Deck 3: Balance of Payments

Question 1

Generally speaking,any transaction that results in a receipt from foreigners

A)will be recorded as a debit, with a negative sign, in the U.S.balance of payments.
B)will be recorded as a debit, with a positive sign, in the U.S.balance of payments.
C)will be recorded as a credit, with a negative sign, in the U.S.balance of payments.
D)will be recorded as a credit, with a positive sign, in the U.S.balance of payments.

Answer 1

D

Question 2

The balance of payments records

A)only international trade, (exports and imports).
B)only cross-border investments (FDI and portfolio investment).
C)not only international trade, (exports and imports) but also cross-border investments.
D)none of the above

Answer 2

C

Question 3

If Japan exports more than it imports,then

A)the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus.
B)one can infer that the yen would be likely to appreciate against other currencies.
C)a) and b)
D)None of the above

Answer 3

B

Question 4

Suppose the InBev Corporation (a non-U.S.MNC)buys the Anheuser-Busch Corporation,paying the U.S.shareholders cash.

A)Payment by InBev will be recorded as a debit.
B)The deposit of the funds by the sellers will be recorded as a debit.
C)Payment by InBev will be recorded as a credit.
D)The deposit of the funds by the buyer will be credit.

Question 5

Generally speaking,any transaction that results in a payment to foreigners

A)will be recorded as a debit, with a negative sign, in the U.S.balance of payments.
B)will be recorded as a debit, with a positive sign, in the U.S.balance of payments.
C)will be recorded as a credit, with a negative sign, in the U.S.balance of payments.
D)will be recorded as a credit, with a positive sign, in the U.S.balance of payments.

Question 6

A country experiencing a significant balance-of-payments surplus would be likely to

A)expand imports, offering marketing opportunities for foreign enterprises.
B)refrain from imposing foreign exchange restrictions.
C)expand exports, offering international marketing opportunities for domestic enterprises.
D)Both a) and b)

Question 7

If the United States imports more than it exports,then this means that

A)the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus.
B)the demand for dollars is likely to exceed the supply in the foreign exchange market, ceteris paribus.
C)the U.S.dollar would be under pressure to appreciate against other currencies.
D)both b) and c) are correct

Question 8

If a country is grappling with a major balance-of-payment difficulty,it may not be able to expand imports from the outside world.Instead,the country may be tempted to

A)impose measures to restrict imports.
B)impose measures to discourage capital outflows.
C)Both a) and b)
D)None of the above

Question 9

A country with a current account surplus

A)acquires IOUs from foreigners, thereby increasing its net foreign wealth.
B)must borrow from foreigners or draw down on its previously accumulated foreign wealth.
C)will experience a reduction in the country's net foreign wealth.
D)both b) and c)

Question 10

The official reserve account includes

A)the export and import of goods and services.
B)all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses.
C)all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs).
D)none of the above

Question 11

Credit entries in the U.S.balance of payments

A)result from foreign sales of U.S.goods and services, goodwill, financial claims, and real assets.
B)result from U.S.purchases of foreign goods and services, goodwill, financial claims, and real assets.
C)give rise to the demand for dollars.
D)give rise to the supply of dollars.
E)both a) and c)

Question 12

Over half of all dollar bills in circulation are held outside American's borders.

Question 13

Since the balance of payments is presented as a system of double-entry bookkeeping,

A)every credit in the account is balanced by a matching debit.
B)every debit in the account is balanced by a matching credit.
C)answers a) and b) are both true
D)none of the above

Question 14

Balance of payments

A)is defined as the statistical record of a country's international transactions over a certain period of time presented in the form of a double-entry bookkeeping.
B)provides detailed information concerning the demand and supply of a country's currency.
C)can be used to evaluate the performance of a country in international economic competition.
D)all of the above

Question 15

If the United States imports more than it exports,then

A)the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus.
B)one can infer that the U.S.dollar would be under pressure to depreciate against other currencies.
C)a) and b)
D)None of the above

Question 16

The current account balance,which is the difference between a country's exports and imports,is a component of the country's GNP.Other components of GNP include

A)consumption and investment and government expenditure.
B)consumption and government expenditure and net exports.
C)consumption and net exports and government expenditure.
D)consumption less imports.

