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Sample Test

International Financial Management, 8e (Eun)

Chapter 3   Balance of Payments

 

1) Over half of all dollar bills in circulation are held outside American’s borders.

 

Answer:  TRUE

Topic:  Balance of Payments Trends in Major Countries

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2) 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

1.   A) consumption and investment and government expenditure.

2.   B) consumption and government expenditure and net exports.

3.   C) consumption and net exports and government expenditure.

4.   D) consumption less imports.

 

Answer:  A

Topic:  Balance of Payments Accounting

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

1.   A) the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus.

2.   B) the demand for dollars is likely to exceed the supply in the foreign exchange market, ceteris paribus.

3.   C) the U.S. dollar would be under pressure to appreciate against other currencies.

4.   D) the demand for dollars is likely to exceed the supply in the foreign exchange market, ceteris paribus, and the U.S. dollar would be under pressure to appreciate against other currencies.

 

Answer:  A

Topic:  Balance of Payments Accounting

Accessibility:  Keyboard Navigation

4) Balance of payments

1.   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.

2.   B) provides detailed information concerning the demand and supply of a country’s currency.

3.   C) can be used to evaluate the performance of a country in international economic competition.

4.   D) all of the options

 

Answer:  D

Topic:  Balance of Payments Accounting

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5) 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

1.   A) impose measures to restrict imports.

2.   B) impose measures to discourage capital outflows.

3.   C) impose measures to restrict imports and discourage capital outflows.

4.   D) none of the options

 

Answer:  C

Topic:  Balance of Payments Accounting

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6) If the United States imports more than it exports, then

1.   A) the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus.

2.   B) one can infer that the U.S. dollar would be under pressure to depreciate against other currencies.

3.   C) the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus, and one can infer that the U.S. dollar would be under pressure to depreciate against other currencies.

4.   D) none of the options

 

Answer:  C

Topic:  Balance of Payments Accounting

Accessibility:  Keyboard Navigation

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

1.   A) will be recorded as a debit, with a negative sign, in the U.S. balance of payments.

2.   B) will be recorded as a debit, with a positive sign, in the U.S. balance of payments.

3.   C) will be recorded as a credit, with a negative sign, in the U.S. balance of payments.

4.   D) will be recorded as a credit, with a positive sign, in the U.S. balance of payments.

 

Answer:  D

Topic:  Balance of Payments Accounting

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

1.   A) will be recorded as a debit, with a negative sign, in the U.S. balance of payments.

2.   B) will be recorded as a debit, with a positive sign, in the U.S. balance of payments.

3.   C) will be recorded as a credit, with a negative sign, in the U.S. balance of payments.

4.   D) will be recorded as a credit, with a positive sign, in the U.S. balance of payments.

 

Answer:  A

Topic:  Balance of Payments Accounting

Accessibility:  Keyboard Navigation

 

 

 

9) If Japan exports more than it imports, then

1.   A) the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus.

2.   B) one can infer that the yen would be likely to appreciate against other currencies.

3.   C) the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus, and one can infer that the yen would be likely to appreciate against other currencies.

4.   D) none of the options

 

Answer:  B

Topic:  Balance of Payments Accounting

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10) The balance of payments records

1.   A) only international trade, (exports and imports).

2.   B) only cross-border investments (FDI and portfolio investment).

3.   C) not only international trade, (exports and imports) but also cross-border investments.

4.   D) none of the options

 

Answer:  C

Topic:  Balance of Payments Accounting

Accessibility:  Keyboard Navigation

 

11) Credit entries in the U.S. balance of payments

1.   A) result from foreign sales of U.S. goods and services, goodwill, financial claims, and real assets.

2.   B) result from U.S. purchases of foreign goods and services, goodwill, financial claims, and real assets.

3.   C) give rise to the demand for dollars.

4.   D) give rise to the supply of dollars.

5.   E) result from foreign sales of U.S. goods and services, goodwill, financial claims, and real assets, and give rise to the demand for dollars.

 

Answer:  E

Topic:  Balance of Payments Accounting

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

1.   A) expand imports, offering marketing opportunities for foreign enterprises.

2.   B) refrain from imposing foreign exchange restrictions.

3.   C) expand exports, offering international marketing opportunities for domestic enterprises.

4.   D) expand imports, offering marketing opportunities for foreign enterprises, and refrain from imposing foreign exchange restrictions.

 

Answer:  D

Topic:  Balance of Payments Accounting

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13) 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.

