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Chapter 02: International Flow of Funds
1. Recently, the U.S. experienced an annual balance of trade representing a ____.
a.
large surplus (exceeding $100 billion)
b.
small surplus
c.
level of zero
d.
deficit
2. A high home inflation rate relative to other countries would ____ the home country's current account balance, other
things being equal. High growth in the home income level relative to other countries would ____ the home country's
current account balance, other things being equal.
a.
increase; increase
b.
increase; decrease
c.
decrease; decrease
d.
decrease; increase
3. If a country's government imposes a tariff on imported goods, that country's current account balance will likely ____
(assuming no retaliation by other governments).
a.
decrease
b.
increase
c.
remain unaffected
d.
either A or C is possible
4. ____ purchases more U.S. exports than the other countries listed here.
a.
Italy
b.
Spain
Chapter 02: International Flow of Funds
c.
Mexico
d.
Canada
5. An increase in the current account deficit will place ____ pressure on the home currency value, other things being
equal.
a.
upward
b.
downward
c.
no
d.
upward or downward (depending on the size of the deficit)
6. If the home currency begins to appreciate against other currencies, this should ____ the current account balance, other
things being equal (assume that substitutes are readily available in other countries, and that the prices charged by firms
remain the same).
a.
increase
b.
have no impact on
c.
reduce
d.
all of the above are equally possible
7. The International Finance Corporation was established to promote economic development:
a.
in Asia through grants to businesses.
b.
by providing nonsubsidized loans (at market interest rates) to governments and their agencies.
c.
by providing low-interest-rate loans (below-market rates) to poor nations.
d.
through the private sector by providing loans to corporations and investing in their stock.
8. The World Bank was established to reduce poverty and promote economic development:
a.
in Asia through grants to businesses.
b.
by providing nonsubsidized loans (at market interest rates) to governments and their agencies.
c.
by providing low-interest-rate loans (below-market rates) to poor nations.
d.
through the private sector by providing loans to corporations and investing in their stock.
9. The International Development Association was established to promote economic development:
a.
in Asia through grants to businesses.
b.
by providing nonsubsidized loans (at market interest rates) to governments and their agencies.
c.
by providing low-interest-rate loans (below-market rates) to poor nations.
d.
through the private sector by providing loans to corporations and investing in their stock.
10. Which of the following would likely have the least direct influence on a country's current account?
a.
inflation
b.
national income
c.
exchange rates
d.
tariffs
e.
a tax on income earned from foreign stocks
11. The "J-curve" effect describes:
a.
the continuous long-term inverse relationship between a country's current account balance and the country's
growth in gross domestic product.
b.
the short-run tendency for a country's balance of trade to deteriorate even while its currency is depreciating.
c.
the tendency for exporters to initially reduce the price of goods when their own currency appreciates.
d.
the tendency of a country's currency to initially depreciate after the country's inflation rate declines.
12. An increase in the use of quotas is expected to:
a.
reduce the country's current account balance, if other governments do not retaliate.
b.
increase the country's current account balance, if other governments do not retaliate.
c.
have no impact on the country's current account balance unless other governments retaliate.
d.
increase the volume of a country's trade with other countries.
13. The United States typically has a balance-of-trade surplus in its trade with ____.
a.
China
b.
Japan
c.
A and B
d.
none of the above
14. The North American Free Trade Agreement (NAFTA) increased restrictions on:
a.
trade between Canada and Mexico.
Chapter 02: International Flow of Funds
b.
trade between Canada and the United States
c.
direct foreign investment in Mexico by U.S. firms.
d.
none of the above.
15. According to the text, international trade (exports plus imports combined) as a percentage of GDP is:
a.
higher in the United States than in European countries.
b.
lower in the United States than in European countries.
c.
higher in the United States than in about half the European countries, and lower in the United States than in
the others.
d.
about the same in the United States as in European countries.
16. The direct foreign investment positions by U.S. firms have generally ____ over time. Restrictions by governments on
direct foreign investment have generally ___ over time.
a.
increased; increased
b.
increased; decreased
c.
decreased; decreased
d.
decreased; increased
17. Which of the following countries purchases the largest amount of exports by U.S. firms?
a.
Mexico
b.
Japan
c.
Canada
d.