Question 17

The capital account includes

A)the export and import of goods and services.
B)all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses.
C)all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs).
D)none of the above

Question 18

The current account includes

A)the export and import of goods and services.
B)all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses.
C)all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs).
D)none of the above

Question 19

Suppose the McDonalds Corporation imports Canadian beef,paying for it by transferring the funds to a New York bank account kept by the Canadian Beef producer.

A)Payment by McDonalds will be recorded as a debit.
B)The deposit of the funds by the seller will be recorded as a debit.
C)Payment by McDonalds will be recorded as a credit.
D)The deposit of the funds by the buyer will be credit.

Question 20

A country's international transactions can be grouped into the following three main types:

A)current account, medium term account, and long term capital account.
B)current account, long term capital account, and official reserve account.
C)current account, capital account, and official reserve account.
D)capital account, official reserve account, trade account.

Question 21

The J-curve effect received wide attention when

A)the British trade balance worsened after a strengthening of the pound in 1967.
B)the British trade balance worsened after a devaluation of the pound in 1967.
C)the British trade balance improved after a devaluation of the pound in 1967.
D)none of the above

Question 22

Current account includes

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

Question 23

In the latter half of the 1980s,with a strong yen,Japanese firms

A)faced difficulty exporting.
B)could better afford to acquire U.S.assets that had become less expensive in terms of yen.
C)financed a sharp increase in Japanese FDI in the United States.
D)all of the above

Question 24

With regard to the capital account

A)the capital account balance measures the difference between U.S.sales of assets to foreigners and U.S.purchases of foreign assets.
B)U.S.sales (or exports) of assets are recorded as credits, as they result in capital inflow.
C)U.S.purchases (imports) of foreign assets are recorded as debits, as they lead to capital outflow.
D)all of the above

Question 25

A depreciation will begin to improve the trade balance immediately if

A)imports and exports are responsive to the exchange rate changes.
B)imports and exports are inelastic to the exchange rate changes.
C)consumers exhibit brand loyalty and price inelasticity.
D)b) and c)

Question 26

The "J-curve effect" shows

A)the initial deterioration and the eventual improvement of a country's trade balance following a currency depreciation.
B)the initial improvement and the eventual depreciation of a country's trade balance following a currency depreciation.
C)the trade balance's lack of responsiveness to the exchanges rate changes.
D)none of the above

Question 27

The difference between Foreign Direct Investment and Portfolio Investment is that

A)Portfolio Investment mostly represents the sale and purchase of foreign financial assets such as stocks and bonds that do not involve a transfer of control.
B)Foreign Direct Investment mostly represents the sale and purchase of foreign financial assets such as stocks whereas Portfolio Investment mostly involves the sales and purchase of foreign bonds.
C)Foreign Direct Investment is about buying land and building factories, whereas portfolio investment is about buying stocks and bonds.
D)All of the above

Question 28

The factors of production are

A)land, labor, capital, and entrepreneurial ability.
B)interest, wages and dividends.
C)payments and receipts of interest, dividends, and other income on foreign investments that were previously made.
D)none of the above

Question 29

When a country's currency depreciates against the currencies of major trading partners,

A)the country's exports tend to rise and imports fall.
B)the country's exports tend to fall and imports rise.
C)the country's exports tend to rise and imports rise.
D)the country's exports tend to fall and imports fall.

Question 30

In the long run,both exports and imports tend to be

A)unresponsive to changes in exchange rates.
B)responsive to changes in exchange rates.
C)both a) and b)
D)none of the above

Question 31

Factor income

A)consists largely of interest, dividends, and other income on foreign investments.
B)is a theoretical construct of the factors of production, land, labor, capital, and entrepreneurial ability.
C)is generally a very minor part of national income accounting, smaller than the statistical discrepancy.
D)none of the above

Question 32

The "J-curve effect"

A)happens most of the time, in the short run.
B)actually only occurs in about 40 percent of the cases according to a study by Sebastian Edwards.
C)is a long-run phenomenon, not a short-run one.
D)none of the above.