1.   A) Payment by McDonalds will be recorded as a debit.

2.   B) The deposit of the funds by the seller will be recorded as a debit.

3.   C) Payment by McDonalds will be recorded as a credit.

4.   D) The deposit of the funds by the buyer will be credit.

 

Answer:  A

Topic:  Balance of Payments Accounting

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

1.   A) every credit in the account is balanced by a matching debit.

2.   B) every debit in the account is balanced by a matching credit.

3.   C) every credit in the account is balanced by a matching debit and every debit in the account is balanced by a matching credit.

4.   D) none of the options

 

Answer:  C

Topic:  Balance of Payments Accounting

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

1.   A) Payment by InBev will be recorded as a debit.

2.   B) The deposit of the funds by the sellers will be recorded as a debit.

3.   C) Payment by InBev will be recorded as a credit.

4.   D) The deposit of the funds by the buyer will be credit.

 

Answer:  C

Topic:  Balance of Payments Accounts

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16) The current account includes

1.   A) the export and import of goods and services.

2.   B) all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses.

3.   C) all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs).

4.   D) none of the options

 

Answer:  A

Topic:  Balance of Payments Accounts

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17) A country with a current account surplus

1.   A) acquires IOUs from foreigners, thereby increasing its net foreign wealth.

2.   B) must borrow from foreigners or draw down on its previously accumulated foreign wealth.

3.   C) will experience a reduction in the country’s net foreign wealth.

4.   D) must borrow from foreigners or draw down on its previously accumulated foreign wealth and will experience a reduction in the country’s net foreign wealth.

 

Answer:  A

Topic:  Balance of Payments Accounts

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18) The capital account includes

1.   A) the export and import of goods and services.

2.   B) all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses.

3.   C) all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs).

4.   D) none of the options

 

Answer:  B

Topic:  Balance of Payments Accounts

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19) The official reserve account includes

1.   A) the export and import of goods and services.

2.   B) all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses.

3.   C) all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs).

4.   D) none of the options

 

Answer:  C

Topic:  Balance of Payments Accounts

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20) A country’s international transactions can be grouped into the following three main types:

1.   A) current account, medium term account, and long term capital account.

2.   B) current account, long term capital account, and official reserve account.

3.   C) current account, capital account, and official reserve account.

4.   D) capital account, official reserve account, trade account.

 

Answer:  C

Topic:  Balance of Payments Accounts

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21) Invisible trade refers to

1.   A) services that avoid tax payments.

2.   B) the underground economy.

3.   C) legal, consulting, and engineering services.

4.   D) tourist expenditures only.

 

Answer:  C

Topic:  Balance of Payments Accounts

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

1.   A) importing goodwill from the latter.

2.   B) exporting goodwill to the latter.

 

Answer:  A

Topic:  Balance of Payments Accounts

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23) In 2012, the United States had a current account deficit. The current account deficit implies that the United States

1.   A) had a surplus on legal consulting and engineering services.

2.   B) produced more output than it consumed.

3.   C) consumed more output than it produced.

4.   D) none of the options

 

Answer:  C

Topic:  The Current Account

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24) The current account is divided into four finer categories:

1.   A) merchandise trade, services, factor income, and statistical discrepancy.

2.   B) merchandise trade, services, factor income, and unilateral transfers.

3.   C) merchandise trade, services, portfolio investment, and unilateral transfers.

4.   D) merchandise trade, services, factor income, and direct investment.

 

Answer:  B

Topic:  The Current Account

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25) The factors of production are

1.   A) land, labor, capital, and entrepreneurial ability.

2.   B) interest, wages and dividends.

3.   C) payments and receipts of interest, dividends, and other income on foreign investments that were previously made.

4.   D) none of the options

 

Answer:  A

Topic:  The Current Account

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26) Factor income

1.   A) consists largely of interest, dividends, and other income on foreign investments.

2.   B) is a theoretical construct of the factors of production, land, labor, capital, and entrepreneurial ability.

3.   C) is generally a very minor part of national income accounting, smaller than the statistical discrepancy.

4.   D) none of the options

 

Answer:  A

Topic:  The Current Account

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27) The entries in the “current account” and the “capital account”, combined, can be outlined (in alphabetic order) as:

 

(i) direct investment

(ii) factor income

(iii) merchandise

(iv) official transfer

(v) other capital

(vi) portfolio investment

(vii) private transfer

(viii) services

 

Current account includes

1.   A) (i), (ii), and (iii)

2.   B) (ii), (iii), and (vii)

3.   C) (iv), (v), and (vii)

4.   D) (i), (v), and (vi)

 

Answer:  B

Topic:  The Current Account

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28) The entries in the “current account” and the “capital account”, combined, can be outlined (in alphabetic order) as:

 

(i) direct investment

(ii) factor income

(iii) merchandise

(iv) official transfer

(v) other capital

(vi) portfolio investment

(vii) private transfer

(viii) services

 

Capital account includes

1.   A) (i), (ii), and (iii)

2.   B) (ii), (iii), and (vii)

3.   C) (iv), (v), and (vii)

4.   D) (i), (v), and (vi)

 

Answer:  D

Topic:  The Current Account

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29) The “J-curve effect” shows

1.   A) the initial deterioration and the eventual improvement of a country’s trade balance following a currency depreciation.