France
Chapter 02: International Flow of Funds
18. The primary component of the current account is the:
a.
balance of trade.
b.
balance of gifts.
c.
balance of aid payments.
d.
balance of grant payments.
19. As a result of the European Union, restrictions on exports between ____ were reduced or eliminated.
a.
member countries and the United States
b.
member countries
c.
member countries and European nonmembers
d.
none of the above
20. Over the last several years, international trade has generally:
a.
increased for most major countries.
b.
decreased for most major countries.
c.
stayed about constant for most major countries.
d.
increased for about half the major countries and decreased for the others.
21. Which of the following is not a result of the North American Free Trade Agreement (NAFTA)?
a.
increased trade between the United States and Central American countries
b.
increased imports by the United States from Mexico
c.
increased exports by U.S. firms to Mexico
d.
increased establishment of subsidiaries in Mexico by U.S. firms
22. The General Agreement on Tariffs and Trade (GATT) accord of 1993 called for:
a.
increased trade restrictions outside North America.
b.
lower trade restrictions around the world.
c.
uniform environmental standards around the world.
d.
uniform worker health laws.
23. Which of the following is mentioned in the text as a possible means by which the government may attempt to improve
its balance-of-trade position (increase its exports or reduce its imports)?
a.
The government could attempt to reduce its home currency's value.
b.
The government could require firms to engage in outsourcing.
c.
The government could provide subsidies to importers.
d.
All of the above are mentioned.
24. The demand for U.S. exports tends to increase when:
a.
economic growth in foreign countries decreases.
Chapter 02: International Flow of Funds
b.
the currencies of foreign countries strengthen against the dollar.
c.
U.S. inflation rises.
d.
none of the above.
25. The term "dumping" refers to the:
a.
exporting of goods that do not meet quality standards.
b.
sale of junk bonds to foreign countries.
c.
removal of foreign subsidiaries by the host government.
d.
exporting of goods at prices below cost.
26. The primary income component in a country’s current account may reflect income received due to:
a.
grants.
b.
direct foreign investment.
c.
aid.
d.
gifts.
27. A weak home currency may not be a perfect solution to correct a balance-of-trade deficit because:
a.
it reduces the prices of imports paid by local companies.
b.
it increases the prices of exports by local companies.
c.
it prevents international trade transactions from being prearranged.
d.
foreign companies may reduce the prices of their products to stay competitive.
28. Intracompany trade makes up more than ____ percent of all international trade.
a.
50
b.
70
c.
25
d.
13
e.
5
29. Like the International Monetary Fund (IMF), the ____ is composed of a number of nations as members. However,
unlike the IMF, it uses the private rather than the government sector to achieve its objectives.
a.
World Bank
b.
International Finance Corporation (IFC)
c.
World Trade Organization (WTO)
d.
International Development Association (IDA)
e.
Bank for International Settlements (BIS)
30. The World Bank's Multilateral Investment Guarantee Agency (MIGA):
a.
offers various forms of export insurance.
b.
offers various forms of import insurance.
c.
offers various forms of exchange rate risk insurance.
d.
provides loans to developing countries.
e.
offers various forms of political risk insurance.
31. Also known as the "central banks' central bank," the ____ attempts to facilitate cooperation among countries with
regard to international transactions.
a.
World Bank
b.
International Finance Corporation (IFC)
c.
World Trade Organization
d.
International Development Association (IDA)
e.
Bank for International Settlements (BIS)
32. Direct foreign investment into the United States represents a ____.
a.
capital inflow
b.
trade inflow
c.
capital outflow
d.
trade outflow
33. A balance-of-trade surplus indicates an excess of imports over exports.
a.
True
b.
False
34. A weakening of the U.S. dollar with respect to the British pound would likely reduce U.S. exports to Britain and
Chapter 02: International Flow of Funds
increase U.S. imports from Britain over time.
a.
True
b.
False
35. The World Bank extends loans only to developed nations, while the International Development Association (IDA)
extends loans only to developing nations.
a.
True
b.
False
36. The World Bank frequently enters into cofinancing agreements, under which it joins with official aid agencies, export
credit agencies, or commercial banks in providing financing.
a.
True
b.
False
37. The balance of payments is a summary of all transactions between domestic and foreign residents for a specific
country over a specified period of time.
a.
True
b.
False
