Fundamentals of Multinational Finance, 5e (Moffett et al.)
Chapter 3 The Balance of Payments
Multiple Choice and True/False Questions
3.1 Typical Balance of Payments Transactions
1) The balance of payments as applied to a course in international finance may be defined as
A) the amount still owed by an exporting firm after making an initial down payment.
B) the amount still owed by governments to the International Monetary Fund.
C) the measurement of all international economic transactions between the residents of a country
and foreign residents.
D) the amount of a country’s merchandise trade deficit or surplus.
2) Balance of payment (BOP) data may be important for any of the following reasons
A) BOP data helps to forecast a country’s market potential, especially in the short run.
B) The BOP is an important indicator of a country’s foreign exchange rate.
C) Changes in a country’s BOP may signal a change in controls over payment of dividends and
interest.
D) All of the above.
3) Which of the following is NOT an item to be considered in BOP calculations?
A) A foreign resident purchases a U.S. Treasury Bill.
B) A U.S.-based firm manages the development of an oil field in Kazakhstan.
C) A consumer buys a VCR made in Korea from a Wal-Mart store.
D) A U.S. citizen living in Minnesota travels to Winnipeg, Canada and buys a case of LaBatt’s
Canadian beer.
4) A country experiencing a serious BOP ________ is more likely to ________ exports than
otherwise.
A) surplus; contract
B) deficit; contract
C) deficit; expand
D) none of the above
5) Expenditures by U.S. tourists in foreign countries for foreign goods or services are factored
into BOP calculations.
6) Which of the following would NOT be considered a typical BOP transaction?
A) Toyota U.S.A. is a U.S. distributor of automobiles manufactured in Japan by its parent
company.
B) The U.S. subsidiary of European financial giant, Credit Suisse, pays dividends to its parent in
Zurich.
C) A U.S. tourist purchases gifts at a museum in London.
D) All are example of BOP transactions.
7) Which of the following could be considered a typical BOP transaction?
A) An American tourist purchases a hotel room in Guanajuato, Mexico.
B) Mountaineers from Colorado, USA, pay for guides for their assent of Mt. Everest.
C) General Electric Inc. pays for a new manufacturing facility in Chile.
D) All of the above are BOP transactions.
3.2 Fundamentals of Balance of Payments Accounting
1) The authors identify a tip for understanding BOP accounting. They recommend that you
“follow the cash flow.”
2) The balance of payments is most like a(an)
A) cash flow statement.
B) balance sheet.
C) income statement.
D) proxy statement.
3) The BOP must be in balance but the current account need not be.
4) According to the authors, the following types of transactions dominate the balance of
payments
A) the exchange of guns for butter.
B) the exchange of stocks and bonds.
C) the exchange of goods and services.
D) the exchange of real and financial assets.
5) Which of the following is NOT an example of an exchange of financial assets?
A) the exchange of travel services
B) the exchange of stocks
C) the exchange of bonds
D) loans
6) Two types of business transactions dominate the balance of payments. Which of the following
is NOT such a transaction?
A) the exchange of real assets and financial assets
B) the exchange of real assets and political contributions
C) the exchange of goods and services and financial transactions such as loans
D) All of the above are business transactions.
3.3 The Accounts of the Balance of Payments
1) Which of the following is NOT a part of the Current Account of BOP?
A) net export/import of goods
B) Balance of Trade
C) net portfolio investment
D) net export/import of services
2) Which of the following is NOT part of the balance of payments account?
A) the current account
B) the financial/capital account
C) the official reserves account
D) All of the above are BOP accounts.
3) The ________ includes all international economic transactions with income or payment flows
occurring within the year.
A) capital account
B) current account
C) financial account
D) IMF account
4) If your company were to import and export textiles, the transactions would be recorded in the
current account subcategory of
A) services trade.
B) income trade.
C) goods trade.
D) current transfers.
5) The travel services provided to international travelers by United Airlines would be recorded in
the current account subcategory of
A) services trade.
B) income trade.
C) goods trade.
D) current transfers.
6) Assume Anaconda Copper Inc. created a subsidiary in Chile last year to mine copper ore. The
proportion of net income paid back to the parent company as a dividend would be recorded in the
current account subcategory of
A) services trade.
B) income trade.
C) goods trade.
D) current transfers.
7) The subcategory that typically dominates the current account is
A) goods (merchandise) trade.
B) services trade.
C) income trade.
D) transfer accounts.
8) Over the last several years, the United States has run a ________ in the goods trade balance
and a ________ in the services trade balance.
A) surplus; deficit
B) surplus; surplus
C) deficit; deficit
D) deficit; surplus
9) In general, a country’s exports decrease as foreign income decreases.
10) In 2001 the United States posted a current account deficit of -$393 billion. The bulk of the
negative value came from
A) a net transfer deficit.
B) an income balance deficit.
C) a goods trade deficit.
D) an income trade deficit.
11) The United States experienced a balance of trade ________ during the 1990s and a balance
of trade ________ during the 2000s.
A) surplus; surplus
B) surplus; deficit
C) deficit; deficit
D) deficit; surplus
12) The ________ is the difference between merchandise imports and exports and a measure of a
country’s international trade in goods and services.
A) balance of payments
B) current account
C) capital account
D) balance of trade
13) In general, as a country’s income increases, so does the demand for imports.
14) Because current and financial/capital account balances use double-entry book keeping it is
unusual to find serious discrepancies in the debits and credits.