2.   B) the initial improvement and the eventual depreciation of a country’s trade balance following a currency depreciation.

3.   C) the trade balance’s lack of responsiveness to the exchanges rate changes.

4.   D) none of the options

 

Answer:  A

Topic:  The Current Account

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30) The “J-curve effect”

1.   A) happens most of the time, in the short run.

2.   B) only occurs in about 40 percent of cases, according to a study by Sebastian Edwards.

3.   C) is a long-run phenomenon, not a short-run one.

4.   D) none of the options

 

Answer:  B

Topic:  The Current Account

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31) The J-curve effect received wide attention when

1967.         A) the British trade balance worsened after a strengthening of the pound in 1967.

1968.         B) the British trade balance worsened after a devaluation of the pound in 1967.

1969.         C) the British trade balance improved after a devaluation of the pound in 1967.

1970.         D) none of the options

 

Answer:  B

Topic:  The Current Account

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32) A currency depreciation will begin to improve the trade balance immediately

1.   A) if the demand for imports and exports are inelastic.

2.   B) if the demand for imports and exports are elastic.

3.   C) if imports decrease and exports decrease.

4.   D) none of the options

 

Answer:  B

Topic:  The Current Account

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33) When a country’s currency depreciates against the currencies of major trading partners,

1.   A) the country’s exports tend to rise and imports fall.

2.   B) the country’s exports tend to fall and imports rise.

3.   C) the country’s exports tend to rise and imports rise.

4.   D) the country’s exports tend to fall and imports fall.

 

Answer:  A

Topic:  The Current Account

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34) A depreciation will begin to improve the trade balance immediately if

1.   A) imports and exports are responsive to the exchange rate changes.

2.   B) imports and exports are inelastic to the exchange rate changes.

3.   C) consumers exhibit brand loyalty and price inelasticity.

4.   D) imports and exports are inelastic to the exchange rate changes and consumers exhibit brand loyalty and price inelasticity.

 

Answer:  A

Topic:  The Current Account

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

1.   A) there is no domestic producer of an import.

2.   B) there is no domestic buyer for an import.

3.   C) there is no export market for a country’s output.

4.   D) none of the options

 

Answer:  A

Topic:  The Current Account

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

 

1.   A) Time

2.   B) Change in the Trade Balance

3.   C) Size of Trade Balance

4.   D) Size of Merchandise Trade Balance

 

Answer:  B

Topic:  The Current Account

 

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

1.   A) unresponsive to changes in exchange rates.

2.   B) responsive to changes in exchange rates.

3.   C) both responsive and unresponsive to changes in exchange rates.

4.   D) none of the options

 

Answer:  B

Topic:  The Current Account

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38) With regard to the capital account,

1.   A) the capital account balance measures the difference between U.S. sales of assets to foreigners and U.S. purchases of foreign assets.

2.   B) U.S. sales (or exports) of assets are recorded as credits, as they result in capital inflow.

3.   C) U.S. purchases (imports) of foreign assets are recorded as debits, as they lead to capital outflow.

4.   D) all of the options

 

Answer:  D

Topic:  The Capital Account

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39) The difference between Foreign Direct Investment and Portfolio Investment is that

1.   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.

2.   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.

3.   C) Foreign Direct Investment is about buying land and building factories, whereas portfolio investment is about buying stocks and bonds.

4.   D) all of the options

 

Answer:  A

Topic:  The Capital Account

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

1.   A) faced difficulty exporting.

2.   B) could better afford to acquire U.S. assets that had become less expensive in terms of yen.

3.   C) financed a sharp increase in Japanese FDI in the United States.

4.   D) all of the options

 

Answer:  D

Topic:  The Capital Account

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

1.   A) a depreciating U.S. dollar.

2.   B) increased gasoline and other commodity prices.

3.   C) the general relaxation of capital controls and regulation in many countries.

4.   D) none of the options

 

Answer:  C

Topic:  The Capital Account

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

1.   A) capital inflows into the U.S. will increase.

2.   B) capital inflows into the U.S. may not materialize.

3.   C) capital will flow out of the U.S.

4.   D) none of the options

 

Answer:  A

Topic:  The Capital Account

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

1.   A) traders will probably be tempted to find another country to invest in.

2.   B) the interest rate increase per se will not be enough to spark capital flow into the country.

3.   C) traders will probably be tempted to find another country to invest in and the interest rate increase per se will not be enough to spark capital flow into the country.