Question 33

In 2007 the United States had a current account deficit.The current account deficit implies that the United States

A)had a surplus on legal consulting and engineering services.
B)produced more output than it consumed.
C)consumed more output than it produced.
D)none of the above

Question 34

Capital account includes

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

Question 35

Invisible trade refers to

A)services that avoid tax payments.
B)the underground economy.
C)legal, consulting, and engineering services.
D)tourist expenditures, only.

Question 36

A currency depreciation will begin to improve the trade balance immediately

A)if the demand for imports and exports are inelastic.
B)if the demand for imports and exports are elastic.
C)if imports decrease and exports decrease.
D)none of the above

Question 37

The current account is divided into four finer categories:

A)merchandise trade, services, factor income, and statistical discrepancy.
B)merchandise trade, services, factor income, and unilateral transfers.
C)merchandise trade, services, portfolio investment, and unilateral transfers.
D)merchandise trade, services, factor income, and direct investment.

Question 38

A country that gives foreign aid to another country can be viewed as

A)importing goodwill from the latter.
B)exporting goodwill to the latter.

Question 39

What is the correct label for the vertical axis in the J-curve?

A)Time
B)Change in the Trade Balance
C)Size of Trade Balance
D)Size of Merchandise Trade Balance

Question 40

In the short run a currency depreciation can make a trade balance worse if

A)there is no domestic producer of an import.
B)there is no domestic buyer for an import.
C)there is no export market for a country's output.

Question 41

If the interest rate rises in the U.S.while other variables remain constant

A)capital inflows into the U.S.will increase.
B)capital inflows into the U.S.may not materialize.
C)capital will flow out of the U.S.
D)none of the above

Question 42

Transactions in currency,bank deposits and so forth

A)tend to be insensitive to both changes in relative interest rates and the anticipated change in exchange rate.
B)tend to be sensitive to both changes in relative interest rates and the anticipated change in exchange rate.
C)tend to be sensitive to changes in relative interest rates but insensitive to the anticipated change in exchange rate.
D)tend to be insensitive to changes in relative interest rates but sensitive to the anticipated change in exchange rate.

Question 43

Continued U.S.trade deficits coupled with foreigners' desire to diversify their currency holdings away from U.S.dollars

A)could further diminish the position of the dollar as the dominant reserve currency.
B)could affect the value of U.S.dollar (e.g.through the currency diversification decisions of Asian central banks).
C)could lend steam to the emergence of the euro as a credible reserve currency.
D)all of the above

Question 44

When Honda,a Japanese auto maker,built a factory in Ohio,

A)it was engaged in foreign direct investment.
B)it was engaged in portfolio investment.
C)it was engaged in a cross-border acquisition.
D)none of the above.

Question 45

The central bank of the United States is

A)the New York Fed.
B)the Federal Reserve System.
C)the EXIM bank.
D)none of the above-the U.S.does not have a central bank.

Question 46

If for a particular county an increase in the interest rate is more or less matched by an expected depreciation in the local currency,

A)traders will probably be tempted to find another country to invest in.
B)the interest rate increase per se will not be enough to spark capital flow into the country.
C)both a) and b) are true
D)capital will glow out of the country as the disgruntled citizens riot and go to war with the neighbors.

Question 47

When a country must make a net payment to foreigners because of a balance-of-payments deficit,the central bank of the country

A)should do nothing.
B)should run down its official reserve assets (e.g.gold, foreign exchanges, and SDRs).
C)should borrow anew from foreign central banks.
D)either b) or c) will work.

Question 48

Which of the following is most indicative of the pressure that a country's currency faces for depreciation or appreciation?

