to another country.

Question 14

Which of the following is NOT part of the current account?

A)Dividends received on a foreign investment
B)Purchase of a plane ticket on a foreign airline
C)Shipment of food aid to a poor country
D)Purchase of a foreign bond

Question 15

Based on Table 9.1,the statistical discrepancy is

A)+100.
B)0)
C)-100.
D)-200.

Question 16

What were some of the consequences of the large current account deficits that the U.S.ran from the 1990s to 2007?

Question 17

Briefly describe the factors that contributed to the U.S.current account deficits of the 1990s.

Question 18

Based on Table 9.1,the balance on the financial account is

A)+100.
B)+200.
C)-100.
D)-200.

Question 19

Based on Table 9.1,if the information in the table is typical of current and financial account values over a long period,then it would be reasonable to infer that

A)the net international investment position is negative.
B)the net international investment position is positive.
C)national savings are less than domestic investment.
D)government accounts are in deficit.

Question 20

Purchases of stocks and bonds are recorded in the capital account.

Question 21

Which of the following is an example of a financial derivative?

A)An option to purchase stock in the future
B)A share of stock in Microsoft
C)A U.S. government bond
D)Monetary gold

Question 22

Which of the following is an example of a change in reserve assets?

A)Toyota builds an automobile plant in Ohio.
B)The Bank of Japan buys dollars.
C)A citizen of Japan buys stock in Microsoft.
D)A citizen of Japan buys a U.S. government bond.

Question 23

Capital controls are most often aimed at slowing or eliminating movements of

A)reserve assets.
B)foreign direct investment.
C)foreign portfolio investment.
D)nonreserve government assets.

Question 24

Which of the following is an example of foreign direct investment?

A)Toyota builds an automobile plant in Ohio.
B)The Bank of Japan buys dollars.
C)A citizen of Japan buys stock in Microsoft.
D)A citizen of Japan buys a U.S. government bond.

Question 25

Direct foreign investment items have more liquidity than foreign portfolio investment items.

Question 26

Explain the difference between primary and secondary income.

Question 27

Capital inflows are desirable because they increase investment in a country.

Question 28

A sudden stop refers to a rapid slowing of capital inflows.

Question 29

Use the following table to answer the next question(s). All values are net.Table 9.3

Based on Table 9.3,the capital account balance is equal to

A)+25.
B)-25.
C)-125.
D)+125.

Question 30

A sudden stop will be easier to navigate if the country borrows internationally in foreign currencies and lend locally in its domestic currency.

Question 31

In most of the financial crises of the last decade,there were large and sudden financial outflows as both home and foreign investors tried to avoid the expected crises.

Question 32

Based on Table 9.3,if values in the table are amended to reflect a net increase in U.S.foreign direct investment of 100,then the new balance for the capital account balance becomes

A)-75.
B)-25.
C)+25.
D)+75.

Question 33

A country that runs out of official reserve assets

A)cannot settle international debts.
B)is bankrupt.
C)will have a current account deficit.
D)will have a current account surplus.

Question 34

The free movement of financial capital is desirable for all countries.

Question 35

Which of the following is NOT an official reserve asset for the United States?

A)Monetary gold
B)British pounds
C)SDRs from the IMF
D)Mexican pesos

Question 36

All financial account transactions are linked to current account transactions,since the current and financial accounts are mirror images of each other.

Question 37

Looking at the financial account data,it is possible to determine the total amount of official reserves available to a nation.

Question 38

Which of the following is an example of portfolio investment?

A)Toyota builds an automobile plant in Ohio.
B)The Bank of Japan buys dollars.
C)A citizen of Japan buys stock in Microsoft.
D)A citizen of Japan buys an option to purchase Microsoft stock in the future.

Question 39

It is unclear whether the free flow of capital is beneficial to all countries.Explain the benefits and costs of allowing capital to move freely.

