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Chapter 20: International Finance
True / False
1. Because of the accounting techniques used, the balance of payments shows that debits equal credits only if exports
equal imports.
a.
True
b.
False
False
2. The balance of payments always balances because each of the specific accounts must, by definition, be in balance.
a.
True
b.
False
False
3. The balance of payments can be thought of as the balance of economic transactions.
a.
True
b.
False
True
4. A country’s balance of payments summarizes all economic transactions during a given period between the residents of
that country and the residents of other countries.
a.
True
b.
False
True
5. The government of a country is not considered a resident while calculating the balance of payments.
a.
True
b.
False
False
6. In the United States, imports have exceeded exports every year since 1979.
a.
True
b.
False
True
7. In the United States, imports have exceeded exports every year since 1966.
a.
True
b.
False
False
8. In 2014, the United States’ balance of trade deficit with China was about 10 times as large as the balance of trade
deficit with Canada
a.
True
b.
False
True
9. If the current account is in deficit, imports of goods and services exceed exports of goods and services, plus net
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Chapter 20: International Finance
unilateral transfers.
a.
True
b.
False
True
10. Current account transactions are records of the income and expenditures from exports and imports, plus international
financial investments and borrowing.
a.
True
b.
False
False
11. U.S. capital outflows occur when foreigners purchase U.S. assets.
a.
True
b.
False
False
12. Between 1917 and 1982, U.S. ran a financial account deficit.
a.
True
b.
False
True
13. Since 1983, U.S. has typically run a financial account surplus.
a.
True
b.
False
True
14. If on Monday of a week $1 = 146 Japanese yen and on Friday of the same week $1 = 147 yen, the dollar is said to
have appreciated and the yen is said to have depreciated.
a.
True
b.
False
True
15. The exchange rate is the price of a currency in terms of another currency for exchanges of goods and services but not
for financial transactions.
a.
True
b.
False
False
16. The term foreign exchange is used to denote the value of domestic currency held to finance international trade.
a.
True
b.
False
False
17. An exchange rate is the price of one commodity (e.g., corn) measured in terms of another commodity (e.g., wheat).
a.
True
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Chapter 20: International Finance
b.
False
False
18. If the British pound appreciates, U.S. television stations need fewer dollars to buy episodes of a British sitcom from
the British Broadcasting Company.
a.
True
b.
False
False
19. If the U.S. dollar appreciates, it becomes cheaper for Australians to visit their relatives in the United States.
a.
True
b.
False
False
20. If an American citizen is planning to visit wildlife reserves in Kenya, he will hope that the U.S. dollar appreciates
against Kenyan shillings.
a.
True
b.
False
True
21. If Europe and the United States were the only two regions in the world, then U.S. government would buy euros to
improve the U.S. balance of payments.
a.
True
b.
False
True
22. Speculators profit by taking risks, while the actions of arbitrageurs involve no risk.
a.
True
b.
False
True
23. The purchasing power parity theory helps explain long-run trends in exchange rates, but not short-run fluctuations.
a.
True
b.
False
True
24. The purchasing power parity (PPP) theory suggests the prices of identical items will equalize internationally. An
illustration that supports this theory is the fact that the price of a McDonald’s “Big Mac” is the same around the world.
a.
True
b.
False
False
25. Under a floating rate system, exchange rates are determined by supply and demand in the foreign exchange market
without government intervention.
a.
True
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Chapter 20: International Finance
b.
False
True
26. If the U.S. dollar depreciates, it becomes cheaper for U.S. residents to travel in foreign countries.
a.
True
b.
False
False
27. Under fixed exchange rates, government officials have limited roles to play in the foreign exchange market.
a.
True
b.
False
False
28. Under the gold standard, each country had little control over its own monetary policies.
a.
True
b.
False
True
29. Under the gold standard, gold discoveries in Alaska and South America led to severe deflation in the U.S. economy.
a.
True
b.
False
False
30. Under the gold standard, a country with a surplus in its balance of payments experienced a rise in its money supply
and a drop in its price level.
a.
True
b.