A)The current account
B)The capital account
C)The statistical discrepancies
D)The official settlement balance

Question 49

Statistical discrepancy,which by definition represents errors and omissions

A)cannot be calculated directly.
B)is calculated by taking into account the balance-of-payments identity.
C)probably has some elements that are honest mistakes, it can't all be money laundering and drugs.
D)all of the above

Question 50

The capital account measures

A)the sum of U.S.sales of assets to foreigners and U.S.purchases of foreign assets.
B)the difference between U.S.sales of assets to foreigners and U.S.purchases of foreign assets.
C)the difference between U.S.sales of manufactured goods to foreigners and U.S.purchases of foreign products.
D)none of the above

Question 51

Government controlled investment funds,known as sovereign wealth funds,

A)are playing a less-important role in international finance following the end of the fixed exchange rate era.
B)are mostly domiciled in Asian and Middle Eastern countries.
C)are usually responsible for converting trade surpluses and oil revenues into foreign exchange reserves.
D)none of the above

Question 52

The capital account may be divided into three categories:

A)cross-border mergers and acquisitions, portfolio investment, and other investment.
B)direct investment, portfolio investment, and Cross-border mergers and acquisitions.
C)direct investment, mergers and acquisitions, and other investment.
D)direct investment, portfolio investment, and other investment.

Question 53

The statistical discrepancy in the balance-of-payments accounts

A)arise since recordings of payments and receipts are done at different times, in different places, possibly using different methods.
B)arise since some transactions (illegal transactions?) occur "off the books".
C)represents omitted and misrecorded transactions.
D)all of the above

Question 54

When Nestlé,a Swiss firm,bought the American firm Carnation,it was engaged in foreign direct investment.If Nestlé had only bought a non-controlling number of shares of the firm,

A)Nestlé would have been engaged in portfolio investment.
B)Nestlé would have been engaged in a cross-border acquisition.
C)it would depend if they bought the shares from an American or a Canadian.
D)none of the above

Question 55

Since security returns tend to have low correlations among countries,

A)investors can reduce risk more effectively if they diversify their portfolio holdings internationally rather than purely domestically.
B)investors who have a domestically diversified portfolio, with exposures across industry types will not gain much from diversifying abroad.
C)investors who diversify internationally will likely underperform investors who keep all their investments in one country.
D)none of the above

Question 56

The world's largest debtor nation and creditor nation,respectively,are

A)Japan and the U.S.
B)The U.S.and Japan.
C)The U.S.and Canada.
D)Great Britain and Mexico.

Question 57

The United States is considered

A)a net creditor nation.
B)a net debtor nation.

Question 58

Foreign direct investment (FDI)occurs

A)when an investor acquires a measure of control of a foreign business.
B)when there is an acquisition, by a foreign entity in the U.S., of 10 percent or more of the voting shares of a business.
C)with sales and purchases of foreign stocks and bonds that do not involve a transfer of control.
D)both a) and b)

Question 59

International portfolio investments have boomed in recent years,as a result of

A)a depreciating U.S.dollar.
B)increased gasoline and other commodity prices.
C)the general relaxation of capital controls and regulation in many countries.
D)none of the above

Question 60

Regarding the statistical discrepancy in the balance-of-payments accounts

A)there is some evidence that financial transactions may be mainly responsible for the discrepancy.
B)the sum of the balance on the capital account and the statistical discrepancy is very close to the balance of the current account in magnitude.
C)it tends to be positive one year and negative in others, so it's safe to ignore it.
D)a) and b)

Question 61

The balance on the reserves account (BRA),under the pure flexible exchange regime is

A)-$44 billion.
B)$44 billion.
C)$216 billion.
D)none of the above

Question 62

The most popular reserve currency is now the

A)U.S.dollar.
B)Euro.
C)Japanese Yen.

Question 63

BCA stands for

A)the balance on the current account.
B)the balance on the capital account.
C)the balance on the official reserves.
D)net imports.

Question 64

The most important international reserve asset,comprising 94 percent of the total reserve assets held by IMF member countries is

A)gold.
B)foreign exchanges.
C)special Drawing Rights (SDRs).
D)reserve positions in the International Monetary Fund (IMF).

