Chapter 3

1 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

2 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

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

4 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

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

6 Suppose the McDonalds Corporation imports 100 tons of Canadian beef, paying for it

by transferring the funds to a New York bank account kept by the Canadian Beef

Conglomerate.

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

7 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) a) and b) are both true

d) None of the above

8 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

9 Invisible trade refers to:

a) services that avoid tax payments

b) underground economy

c) legal, consulting, and engineering services

d) tourist expenditures, only

10 The current account is divided into four finer categories:

a) Merchandise trade, services, factor income, and statistical discrepance.

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

11 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

13 Capital account includes

a) (i), (ii), and (iii)

b) (ii), (iii), and (vii)

c) (iv), (v), and (vii)

d) (i), (v), and (vi)

14 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

15 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.

d) None of the above.

16 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)

17 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

18 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

19 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

20 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

21 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

Answer: a) p 66.

22 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.

23 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

24 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.

25 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

26 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.

27 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.

28 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

29 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) a and b

30 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

31 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

32 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)

33 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) b) or c) will work

34 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

35 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

36 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

37 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)

38 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

39 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

40 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

41 The “one word that haunts the dollar” is

a) (Central bank) diversification

b) Reunification (Korean)

c) Misinterpretation

d) Terrorism

42 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

43 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

44 Over the last several years the U.S. has run persistent

a) Balance-of-payments deficits

b) Balance-of-payments surpluses

c) Current Account deficits

d) Capital Account deficits

45 More important than he absolute size of a country’s balance-of-payments

disequilibrium

a) is the nature and cause of the disequilibrium

b) is whether it is a trade surplus or deficit

c) is whether the local government is mercantilist or not

d) Nothing is more important than he absolute size of a country’s balance-of-

payments disequilibrium