4.   D) capital will glow out of the country as the disgruntled citizens riot and go to war with the neighbors.

 

Answer:  C

Topic:  The Capital Account

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44) The capital account measures

1.   A) the sum of U.S. sales of assets to foreigners and U.S. purchases of foreign assets.

2.   B) the difference between U.S. sales of assets to foreigners and U.S. purchases of foreign assets.

3.   C) the difference between U.S. sales of manufactured goods to foreigners and U.S. purchases of foreign products.

4.   D) none of the options

 

Answer:  B

Topic:  The Capital Account

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

1.   A) it was engaged in foreign direct investment.

2.   B) it was engaged in portfolio investment.

3.   C) it was engaged in a cross-border acquisition.

4.   D) none of the options.

 

Answer:  A

Topic:  The Capital Account

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46) Government controlled investment funds, known as sovereign wealth funds,

1.   A) are playing a less-important role in international finance following the end of the fixed exchange rate era.

2.   B) are mostly domiciled in Asian and Middle Eastern countries.

3.   C) are usually responsible for converting trade surpluses and oil revenues into foreign exchange reserves.

4.   D) none of the options

 

Answer:  B

Topic:  The Capital Account

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47) Foreign direct investment (FDI) occurs

1.   A) when an investor acquires a measure of control of a foreign business.

2.   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.

3.   C) with sales and purchases of foreign stocks and bonds that do not involve a transfer of control.

4.   D) when an investor acquires a measure of control of a foreign business and 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.

 

Answer:  D

Topic:  The Capital Account

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48) The capital account may be divided into three categories—

1.   A) cross-border mergers and acquisitions, portfolio investment, and other investment.

2.   B) direct investment, portfolio investment, and cross-border mergers and acquisitions.

3.   C) direct investment, mergers and acquisitions, and other investment.

4.   D) direct investment, portfolio investment, and other investment.

 

Answer:  D

Topic:  The Capital Account

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49) 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,

1.   A) Nestlé would have been engaged in portfolio investment.

2.   B) Nestlé would have been engaged in a cross-border acquisition.

3.   C) it would depend if they bought the shares from an American or a Canadian.

4.   D) none of the options

 

Answer:  A

Topic:  The Capital Account

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50) Transactions in currency, bank deposits and so forth

1.   A) tend to be insensitive to both changes in relative interest rates and the anticipated change in exchange rate.

2.   B) tend to be sensitive to both changes in relative interest rates and the anticipated change in exchange rate.

3.   C) tend to be sensitive to changes in relative interest rates but insensitive to the anticipated change in exchange rate.

4.   D) tend to be insensitive to changes in relative interest rates but sensitive to the anticipated change in exchange rate.

 

Answer:  B

Topic:  The Capital Account

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51) Since security returns tend to have low correlations among countries,

1.   A) investors can reduce risk more effectively if they diversify their portfolio holdings internationally rather than purely domestically.

2.   B) investors who have a domestically diversified portfolio, with exposures across industry types will not gain much from diversifying abroad.

3.   C) investors who diversify internationally will likely underperform investors who keep all their investments in one country.

4.   D) none of the options

 

Answer:  A

Topic:  The Capital Account

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52) The world’s largest debtor nation and creditor nation, respectively, are

1.   A) Japan and the U.S.

2.   B) The U.S. and Japan.

3.   C) The U.S. and Canada.

4.   D) Great Britain and Mexico.

 

Answer:  B

Topic:  The Capital Account

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53) Statistical discrepancy, which, by definition, represents errors and omissions,

1.   A) cannot be calculated directly.

2.   B) is calculated by taking into account the balance-of-payments identity.

3.   C) probably has some elements that are honest mistakes, it can’t all be money laundering and drugs.

4.   D) all of the options

 

Answer:  D

Topic:  Statistical Discrepancy

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54) The statistical discrepancy in the balance-of-payments accounts

1.   A) arise since recordings of payments and receipts are done at different times, in different places, possibly using different methods.

2.   B) arise because some transactions (illegal transactions) occur “off the books.”

3.   C) represents omitted and misreported transactions.

4.   D) all of the options

 

Answer:  D

Topic:  Statistical Discrepancy

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

1.   A) The current account

2.   B) The capital account

3.   C) The statistical discrepancies

4.   D) The official settlement balance

 

Answer:  D

Topic:  Statistical Discrepancy

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56) The United States is considered

1.   A) a net creditor nation.

2.   B) a net debtor nation.

 

Answer:  B

Topic:  Statistical Discrepancy

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57) Regarding the statistical discrepancy in the balance-of-payments accounts,

1.   A) there is some evidence that financial transactions may be mainly responsible for the discrepancy.

2.   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.