False
False
31. The Bretton Woods agreement established the gold standard.
a.
True
b.
False
False
32. The Bretton Woods system fixed all exchange rates in terms of the U.S. dollar.
a.
True
b.
False
True
33. Under the Bretton Woods agreement, the world monetary system operated exactly like the gold standard of pre-World
War I years.
a.
True
b.
False
False
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Chapter 20: International Finance
34. In a fixed exchange rate system, rates are maintained by the central bank’s ongoing purchases and sales of currencies.
a.
True
b.
False
True
35. The present international exchange rate system operates on the gold standard.
a.
True
b.
False
False
36. Fixed exchange rates are more volatile than floating exchange rates.
a.
True
b.
False
False
37. The current international financial system is a managed float system.
a.
True
b.
False
True
38. Flexible exchange rates do not allow for discretionary monetary policy.
a.
True
b.
False
False
Multiple Choice
39. Which of the following events would not be recorded in the U.S. balance of payments?
a.
The increase in the money supply of a foreign nation
b.
Oxfam America, a U.S. relief agency, sending rice to drought victims in sub-Saharan Africa
c.
Oxfam America, a U.S. relief agency, sending wheat to drought victims in sub-Saharan Africa
d.
The Pentagon stationing troops in Saudi Arabia
e.
U.S. exporting computer software and imports oil from Iraq
a
40. The balance of payments summarizes the transactions that occur during a given time period between:
a.
the local governments of a country and the federal government of the country.
b.
the producers and consumers of all goods and services within a country.
c.
individuals, firms, and government of one country and individuals, firms, and governments of the other
countries.
d.
two firms that operate in two different states in a country.
e.
the firms in a country and the government of the country.
c
41. The value of a country’s exports is listed in its balance of payments account as a(n) _____.
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Chapter 20: International Finance
a.
credit
b.
debit
c.
payment
d.
investment
e.
unilateral transfer
a
42. A nation has an unfavorable balance of trade when:
a.
it has a surplus in its balance of payments.
b.
it has a deficit in its balance of payments.
c.
the value of its imports of goods is greater than the value of its exports of goods.
d.
its current account is in surplus and its capital account is in deficit.
e.
it has high tariffs.
c
43. A nation’s merchandise trade balance reflects _____.
a.
trade in tangible products
b.
the value of exports of services
c.
the value of imports of services
d.
the same information as its balance of payments
e.
trade in tangibles and intangibles
a
44. The merchandise trade balance measures:
a.
the value of goods and services exported.
b.
the value of all goods and services exported minus the value of all goods and services imported.
c.
the value of all goods and services exported minus the value of all goods and services imported, and the
transactions to finance the difference.
d.
the value of all tangible products exported minus the value of all tangible products imported.
e.
the value of all tangible products exported minus the value of all tangible products imported, and the
transactions to finance the difference.
45. The merchandise trade balance does not include:
a.
exports of refrigerators.
b.
imports of automobiles.
c.
exports of agricultural products.
d.
shipping and insurance services.
e.
imports of food items with heavy tariffs.
46. Which of the following is not true about the U.S. trade balance since 1979?
a.
The balance of trade has been in deficit.
b.
During recessions the balance has usually been flat.
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Chapter 20: International Finance
c.
The balance of trade has been in surplus.
d.
When the economy expanded, the demand for imports increased.
e.
When the economy expanded, the trade balance worsened.
47. Which of the following statements defines trade balance?
a.
The trade balance is the sum of the services balance, the current account balance, and the capital account
balance.
b.
The trade balance is merchandise exports minus merchandise imports.
c.
The trade balance is the sum of the current account balance and the capital account balance.
d.
The trade balance is foreign purchases of domestic assets minus domestic purchases of foreign assets.
e.
The trade balance is the sum of the services balance and the capital account balance.
48. The merchandise trade balance:
a.
reflects trade in intangibles like insurance and tourism.
b.
includes personal gifts to friends abroad.
c.
records the flow of financial assets like stocks and bonds.
d.
equals the value of imports in goods and services minus the value of exports in goods and services.
e.
equals the value of tangible products exported minus the value of tangible products imported.
e
49. Which of the following is not classified as a service in the current account?
a.