Question 40

All of the following are true about foreign direct investment (FDI)and portfolio investment except

A)increases in the flow of portfolio investments increase the likelihood of financial crisis.
B)both portfolio investments and FDI are the same in that they both give their holders a claim on the future output of the foreign economy.
C)FDI is relatively illiquid compared to portfolio investment.
D)portfolio investments have been on the decline in recent years (or decades).

Question 41

Use the following table to answer the next question(s). All values are measured as a percent of GNP.Table 9.2

Based on Table 9.2,total savings,private plus public,is equal to

A)3 percent of GNP.
B)18 percent of GNP.
C)16 percent of GNP.
D)20 percent of GNP.

Question 42

The U.S.current account deficit improved slightly from 2007 to 2010 because

A)spending on imports fell due to an overall fall in consumption.
B)state, local, and federal government budget deficits increased.
C)worldwide economic growth spurred U.S. exports.
D)capital controls restricted capital inflow.

Question 43

National savings is important for all of the following reasons EXCEPT

A)it can be used to consume additional foreign goods.
B)it can be used to fund private investment.
C)it can be used to fund government investment.
D)it can be used to fund foreign investment.

Question 44

During the 1990s,which of the following did NOT occur?

A)Private savings fell.
B)Investment rose.
C)The United States received capital inflows.
D)Private savings was greater than investment for most of the 1990s.

Question 45

The difference between GNP and GDP is

A)GNP includes income received from abroad and excludes income paid abroad.
B)GNP excludes income received from abroad and includes income paid abroad.
C)GNP includes exports and imports.
D)GNP excludes exports and imports.

Question 46

Describe how a sudden stop leads to a financial crisis.

Question 47

Which of the following is NOT true about this national income equation:

A)For the current account, CA, to improve, we may have to invest less than otherwise would be the case.
B)For the current account, CA, to improve, we may have to save less to maintain the same amount of investment that includes foreign saving.
C)For the current account, CA, to improve, the government may have to run budget surplus.
D)A reduction in the trade deficit with one country will simply show up as an increase in a trade deficit with another country.

Question 48

Typically,the most important determinant of private investment in an economy is

A)the inflow of foreign investment.
B)the size of the capital account surplus.
C)the size of the current account deficit.
D)the amount of domestic savings.

Question 49

All other things equal,an increase in government spending that is NOT funded by taxes will

A)have an undetermined effect on the current account.
B)have no effect on the current account.
C)increase the current account deficit.
D)decrease the current account deficit.

Question 50

What is the difference between the U.S.current account deficits of the 1980s and the 1990s?

Question 51

Based on Table 9.2,the current account balance is

A)-2 percent of GNP.
B)+2 percent of GNP.
C)+4 percent of GNP.
D)-4 percent of GNP.

Question 52

An increase in government budget deficits will necessarily be associated with an worsening of the current account balance.

Question 53

Global capital flows have completely broken the link between domestic savings and domestic investment.

Question 54

Your text considers both the low savings and high savings nations and concludes what about the relationship between government budgets and the current account?

Question 55

If a country runs a current account surplus and national private savings equals domestic investment,then the combined governmental accounts

A)must be balanced.
B)must be positive.
C)must be negative.
D)could be either negative or positive, depending on the net international investment position.

Question 56

What are official reserve assets,and why are they important to countries?

Question 57

If domestic savings is less than domestic investment,then

A)reserve assets will increase.
B)the government runs a budget deficit.
C)there will be negative foreign investment.
D)a trade surplus must result.

Question 58

Which of the following is NOT true about the national income identity given by the equation: S + (T -
G)= I + CA?

A)If CA is positive, national saving finances the purchase of our goods by foreign users.
B)If CA is negative, our investment is less than our national savings.
C)A negative CA may imply that foreigners have confidence in the U.S. economy.
D)If CA is negative and large, a country risks foreigners owning a large piece of its assets.

Question 59

If all government budgets are balanced,and S is greater than I,then

A)the net international investment position must be positive.
B)the financial account must be positive.
C)the financial account must be negative.
D)the net international investment position must be negative.

Question 60

What does a current account deficit do that is positive for a nation?