3.   C) it tends to be positive one year and negative in others, so it’s safe to ignore it.

4.   D) there is some evidence that financial transactions may be mainly responsible for the discrepancy, and 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.

 

Answer:  D

Topic:  Statistical Discrepancy

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58) The central bank of the United States is

1.   A) the New York Fed.

2.   B) the Federal Reserve System.

3.   C) the EXIM bank.

4.   D) none of the options—the U.S. does not have a central bank.

 

Answer:  B

Topic:  Official Reserve Account

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

1.   A) should do nothing.

2.   B) should run down its official reserve assets (e.g., gold, foreign exchanges, and SDRs).

3.   C) should borrow anew from foreign central banks.

4.   D) should either run down its official reserve assets (e.g., gold, foreign exchanges, and SDRs) or borrow anew from foreign central banks.

 

Answer:  D

Topic:  Official Reserve Account

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

1.   A) could further diminish the position of the dollar as the dominant reserve currency.

2.   B) could affect the value of U.S. dollar (e.g., through the currency diversification decisions of Asian central banks).

3.   C) could lend steam to the emergence of the euro as a credible reserve currency.

4.   D) all of the options

 

Answer:  D

Topic:  Official Reserve Account

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61) Currently, international reserve assets are comprised of

1.   A) gold, platinum, foreign exchanges, and special drawing rights (SDRs).

2.   B) gold, foreign exchanges, special drawing rights (SDRs), and reserve positions in the International Monetary Fund (IMF).

3.   C) gold, diamonds, foreign exchanges, and special drawing rights (SDRs).

4.   D) reserve positions in the International Monetary Fund (IMF), only.

 

Answer:  B

Topic:  Official Reserve Account

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62) International reserve assets include “foreign exchanges”. These are

1.   A) Special Drawing Rights (SDRs) at the IMF.

2.   B) reserve positions in the International Monetary Fund (IMF).

3.   C) foreign currency held by a country’s central bank.

4.   D) none of the options

 

Answer:  C

Topic:  Official Reserve Account

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

1.   A) gold.

2.   B) foreign exchanges.

3.   C) special Drawing Rights (SDRs).

4.   D) reserve positions in the International Monetary Fund (IMF).

 

Answer:  B

Topic:  Official Reserve Account

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64) The “one word that haunts the dollar” is

1.   A) (Central bank) diversification.

2.   B) Reunification (Korean).

3.   C) Euro.

4.   D) (Current account) deficit.

 

Answer:  A

Topic:  Official Reserve Account

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

1.   A) local currencies.

2.   B) U.S. dollars.

3.   C) Yen.

4.   D) Euro.

 

Answer:  B

Topic:  Official Reserve Account

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66) 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

19.                A) from zero percent in 1999 to 19.9 percent in 2015.

20.                B) from 17.9 percent in 1999 to 19.9 percent in 2015.

21.                C) from 17.9 percent in 1999 to 52.8 percent in 2015.

22.                D) none of the options

 

Answer:  B

Topic:  Official Reserve Account

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

1.   A) The local currency

2.   B) U.S. dollars

3.   C) SDRs

4.   D) Euro

 

Answer:  A

Topic:  Official Reserve Account

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68) 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.

1.   A) BCA + BKA + BRA = 0

2.   B) BCA = −BKA

3.   C) BCA + BKA = −BRA

4.   D) BRA = −BCA

 

Answer:  B

Topic:  The Balance of Payments Identity

 

 

69) Assume that the balance-of-payments accounts for a country are recorded correctly.

 

Balance on the current account = BCA = $130 billion

Balance on the capital account = BKA = −$86 billion

Balance on the reserves account = BRA =?

 

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

1.   A) −$44 billion

2.   B) $44 billion

3.   C) $216 billion

4.   D) none of the options

 

Answer:  A

Explanation:  The formula for the fixed exchange rate regime is BCA + BKA = −BRA. This translates to $130 billion − $86 billion = −BRA, or, $44 billion = −BRA. Thus, BRA = −$44 billion.

Topic:  The Balance of Payments Identity

 

70) Assume that the balance-of-payments accounts for a country are recorded correctly.

 

Balance on the current account = BCA = $130 billion

Balance on the capital account = BKA = −$86 billion

Balance on the reserves account = BRA =?