Transportation
b.
Insurance
c.
Tourist expenditures
d.
Computer software development
e.
Unilateral transfers
e
50. The balance of goods and services is:
a.
the same as the merchandise trade balance since services cannot be traded.
b.
equivalent to the trade balance.
c.
the value of all tangible and intangible products exported minus the value of all tangible and intangible
products imported.
d.
the value of all tangible products exported minus the value of all tangible products imported.
e.
the value of all tangible products exported minus the value of all tangible products imported, and the
transactions to finance the difference.
c
51. In 2014, the United States had the largest merchandise trade deficit with:
a.
the European Union.
b.
Canada.
c.
China.
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Chapter 20: International Finance
d.
Mexico.
e.
Brazil.
c
52. A country’s investment earnings from foreign assets minus foreigners’ earnings from their assets in the country is
called _____.
a.
the merchandise trade balance
b.
net unilateral transfers abroad
c.
the balance on good and services
d.
net investment income from abroad
e.
the financial account balance
53. Which of the following is not considered a unilateral transfer?
a.
Income earned from foreign investments
b.
Foreign aid
c.
Personal gifts to friends or family abroad
d.
Institutional charitable donations
e.
Government transfers to foreign residents
a
54. Which of the following is true concerning unilateral transfers in the U.S. balance of payments?
a.
Unilateral transfers have been positive since World War II.
b.
Unilateral transfers have been negative since World War II.
c.
Unilateral transfers have been negative every year since World War II except during the war in Iraq.
d.
The United States places tight restrictions on its currency being sent out of the country.
e.
Developing countries ordinarily place no restrictions on its currency being sent out of their countries.
c
55. The current account reflects:
a.
trade in only tangible products.
b.
trade in goods as well as services.
c.
trade in services only.
d.
the purchase of securities from foreigners.
e.
the sale of securities to foreigners.
56. The debit side of the current account includes the imports of _____.
a.
goods only
b.
goods and services
c.
services only
d.
services and resources only
e.
financial assets
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Chapter 20: International Finance
57. Table 20.1 shows a current account. In the table below, _____ is the balance on current account.
Table 20.1
($)
Net exports of goods
−2,000
Net exports of services
500
Net unilateral transfers
−1,000
Net investment
100
Statistical discrepancy
−20
a.
−$1,500
b.
−$2,000
c.
−$2,400
d.
−$2,420
e.
−$2,500
58. Which of the following is not considered a unilateral transfer?
a.
Foreign aid from one government to another
b.
Income earned from foreign investments
c.
Personal gifts to friends in foreign countries
d.
Donations to foreign countries from non-government domestic charities
e.
Government transfers to foreign residents
59. Net unilateral transfers in the United States have been:
a.
positive every year since 1950.
b.
negative every year since 1950.
c.
positive every year since 1950 except in 1991 during the Persian Gulf War.
d.
negative every year since 1950 except in 1991 during the Persian Gulf War.
e.
positive about half the time and negative about half the time since 1950.
60. When net unilateral transfers are added to the net exports of goods and services, the result is called the:
a.
merchandise trade balance.
b.
official reserve transactions account.
c.
balance of payments.
d.
balance on capital account.
e.
balance on current account.
61. A country runs a deficit in its current account if:
a.
it consumes less goods and services compared to what it produces.
b.
the interest and dividends earned by its residents on foreign assets exceed the interest and dividends earned by
foreigners who invest in domestic assets.
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Chapter 20: International Finance
c.
it follows the double-entry bookkeeping requirement that total debits must equal total credits.
d.
foreign currency received from exports and transfers exceeds the foreign exchange needed to pay for imports
and to make unilateral transfers.
e.
foreign currency received from exports and transfers is less than the foreign exchange needed to pay for
imports and to make unilateral transfers.