Question 61

Borrowing from other countries can lead to economic growth.

Question 62

There are debt relief programs currently available for highly indebted poor countries.

Question 63

It is important to compare debt levels of low- and middle-income countries to exports because countries must earn foreign exchange in order to service their debts.

Question 64

The government budget deficit and the trade deficit are often called the "twin deficits." Explain why this name applies,and why it is not always accurate.

Question 65

Which of the following is FALSE?

A)Current account deficits must be financed through inflows of capital.
B)Loans from abroad add to a country's stock of external debt and generate debt service.
C)Borrowed funds are always used in a manner that contributes to the expansion of the country's productive capability.
D)Debt service can become an unsustainable burden that holds back development.

Question 66

Between 1972 and 1999,the majority of loans to HIPC countries went to regimes considered "not free," and between 1985 and 1995,to places that were considered "corrupt" by international organizations.

Question 67

Debt service

A)is rarely an issue for high-income countries.
B)always makes a country worse off for having borrowed.
C)is a problem when the amount of debt is small relative to the size of the economy.
D)tends to benefit low- and middle-income countries at the expense of high-income countries.

Question 68

Which of the following is an example of external debt for the United States?

A)A purchase of Apple stock by a person in Canada
B)A loan made in yen to a company in the United States
C)A loan made by Citibank to the government of Mexico
D)A purchase of U.S. Treasury bills by the Bank of Japan

Question 69

An example of odious debt would be debts on the part of a nation that were incurred by a dictator for the well-being of his family.

Question 70

Total debt is more important in figuring out the ability of a country to service its debt than are debt to GDP and debt to export ratios.

Question 71

External debt is not usually a problem for high-income countries for which of the following reasons?

A)High-income countries take out loans denominated in their own currency.
B)High-income countries do not need to borrow.
C)High-income countries are too large to default on loans.
D)High-income countries use loans to build infrastructure and create economic growth.

Question 72

Unsustainable debt may occur for all of the following reasons except

A)when countries are dependent on one or two key export commodities, and there is a sudden drop in the price of those commodities.
B)when natural disasters occur.
C)when civil conflicts are resolved and a peace dividend occurs.
D)when there are corrupt politicians and practices.

Question 73

Ultimate solutions to the problems of unsustainable debt must take into account the incentives for lenders to make loans.

Question 74

Critics of debt relief make all of the following arguments except

A)it would be wasted money since the conditions that caused the debt would be likely to persist.
B)debt relief can quickly fuel a new round of borrowing that simply restores debt to prior levels.
C)debt relief will encourage other nations to borrow excessively with the hope that their debts may be forgiven in the future.
D)the cost of debt relief to the most severely indebted countries is too large for the high income countries to afford.

Question 75

Which of the following is NOT a problem with excessive debt?

A)It worsens the central government's budget position by adding large debt service payments to other budget items.
B)It reduces the quantity of resources available to invest in economic development.
C)If debt service is substantial, schools, health clinics, roads, ports, other infrastructure, and social needs are less likely to be addressed.
D)It can reduce the chance of a crisis.

Question 76

Suppose that Mexico has external debt,and the value of the country's currency,the peso,falls.Which of the following is true?

A)The peso value of the loans will decrease as well.
B)Mexico will find it easier to pay off its external debt.
C)Mexico will declare bankruptcy.
D)The cost of debt service will be higher.

Question 77

Which of the following is FALSE about the Highly Indebted Poor Countries initiative?

A)Most of the countries included are in sub-Saharan Africa.
B)Countries qualify for debt relief partly based on their level of poverty.
C)Countries do not have to have established a past track record of economic reform in order to qualify as long as they make future commitments.
D)External debt levels must be high relative to exports in order to qualify.

Question 78

For countries such as the United States and the United Kingdom,it is important to have trade surpluses in order to service their external debts.

Question 79

Explain why current account deficits may or may not be harmful to a country.

Question 80

Borrowing money from other countries is rarely a good idea.