 

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

1.   A) −$44 billion.

2.   B) $44 billion.

3.   C) $216 billion.

4.   D) none of the options

 

Answer:  D

Explanation:  Under the pure flexible exchange regime, central banks do not need to maintain official reserves.

Topic:  The Balance of Payments Identity

 

 

71) Assume that the balance-of-payments accounts for a country are recorded correctly.

 

Balance on the current account = BCA = $130 billion

Balance on the capital account = BKA = −$86 billion

Balance on the reserves account = BRA =?

 

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

1.   A) −BCA = BKA.

2.   B) BCA = −BRA = 0.

3.   C) BKA = −BRA.

4.   D) BSA = BCA.

 

Answer:  A

Topic:  The Balance of Payments Identity

 

72) 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

1.   A) equal in magnitude to the country’s national debt.

2.   B) zero.

3.   C) equal in magnitude to the Trade Deficit or Surplus.

4.   D) none of the options

 

Answer:  B

Topic:  The Balance of Payments Identity

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

1.   A) The statistical discrepancy = (BCA + BKA) − BRA

2.   B) The statistical discrepancy = BCA − BKA + BRA

3.   C) The statistical discrepancy = BCA − BKA − BRA

4.   D) The statistical discrepancy = BCA + BKA + BRA

 

Answer:  D

Topic:  The Balance of Payments Identity

74) BCA stands for

1.   A) the balance on the current account.

2.   B) the balance on the capital account.

3.   C) the balance on the official reserves.

4.   D) net imports.

 

Answer:  A

Topic:  The Balance of Payments Identity

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75) BKA stands for

1.   A) the balance on the current account.

2.   B) the balance on the capital account.

3.   C) the balance on the official reserves.

4.   D) net imports.

 

Answer:  B

Topic:  The Balance of Payments Identity

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

1.   A) this would have the result of a strengthening of the value of the dollar.

2.   B) this have the result of a weakening in the value of the dollar.

3.   C) this would not have much impact, as the information would be lost in the day-to-day volatility of exchange rates.

4.   D) none of the options

 

Answer:  B

Topic:  The Balance of Payments Identity

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77) The economic theory of mercantilism holds that

1.   A) a continuing trade surplus should be a government’s major policy goal.

2.   B) the main source of wealth of a country is its productive capacity.

3.   C) free trade is the result of countries exploiting their comparative advantage.

4.   D) none of the options

 

Answer:  A

Topic:  Balance of Payments Trends in Major Countries

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78) The U.S. Trade Deficit

1.   A) is a capital account surplus.

2.   B) is a current account deficit.

3.   C) is both a capital account surplus and a current account deficit.

4.   D) none of the options

 

Answer:  C

Topic:  Balance of Payments Trends in Major Countries

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79) As of 2011, gold accounted for

1.   A) 90 percent of the total reserve assets held by IMF member countries.

2.   B) 70 percent of the total reserve assets held by IMF member countries.

3.   C) approximately 50 percent of the total reserve assets held by IMF member countries.

4.   D) less than one percent of the total reserve assets held by IMF member countries.

 

Answer:  D

Topic:  Official Reserve Account

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80) The most popular reserve currency is now the

1.   A) U.S. dollar.

2.   B) Euro.

3.   C) Japanese Yen.

4.   D) none of the options

 

Answer:  A

Topic:  Balance of Payments Trends in Major Countries

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81) Suppose a country is currently experiencing a trade deficit. In the long run, this could be self-correcting if

1.   A) the deficit exists because of the import demand for capital goods.

2.   B) the deficit exists because of the import demand for consumption goods.

3.   C) the deficit exists because foreigners want to buy the country’s currency as an investment.

4.   D) none of the options

 

Answer:  A

Topic:  Balance of Payments Trends in Major Countries

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82) The capital account is divided into three subcategories: direct investment, portfolio investment, and other investment. Direct investment involves

1.   A) acquisitions of controlling interests in foreign businesses.

2.   B) investments in foreign stocks and bonds that do not involve acquisitions of control.

3.   C) bank deposits, currency investment, trade credit, and the like.

4.   D) all of the options

 

Answer:  A

Topic:  Balance of Payments Trends in Major Countries

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83) The capital account is divided into three subcategories: direct investment, portfolio investment, and other investment. Portfolio investment involves

1.   A) acquisitions of controlling interests in foreign businesses.

2.   B) investments in foreign stocks and bonds that do not involve acquisitions of control.

3.   C) bank deposits, currency investment, trade credit, and the like.

4.   D) all of the options

 

Answer:  B

Topic:  The Capital Account

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84) The capital account is divided into three subcategories: direct investment, portfolio investment, and other investment. “Other” investment involves