62. The current account records:
a.
last year’s flows of funds into and out of the country.
b.
the current flows of imports and exports of goods and services, net income earned by residents from foreign
assets, and net transfer payments.
c.
all the foreign direct investment received by a country in a year.
d.
the purchase of financial assets, such as stocks and bonds, by the residents of a country in a year.
e.
the purchase of all real assets, such as land and housing by the citizens of a country in a year.
63. The trade balance of the country of Utopia would be in deficit only if:
a.
its import of services exceed its export of services.
b.
its merchandise exports exceed its merchandise imports.
c.
its merchandise imports exceed its merchandise exports.
d.
foreign investors invest in domestic assets.
e.
the citizens of Utopia purchase foreign securities to earn a high return and diversify their investment.
64. If foreigners increase their ownership of U.S. assets, this would help to offset:
a.
a deficit in the U.S. current account.
b.
a deficit in the U.S. capital account.
c.
a surplus in the U.S. current account.
d.
a surplus in the U.S. capital account.
e.
a surplus in the overall balance of payments.
65. In the balance of payments accounts, there will be a surplus in the financial account of a country if:
a.
it sells more goods to foreign countries than it imports.
b.
it buys more goods from foreign countries than it exports.
c.
it sells more assets to individuals in other countries than the assets it buys from them.
d.
it buys more assets from individuals in other countries than the assets it sells to them.
e.
it imports less machinery than it exports.
66. The statistical discrepancy in the balance of payments is:
a.
always positive.
b.
always negative.
c.
always zero.
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Chapter 20: International Finance
d.
positive, negative, or zero.
e.
indeterminate.
67. In order for the balance of payments to balance, the:
a.
current account balance must equal the capital account balance.
b.
sum of the current account balance, the capital account balance, the net flow of international reserves, and the
statistical discrepancy must have a negative value.
c.
sum of the current account balance, the capital account balance, the net flow of international reserves, and the
statistical discrepancy must have a positive value.
d.
sum of the current account balance, the capital account balance, the net flow of international reserves, and the
statistical discrepancy must equal zero.
e.
the sum of the current account balance, the capital account balance, and the net flow of international reserves
must be greater than the statistical discrepancy.
68. The statistical discrepancy:
a.
is always positive but less than 1.
b.
is always negative and greater than −1.
c.
must be reduced to zero and eliminated from the balance of payments before the records become official.
d.
is a residual factor that indicates the net error in the balance of payments data.
e.
is a record of all transactions between residents of two countries over a specified period.
69. Which of the following is a credit item in the U.S. balance of payments?
a.
Imports of cars from Japan
b.
Purchase of an American car by a Japanese citizen
c.
Purchase of Chinese assets by an American citizen
d.
An American firm’s purchase of steel from a European steel mill
e.
An increase in American tourists abroad
70. Which of the following is a credit item in the U.S. balance of payments?
a.
U.S. companies selling merchandise abroad
b.
Foreign companies selling merchandise to U.S. consumers
c.
U.S. consumers sending money to foreign companies
d.
Immigrants to the United States sending money back to their families in their native countries
e.
Immigrants to the United States sending gifts back to their families in their native countries
a
71. Which of the following would be represented as a debit in the U.S. balance of payments?
a.
U.S. purchase of cars from Italy
b.
U.S. sale of beef to Israel
c.
Transfers received by the U.S. government from foreign governments
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Chapter 20: International Finance
d.
Gifts received by U.S. residents from friends abroad
e.
Income received by U.S. residents from overseas investments
72. The foreign exchange rate is:
a.
an entry in the current account.
b.
the price of a foreign good in the world market.
c.
an entry in the capital account.
d.
an entry in the balance of trade.
e.
the cost of one currency in terms of another.
73. The exchange rate is the:
a.
ratio of exports to imports.
b.
interest rate the U.S. government charges on international loans.
c.
percentage of domestic goods that are exported.
d.
cost of one nation’s currency in terms of another nation’s currency.
e.
rate that central banks charge each other for currency exchanges.
74. The exchange rate is the:
a.
opportunity cost of producing exportable goods in a country.
b.
total monetary value of exports minus imports.
c.
amount of a country’s currency that can be exchanged for one ounce of gold.
d.
sum of net unilateral transfers.
e.
price of one country’s currency in terms of another country’s currency.
