Chapter 02: International Flow of Funds
38. The value of financial assets transferred across country borders by people who move to a different country is included
in the balance of payments in the capital account.
a.
True
b.
False
39. Portfolio investment represents transactions involving long-term financial assets (such as stocks and bonds) between
countries that do not affect the transfer of control.
a.
True
b.
False
40. The current account represents the investment in fixed assets in foreign countries that can be used to conduct business
operations.
a.
True
b.
False
41. Exporting of products by one country to other countries at prices below cost is called elasticity.
a.
True
b.
False
42. Direct foreign investment by U.S.-based MNCs occurs primarily in the Bahamas and Brazil.
a.
True
b.
False
43. The J-curve effect is the initial worsening of the U.S. trade balance due to a weakening dollar because of established
trade relationships that are not easily changed; as the dollar weakens, the dollar value of imports initially rises before the
U.S. trade balance is improved.
a.
True
b.
False
44. Outsourcing is the process of subcontracting to a third party in another country to provide supplies or services that
were previously obtained internally.
a.
True
b.
False
45. Intracompany trade is the exporting of products by one country to other countries below cost.
a.
True
b.
False
46. A tariff is a maximum limit on imports.
a.
True
b.
False
47. A country’s net outflow of funds ____ its interest rates, and ____ its economic conditions.
a.
affects; affects
b.
affects; does not affect
c.
does not affect; does not affect
d.
does not affect; affects
48. The sale of patent rights by a U.S. firm to a Russian firm reflects a credit to the U.S. balance of payments account.
a.
True
b.
False
49. A U.S. purchase of patent rights from a firm in Mexico reflects a credit to the U.S. balance of payments account.
a.
True
b.
False
50. Regarding the U.S. balance of payments, capital account items are relatively minor compared to the financial account
items.
a.
True
b.
False
51. In recent years, the United States has had a relatively (compared to other countries) ____ balance of trade ____ with
China.
a.
b.
c.
d.
52. The Central American Trade Agreement (CAFTA) is intended to raise tariffs and regulations between the United
States, the Dominican Republic, and Central American countries.
a.
True
b.
False
53. U.S. government officials would likely prefer that China devalue the yuan against the dollar.
a.
True
b.
False
54. Assume that some U.S. firms will purchase supplies from either China or from U.S. firms. If the Chinese yuan
appreciates against the dollar, that should reduce the U.S. balance-of-trade deficit with China.
a.
True
b.
False
55. Assume the United States has a balance-of-trade surplus with the country of Thor. When individuals in Thor without
permission manufacture video games and DVDs that look almost exactly like the original products produced in the United
States and other countries, they ____ the U.S. balance-of-trade surplus with Thor. This activity is called ____.
a.
reduce; flipping
b.
reduce; piracy
c.
increase; piracy
d.
increase; flipping
56. Japan’s annual interest rate has been relatively ____ compared to other countries for several years, because the supply
of funds in its credit market has been very ____.
a.
low; small
b.
high; small
c.
low; large
d.
high; large
57. Without international capital flows, there would be ____ funding available in the United States across all risk levels,
and the cost of funding would be ____ regardless of the firm’s risk level.
a.
more; lower
b.
more; higher
c.
less; lower
d.
less; higher
58. The primary component of the capital account is the balance of trade.
a.
True
b.
False
59. A balance-of-trade surplus indicates an excess of merchandise imports over merchandise exports.
a.
True
b.
False
60. An American tourist visiting Germany and spending money there (for lodging, food, etc.) will reduce the U.S. current
account deficit and reduce Germany’s current account balance.
Chapter 02: International Flow of Funds
a.
True
b.
False
61. A balance-of-trade deficit indicates an excess of imports over exports.
a.
True
b.
False
62. The capital account reflects changes in country ownership of direct foreign investment.
a.
True
b.
False
63. Outsourcing allows some MNCs to reduce costs but shifts jobs to other countries.
a.
True
b.
False
64. A weakening of the U.S. dollar with respect to the British pound would likely reduce U.S. exports to the United
Kingdom and increase U.S. imports from the United Kingdom.
Chapter 02: International Flow of Funds
a.
True
b.
False
65. The World Trade Organization was established to provide a forum for multilateral trade negotiations and to settle
trade disputes.
a.
True
b.
False
66. The ____ is the difference between exports and imports.
a.
balance of trade
b.
balance on goods and services
c.
balance of payments
d.
current account
e.
capital account
67. Which of the following will probably not result in an increase in a country’s current account balance (assuming
everything else remains constant)?
a.
a decrease in the country’s rate of inflation
b.
a decrease in the country’s national income level
c.
an increase in government restrictions in the form of tariffs or quotas
d.
an appreciation of the country‘s currency
e.
All of the above will result in an increased current account balance.
68. Which of the following is a key component that determines a country’s primary income (within the country’s current
account)?
a.
direct foreign investment
b.
international trade
c.
tax rates
d.
gifts
69. The ____, an accord among 117 nations, called for lower tariffs around the world.
a.
General Agreement on Tariffs and Trade (GATT)
b.
North American Free Trade Agreement (NAFTA)
c.
Single European Act of 1987
d.
European Union Accord
e.
none of the above
70. Which of the following is not likely to represent a strategy by the government of Country X to reduce its balance-of–
trade deficit with Country Y?
a.
The government of Country X eliminates environmental restrictions.
b.
The government of Country X subsidizes firms in its country to facilitate dumping.
c.
The government of Country X provides tax breaks to firms in specific industries.
d.
The government of Country X removes a tariff on goods imported from Country Y.
71. Which of the following statements is not true?
a.
Exporters commonly complain that they are being mistreated because the currency of their country is too
weak.
b.
Outsourcing affects the balance of trade because it means that a service is purchased in another country.
c.
Sometimes, trade policies are used to punish countries for various actions.
d.
Tariffs imposed by the EU have caused some friction between EU countries that commonly import products
and other EU countries.
e.
All of the above are true.
72. ____ represents aid, grants, and gifts from one country to another.
a.
Secondary income
b.
Primary income
c.
The balance of trade
d.
The balance of payments
e.
The capital account
73. Which of the following is not a goal of the International Monetary Fund (IMF)?
a.
To promote cooperation among countries on international monetary issues
b.
To promote stability in exchange rates
c.
To enhance a country’s long-term economic growth via the extension of structural adjustment loans
d.
To promote free trade
e.
To promote free mobility of capital funds across countries
74. According to the “J-curve effect,” a weakening of the U.S. dollar relative to its trading partners’ currencies would
result in an initial ____ in the current account balance, followed by a subsequent ____ in the current account balance.
a.
decrease; increase
b.
increase; decrease
c.
decrease; decrease
d.
increase; increase