1.   A) acquisitions of controlling interests in foreign businesses.

2.   B) investments in foreign stocks and bonds that do not involve acquisitions of control.

3.   C) bank deposits, currency investment, trade credit, and the like.

4.   D) all of the options

 

Answer:  C

Topic:  The Capital Account

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85) Over the last several years, the U.S. has run persistent

1.   A) balance-of-payments deficits.

2.   B) balance-of-payments surpluses.

3.   C) current account deficits.

4.   D) capital account deficits.

 

Answer:  C

Topic:  Balance of Payments Trends in Major Countries

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86) If a country must make a net payment to foreigners because of a balance-of-payments deficit, the country should

1.   A) either increase its official reserve assets or borrow anew from foreigners.

2.   B) either run down its official reserve assets or borrow anew from foreigners.

3.   C) either run down its official reserve assets or lend more foreigners.

4.   D) none of the options

 

Answer:  B

Topic:  Balance of Payments Trends in Major Countries

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87) Under the fixed exchange rate regime,

1.   A) the combined balance on the current and capital accounts will be equal in size, but opposite in sign, to the change in the official reserves.

2.   B) the balance on the current and capital accounts will be equal in size, but opposite in sign.

3.   C) a current account surplus or deficit must be matched by an official reserves deficit or surplus.

4.   D) a capital account surplus or deficit must be matched by an official reserves deficit or surplus.

 

Answer:  A

Topic:  The Balance of Payments Identity

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88) Under the pure flexible exchange rate regime,

1.   A) the combined balance on the current and capital accounts will be equal in size, but opposite in sign, to the change in the official reserves.

2.   B) the balance on the current and capital accounts will be equal in size, but opposite in sign.

3.   C) a current account surplus or deficit must be matched by an official reserves deficit or surplus.

4.   D) a capital account surplus or deficit must be matched by an official reserves deficit or surplus.

 

Answer:  B

Topic:  The Balance of Payments Identity

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89) More important than the absolute size of a country’s balance-of-payments disequilibrium

1.   A) is the nature and cause of the disequilibrium.

2.   B) is whether it is a trade surplus or deficit.

3.   C) is whether the local government is mercantilist or not.

4.   D) is nothing is more important than the absolute size of a country’s balance-of-payments disequilibrium.

 

Answer:  A

Topic:  Balance of Payments Trends in Major Countries

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90) The notation is

 

Y = GNP = national income

C = consumption

I = private investment

G = government spending

X = exports

M = imports

T = taxes

 

The current account balance is given by

1.   A) C + I + G + X + M

2.   B) X − M

3.   C) I + X + M

4.   D) M − X

 

Answer:  B

Topic:  Appendix 3A: The Relationship between Balance of Payments and National Income Accounting

 

91) The notation is

 

Y = GNP = national income

C = consumption

I = private investment

G = government spending

X = exports

M = imports

T = taxes

 

The difference between a country’s savings and investment is given by

1.   A) (Y − C − T) − I

2.   B) I × (Y − C − T)

3.   C) X − M

4.   D) GNP − T

 

Answer:  A

Topic:  Appendix 3A: The Relationship between Balance of Payments and National Income Accounting

 

 

92) If the difference between tax revenue and government expenditures is negative, it implies that

1.   A) tax revenue is insufficient to cover government spending.

2.   B) a government budget deficit exists.

3.   C) the government will be issuing new debt securities.

4.   D) all of the options

 

Answer:  D

Topic:  Appendix 3A: The Relationship between Balance of Payments and National Income Accounting

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93) The notation is

 

Y = GNP = national income

C = consumption

I = private investment

G = government spending

X = exports

M = imports

T = taxes

 

National income, or Gross National Product is given by

1.   A) GNP ≡ Y ≡ C + I + G + X + M

2.   B) GNP ≡ Y ≡ C + I + G + X − M

3.   C) GNP ≡ I ≡ C + Y + G + X − M

4.   D) GNP ≡ Y ≡ C + I + X + M − G

 

Answer:  B

Topic:  Appendix 3A: The Relationship between Balance of Payments and National Income Accounting

 

 

94) The notation is

 

Y = GNP = national income

C = consumption

I = private investment

G = government spending

X = exports

M = imports

T = taxes

 

Which of the following is a true statement?

1.   A) BCA ≡ X − M

2.   B) BKA ≡ X − M

3.   C) BKA − BCA ≡ X − M

4.   D) BKA ≡ M − X

 

Answer:  A

Topic:  Appendix 3A: The Relationship between Balance of Payments and National Income Accounting

 

95) The notation is

 

Y = GNP = national income

C = consumption

I = private investment

G = government spending

X = exports

M = imports

T = taxes

 

Private savings, S, is defined as S = Y − C − T. Which of the following is also accurate?