75. An exchange rate is:
a.
the rate at which goods are traded between countries.
b.
the rate at which the central bank of a country gives loans to commercial banks.
c.
the rate at which commercial banks give loans to individuals.
d.
the price of one currency in terms of another.
e.
the price at which one good trades for another.
76. A German national who exchanges euros for dollars at a U.S. airport is:
a.
contributing to U.S. exports of merchandise.
b.
lending dollars to Germany.
c.
participating in the foreign exchange market.
d.
engaging in speculative activities.
e.
engaging in illegal activities.
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77. If $1 equals 2 euros, then 1 euro equals _____.
a.
$4.00
b.
$2.00
c.
$0.50
d.
$1.00
e.
$0.25
c
78. If the U.S. dollar appreciates, it implies that:
a.
the value of the U.S. dollar has decreased.
b.
the value of foreign currency in terms of U.S. dollars has increased.
c.
fewer U.S. dollars are required to purchase foreign exchange.
d.
more U.S. dollars are required to purchase foreign exchange.
e.
exports will rise immediately.
c
79. A drop in the dollar price of British pounds implies that:
a.
fewer U.S. dollars are needed to buy British pounds.
b.
more dollars are needed to buy British pounds.
c.
the pound has appreciated.
d.
the dollar has depreciated.
e.
British goods are now more expensive to Americans.
a
80. For the U.S., a drop in the price of foreign exchange means that:
a.
fewer U.S. dollars are needed to purchase foreign currency.
b.
more U.S. dollars are needed to purchase foreign currency.
c.
imports will become more expensive worldwide.
d.
exports will become cheaper worldwide.
e.
transaction costs in international markets will decrease.
a
81. If the exchange rate changes from 20 cents per franc to 18 cents per franc, the U.S. dollar has:
a.
appreciated, since its value has increased.
b.
appreciated, since its value has declined.
c.
depreciated, making French goods more expensive in the U.S.
d.
depreciated, since its value has declined.
e.
depreciated, since its value has increased.
a
82. If the exchange rate changes from 1 euro per U.S. dollar to 1.2 euros per U.S. dollar, the Euro has:
a.
appreciated, since its value has increased.
b.
appreciated, since the price of U.S. dollars has increased.
c.
appreciated, making U.S. goods cheaper in European countries.
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Chapter 20: International Finance
d.
depreciated, since its value has declined.
e.
depreciated, since its value has increased.
83. If the exchange rate changes from 75 cents per euro to $1 per euro, the euro has:
a.
appreciated, since its value has increased.
b.
appreciated, since the price of U.S. dollars has increased.
c.
appreciated, making U.S. goods more expensive in European nations.
d.
depreciated, since its value has declined.
e.
depreciated, since its value has increased.
84. The exchange rate is:
a.
the price of foreign exchange determined by the interaction of supply and demand.
b.
an interest rate for foreign loans determined by the interaction of supply and demand.
c.
fixed by each government separately.
d.
always fixed for any two currencies by the two nations involved, regardless of any agreements made with
other nations.
e.
fixed by GATT.
85. When supply and demand analysis is used to study the exchange rate, foreign exchange is treated just like _____.
a.
a normal good
b.
a debt
c.
fiat money
d.
commodity money
e.
an investment
86. If the U.S. dollar depreciates, it means that:
a.
the value of the U.S. dollar has increased.
b.
the value of foreign exchange has decreased.
c.
fewer U.S. dollars are required to purchase foreign exchange.
d.
more U.S. dollars are required to purchase foreign exchange.
e.
exports will fall.
87. The demand curve for euros shows:
a.
a direct relationship between the dollar price of euro and the quantity of euros demanded.
b.
an inverse relation between the dollar price of euro and the quantity of euros demanded.
c.
that the higher the dollar price of euro, the greater the quantity of euros demanded.
d.
that the more expensive it is to buy euros, the larger the quantity of European goods demanded by Americans.
e.
that the dollar price of euro is being fixed by the European Union.