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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
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 LESS 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
7) An increase in GDP should lead to a decrease in imports.
