978-0133879872 Test Bank Chapter 3 Part 2

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17) Consider the following: A foreign automobile company builds a manufacturing plant in

Tennessee and European investors buy U.S. Treasury Bonds.

A) Both activities would be considered direct investment.

B) Both activities would be considered portfolio investment.

C) The auto manufacturer in engaging in portfolio investment, and the European investors are

engaged in direct investing.

D) The auto manufacturer in engaging in direct investment, and the European investors are

engaged in portfolio investing.

18) China is currently experiencing a surplus in its current account and its capital/financial

accounts. Which of the following is NOT a contributing factor for this unusual situation?

A) The exceptional growth in the Chinese economy contributes to the current account surplus.

B) The positive prospects for China’s continued growth contribute to the capital/financial

account surplus.

C) China’s inevitable acquisition of Taiwan is driving the market for Chinese investment.

D) All of the above are contributing factors for China’s twins surpluses.

19) If China wished to reduce their accumulation of foreign exchange reserves they could:

A) allow their currency, the yuan, to float freely in the market place.

B) reduce their current account surplus by importing more goods than they export.

C) undertake both of the activities identified in choices A and B.

D) dig a big hole and bury the reserves.

20) The largest single component of the United States current account is:

A) current transfers.

B) income payments and receipts.

C) goods (merchandise) imports and exports.

D) services imports and exports.

21) In general, as a country’s income increases, so does the demand for imports.

22) For at least the last decade, the United States has consistently run a surplus in services trade

income.

23) Expenditures by U.S. students abroad and foreign students pursuing studies in the United

States would be considered a services trade and part of the U.S. current account.

24) International debt security purchases and sales are defined as portfolio investments for

financial account purposes because by definition debt securities do not provide the buyer with

ownership or control.

25) Significant amounts of United States Treasury issues are purchased by foreign investors,

therefore the U.S. must earn foreign currency to repay this debt.

26) In the United States and most developed countries, the current account and the combined

financial/capital accounts tend to be inversely related in that when one is positive, the other tends

to be negative.

27) The biggest problem that China faces in maintaining a stable value for their currency, the

yuan, is their lack of foreign exchange reserves.

28) As of year-end 2010, the United States still held the world’s largest foreign exchange reserve,

but the total was rapidly being approached by China.

29) China’s current political plan includes reducing their foreign exchange reserve balance by

allowing the yuan to float freely and by switching their goods balance from one of a net surplus

to a net deficit.

30) An excess of merchandise exports over merchandise imports results in a balance of trade

deficit.

31) The transition to floating exchange rate regimes in the 1970s (described in Chapter 3)

changed the focus from the total BOP to its various subaccount like the current and financial

account balances.

32) What is a country’s balance of (merchandise) trade, and why is it so widely reported in the

financial and popular press?

33) What is the Official Reserves Account (ORA), and why is it more important for countries

under a fixed exchange rate regime than for ones under a floating exchange rate regime?

3.3 The BOP Impacts on Key Macroeconomic Rates

1) Under an international regime of fixed exchange rates, countries with a BOP ________ should

consider ________ their currency while countries with a BOP ________ should consider

________ their currency.

A) deficit, revaluing; surplus, revaluing

B) deficit, devaluing; surplus, devaluing

C) surplus, devaluing; deficit, revaluing

D) surplus, revaluing; deficit, devaluing

2) Use the following terms for this question:

C = consumption

I = capital investment spending

G = government spending

X = exports of goods and services

M = imports of goods and services

BOP = balance of payments

GDP = gross domestic product

NPV = net present value

INF = inflation

R = real rate of return

The static equation for the nations GDP is:

A) GDP = C + I + G + (X + M ) × INF

B) GDP = C + I + G + X + M

C) GDP = C + I + G + X – M

D) GDP = C + I + X – M + R

3) Use the following terms for this question:

(X-M) = Current Account Balance

(CI-CO) = Capital Account Balance

(FI-FO) = Financial Account Balance

(I-S) = Investment-Saving Balance

FXB = Reserve Balance

BOP = balance of payments

GDP = gross domestic product

C = consumption

I = capital investment spending

G = government spending

The static equation for the BOP is:

A) BOP = (X-M) – (CI-CO) – (FI-FO) + FXB

B) BOP = (X-M) + (I-S) + (FI-FO) + FXB

C) BOP = (X-M) + (CI-CO) + (FI-FO) + FXB

D) BOP = GDP – [C + I +G] + (FI-FO)

4) Imports have the potential to lower a country’s inflation rate because of each of the following

EXCEPT:

A) the import of lower priced goods limits what domestic competitors can charge for goods.

B) the import of lower priced services limits what domestic competitors can charge for services.

C) the higher prices of foreign goods spurs domestic competitors to cut prices.

D) all of the above

5) Under a fixed exchange rate system, the government bears the responsibility to ensure that the

BOP is near zero. If the sum of the current and capital accounts do not approximate zero, the

government is expected to intervene in the foreign exchange market by buying or selling official

foreign exchange reserves. If the sum of the first two accounts is GREATER THAN ZERO, a

________ demand for the domestic currency exists in the world. To preserve the fixed exchange

rate, the government must then intervene in the foreign exchange market and ________ domestic

currency for foreign currencies or gold so as to bring the BOP back near zero.

A) surplus; sell

B) surplus; buy

C) deficit; sell

D) deficit; buy

6) Under a fixed exchange rate system, the government bears the responsibility to ensure that the