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Chapter 13: Accounting Frameworks
MULTIPLE CHOICE
1. Which item below is not an element of income in a closed economy?
a. Wages.
b. Salaries.
c. Payments for use of property assets.
d. Barter transactions.
2. Which item below is not an element of household expenditures in an open economy?
a. Consumption of goods and services.
b. Savings.
c. Taxes.
d. Social security receipts.
3. Which statement about the capital account in an open economy is false?
a. The only expenditure of the capital account is domestic investment.
b. The only receipt of the capital account is domestic investment.
c. Domestic savings plus foreign savings equals domestic investment.
d. Investment minus domestic savings equals foreign savings.
4. Which of the following is not an element of the current account?
a. Foreign direct investment.
b. Exports.
c. Net income.
d. Net transfers.
5. Which of the following is not an element of the capital account?
a. Foreign direct investment.
b. Portfolio investment.
c. Remittances
d. Commercial bank lending
6. Which of the following is not an element of the current account?
a. Imports.
b. Portfolio investment.
c. Income from factors of production owned abroad.
d. Foreign aid.
7. Which of the following is not a component of official reserves?
a. Foreign exchange.
b. Foreign government bonds.
c. Accounts at foreign central banks.
d. Equities of foreign firms.
8. Which of the following is associated with a trade deficit?
a. Domestic savings exceeds domestic investment.
b. Foreign savings is negative.
c. Foreign savings is positive.
d. Foreign investment is positive.
9. Which of the following is associated with a trade surplus?
a. Domestic savings exceeds domestic investment.
b. Foreign savings is positive.
c. Foreign investment is negative.
d. Domestic investment exceeds domestic savings.
TRUE AND FALSE
1. A trade deficit must be equivalent to domestic investment minus domestic savings.
2. A trade surplus is associated with an excess of domestic investment over domestic
savings.
3. A trade deficit is associated with an excess of domestic savings over domestic
investment.
4. A trade deficit must be offset by foreign savings.
5. If the current and capital/financial accounts are both positive, then the official reserve
transactions must be negative.
6. If the current and official reserve transactions are both positive, then the capital/financial
account must be positive.
7. The balance of payments is an exact measurement of all payments flowing into and out of
a country.
8. Since the early 2000s, China has exhibited buildups of foreign reserves.
9. If a central bank sells foreign exchange holdings, this generates an inflow of funds and
positive entries in the official reserves balance.
10. If a central bank buys foreign exchange holdings, this generates an inflow of funds and
positive entries in the official reserves balance.
SHORT ANSWER
1. What is a closed economy for the purposes of national income accounting?
2. What elements or accounts must we add to a closed economy to depict an open economy
with government, savings and investment?
3. In an open economy, what three types of expenditures are made by households?
4. In an open economy, what are the sources of income for the capital account?
5. Please list the ways that an open economy interacts with the rest of the world.
6. If a country imports more than it exports, how is the shortfall made up?
7. If a country exports more than it imports, how is the excess accounted for?
8. What makes up the transfers item of the current account in the balance of payments.
9. What is the difference between equity portfolio investment and foreign direct investment
in the capital account?
10. What is the role of the official reserves balance in the capital account?
11. Why is the errors and omissions account a necessary part of the balance of payments?
1
12. Please explain how the balance of payments accounts could be used to diagnose a country
with large and persistent current account deficits.