1.   A) S = C + I + G + X − M − C − T

2.   B) S = C + I + G + X

3.   C) S = C + X − M − C − T

4.   D) S = C + G + X − M − C − T

 

Answer:  A

Topic:  Appendix 3A: The Relationship between Balance of Payments and National Income Accounting

 

 

96) If the difference between a country’s savings and investment is negative, it implies that

1.   A) a country’s domestic savings is insufficient to finance domestic investment.

2.   B) a government budget deficit exists.

3.   C) a country’s domestic savings is sufficient to finance domestic investment

4.   D) none of the options

 

Answer:  A

Topic:  Appendix 3A: The Relationship between Balance of Payments and National Income Accounting

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97) The notation is

 

Y = GNP = national income

C = consumption

I = private investment

G = government spending

X = exports

M = imports

T = taxes

 

There is an intimate relationship between a country’s BCA and how the country finances its domestic investment and pays for government expenditures. This relationship is given by BCA ≡ X − M ≡ (S − I) + (T − G). Given this, which of the following is a true statement?

1.   A) If (S − I) < 0, it implies that a country’s domestic savings is insufficient to finance domestic investment.

2.   B) If (T − G) < 0, it implies that a country’s tax revenue is insufficient to finance government spending.

3.   C) If (S − I) < 0, it implies that a country’s domestic savings is insufficient to finance domestic investment and if (T − G) < 0, it implies that a country’s tax revenue is insufficient to finance government spending.

4.   D) none of the options

 

Answer:  C

Topic:  Appendix 3A: The Relationship between Balance of Payments and National Income Accounting

 

 

98) The notation is

 

Y = GNP = national income

C = consumption

I = private investment

G = government spending

X = exports

M = imports

T = taxes

 

There is an intimate relationship between a country’s BCA and how the country finances its domestic investment and pays for government expenditures. Given this, which of the following is a true statement?

1.   A) If (S − I) < 0, it implies that a country’s domestic savings is insufficient to finance domestic investment.

2.   B) If (T − G) < 0, it implies that a country’s tax revenue is insufficient to finance government spending.

3.   C) If (S − I) < 0, it implies that a country’s domestic savings is insufficient to finance domestic investment and if (T − G) < 0, it implies that a country’s tax revenue is insufficient to finance government spending.

4.   D) none of the options

 

Answer:  C

Topic:  Appendix 3A: The Relationship between Balance of Payments and National Income Accounting

 

 

99) The notation is

 

Y = GNP = national income

C = consumption

I = private investment

G = government spending

X = exports

M = imports

T = taxes

 

There is an intimate relationship between a country’s BCA and how the country finances its domestic investment and pays for government expenditures. Given this, which of the following is a true statement?

1.   A) If (S − I) < 0, it implies that a country’s domestic savings is insufficient to finance domestic investment.

2.   B) If (T − G) < 0, it implies that a country’s tax revenue is insufficient to finance government spending.

3.   C) When BCA is negative, it implies that government budget deficits and/or part of domestic investment are being finance with foreign-controlled capital.

4.   D) all of the options

 

Answer:  D

Topic:  Appendix 3A: The Relationship between Balance of Payments and National Income Accounting

100) The notation is

 

Y = GNP = national income

C = consumption

I = private investment

G = government spending

X = exports

M = imports

T = taxes

 

There is an intimate relationship between a country’s BCA and how the country finances its domestic investment and pays for government expenditures. This relationship is given by BCA ≡ X − M ≡ (S − I) + (T − G). Given this, in order for a country to reduce a BCA deficit, which of the following must occur?

1.   A) For a given level of S and I, the government budget deficit (T − G) must be reduced.

2.   B) For a given level of I and (T − G), S must be increased.

3.   C) For a given level of S and (T − G), I must fall.

4.   D) All of the options would work to reduce a BCA deficit.

 

Answer:  D

Topic:  Appendix 3A: The Relationship between Balance of Payments and National Income Accounting

 

International Financial Management, 8e (Eun)

Chapter 5   The Market for Foreign Exchange

 

1)The world’s largest foreign exchange trading center is

1.   A) New York.

2.   B) Tokyo.

3.   C) London.

4.   D) Hong Kong.

 

Answer:  C

Topic:  Function and Structure of the FX Market

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2) On average, worldwide daily trading of foreign exchange is closest to

A)$100 million.

1.   B) $15 billion.

2.   C) $504 billion.

3.   D) $5 trillion.

 

Answer:  D

Topic:  Function and Structure of the FX Market

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