Question 65

The vast majority of the foreign-exchange reserves held by central banks are denominated in

A)local currencies.
B)U.S.dollars.
C)Yen.
D)Euro.

Question 66

If the central banks of the world chose to diversify their foreign-exchange reserves away from the dollar and into the euro,

A)this would have the result of a strengthening of the value of the dollar.
B)this would have the result of a weakening in the value of the dollar.
C)this would not have much impact, as the information would be lost in the day-to-day volatility of exchange rates.

Question 67

International reserve assets include "foreign exchanges".These are

A)Special Drawing Rights (SDRs) at the IMF.
B)reserve positions in the International Monetary Fund (IMF).
C)foreign currency held by a country's central bank.
D)none of the above

Question 68

Which of the following would not count as a foreign-exchange reserve held by a central bank?

A)The local currency
B)U.S.dollars
C)SDRs
D)Euro

Question 69

BKA stands for

A)the balance on the current account.
B)the balance on the capital account.
C)the balance on the official reserves.
D)net imports.

Question 70

When the balance-of-payments accounts are recorded correctly,the combined balance of the current account,the capital account,and the reserves account must be

A)equal in magnitude to the country's national debt.
B)zero.
C)equal in magnitude to the Trade Deficit or Surplus.
D)none of the above

Question 71

The balance of payments identity is given by BCA + BKA + BRA = 0.Rearrange the identity for a country with a pure flexible exchange rate regime.

A)BCA + BKA + BRA = 0
B)BCA = -BKA
C)BCA + BKA = -BRA
D)BRA = -BCA

Question 72

As of 2007 gold accounting for

A)90 percent of the total reserve assets held by IMF member countries.
B)70 percent of the total reserve assets held by IMF member countries.
C)approximately 50 percent of the total reserve assets held by IMF member countries.
D)less than 2 percent of the total reserve assets held by IMF member countries.

Question 73

The balance on the reserves account (BRA),under the fixed exchange regime is

A)-$44 billion
B)$44 billion
C)$216 billion
D)none of the above

Question 74

The balance of payments identity is given by BCA + BKA + BRA = 0.Rearrange the identity to solve for the statistical discrepancy.

A)The statistical discrepancy = (BCA + BKA) - BRA
B)The statistical discrepancy = BCA - BKA + BRA
C)The statistical discrepancy = BCA - BKA - BRA
D)The statistical discrepancy = BCA + BKA + BRA

Question 75

The "one word that haunts the dollar" is

A)(Central bank) diversification.
B)Reunification (Korean).
C)Euro.
D)(Current account) deficit.

Question 76

Among IMF member countries,the dollar's dominant position in the world's reserve holdings may decline to a certain extent as the euro becomes a "known quantity" and its external value becomes more stable.In fact,the euro's share has increased

A)from zero percent in 1999 to 25.8 percent in 2006.
B)from 13.5 percent in 1999 to 25.8 percent in 2006.
C)from 13.5 percent in 1999 to 52.8 percent in 2006.
D)none of the above

Question 77

The U.S.Trade Deficit

A)is a capital account surplus.
B)is a current account deficit.
C)is both a capital account surplus and a current account deficit.
D)none of the above

Question 78

Currently,international reserve assets are comprised of

A)gold, platinum, foreign exchanges, and special drawing rights (SDRs).
B)gold, foreign exchanges, special drawing rights (SDRs), and reserve positions in the International Monetary Fund (IMF).
C)gold, diamonds, foreign exchanges, and special drawing rights (SDRs).
D)reserve positions in the International Monetary Fund (IMF), only.

Question 79

In a pure flexible exchange rate regime,a country's central banks will not need to maintain official reserves.Under this regime

A)-BCA = BKA.
B)BCA = - BRA = 0.
C)BKA = -BRA.
D)BSA = BCA.

Question 80

The economic theory of mercantilism holds that

A)a continuing trade surplus should be a government's major policy goal.
B)the main source of wealth of a country is its productive capacity.
C)free trade is the result of countries exploiting their comparative advantage.
D)none of the above