15) Which of the following is NOT part of the Financial Account of the BOP?
A) net foreign direct investment
B) net import/export of services
C) net portfolio investment
D) other Financial items
16) The ________ of the balance of payments measures all international economic transactions
of financial assets.
A) current account
B) merchandise trade account
C) services account
D) capital/financial account
17) The financial account consists COMPLETELY of which three components?
A) stock investment, bond investment, and mutual fund investment
B) direct investment, stock investment, and bond investment
C) direct investment, portfolio investment, and other asset investment
D) mutual fund investment, portfolio investment, and stock investment
18) When categorizing investments for the financial account component of the balance of
payments the ________ is an investment where the investor has no control whereas the
________ is an investment where the investor has control over the asset.
A) direct investment; portfolio investment
B) direct investment; indirect investment
C) portfolio investment; indirect investment
D) portfolio investment; direct investment
19) 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.
20) In general there is consensus that ________ should be free but there is no such consensus
that ________ should be free.
A) international investment; international goods trade
B) international investment; international trade
C) international trade; international goods trade
D) international trade; international investment
21) The role of official reserves is ________ under a ________ exchange rate regime.
A) enhanced; floating
B) diminished; fixed
C) enhanced; fixed
D) None of the above apply.
22) If most major economies are operating under a regime of fixed exchange rates, then a
________ in a country’s balance of payments suggests that the country should ________ its
currency.
A) surplus; revalue
B) surplus; devalue
C) deficit; revalue
D) all of the above
23) 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
24) The two major concerns about foreign direct investment are
A) national defense and taxes.
B) who controls the assets and who receives the profits.
C) who receives the profits and taxes.
D) who pays the taxes and who receives the taxes.
25) China’s “double surplus” in the current account and the financial account is typical for large
economies in the modern era.
26) Ordinarily countries will demonstrate an inverse relationship between their current and
financial accounts. A surplus in one will usually result in a deficit in the other.
27) China holds a massive amount of foreign exchange reserves. As of 2010 they held nearly
$2,500 billion. This huge foreign exchange reserve should allow China to
A) manage the value of the Chinese yuan to maintain competitiveness in world markets.
B) maintain a relatively stable managed fixed exchange rate for the yuan for years to come.
C) remain a very important player in world trade for at least the next several years.
D) All of the above.
3.4 BOP Impacts on Key Macroeconomic Rates
1) In a static (accounting) sense, a nation’s GDP can be represented by the following equation:
where C = consumption spending, I = investment spending, G = government spending, X =
exports of goods and services, and M = imports of goods and services.
A) GDP = C + I + G + M – X
B) GDP = C + I + G + X – M
C) GDP = C + I – G + X – M
D) GDP = C + I + G + X + M
2) ________ has increasingly focused on cost reduction through imports from less costly (lower
wage) foreign locations.
A) Exchange rate management
B) Inflation rate management
C) Supply chain management
D) Interest rate management
3) A positive current account balance (surplus) contributes directly to increasing the measure of
GDP.
3.5 Trade Balances and Exchange Rates
1) The J-curve adjustment path for trade balance adjustments assumes that export products are
predominantly priced in the ________ currency and that import products are predominantly
priced in the ________ currency.
A) domestic; domestic
B) domestic; foreign
C) foreign; foreign
D) foreign; domestic
2) The J-curve adjustment path for trade balance adjustments assumes that ________ products
are predominantly priced in the domestic currency and that ________ products are
predominantly priced in the foreign currency
A) import; import
B) import; export
C) export; export
D) export; import
3) Assume that a country is experiencing a balance of trade deficit and then suffers a rapid
depreciation of its currency. J-curve theory suggests that the trade balance will adjust in three
distinct periods in the following order
A) quantity adjustment period; pass-through period; currency contract period.
B) pass-through period; currency contract period; quantity adjustment period.
C) currency contract period; pass-through period; quantity adjustment period.
D) pass-through period; quantity adjustment period; currency contract period.
4) The immediate impact on the balance of trade (BOT) for a country in deficit when there is an
immediate devaluation of its currency is likely to be an even larger BOT deficit than prior to
devaluation.
5) It is possible that the J-curve path for BOT adjustments may be elongated or even inapplicable
if exports are NOT predominately priced in the domestic currency and/or imports are NOT
predominately priced in the foreign currency.
3.6 Capital Mobility
1) The era between 1880 and 1914, when the gold standard was in use, was characterized by
increasing capital mobility.
2) Which of the following is the best definition of money laundering?
A) legal transfer of funds through the usual international payments mechanisms
B) the transfer of cash into collectibles that are then transferred across borders
C) the cross-border purchase of assets that are then managed in a way that hide the movement of
money and its ownership
D) false invoicing of international trade transactions
3) The time from 1971 to today has predominately used a regime of variable exchange rates. It
has also seen a decrease in capital mobility.
4) Which of the following does NOT represent a possible mechanism by which capital can be
moved from country to country?
A) transfers via the usual international payments mechanism such as regular bank transfers
B) transfers via a physical bearer such as smuggling
C) the transfer of cash into collectibles
D) All of the above are mechanisms for moving capital from country to country.
Essay Questions
3.1 Typical Balance of Payments Transactions
1) There are no questions in this section.
3.2 Fundamentals of Balance of Payments Accounting
1) There are no questions in this section.
3.3 The Accounts of the Balance of Payments
1) What is a country’s balance of (merchandise) trade and why is it so widely reported in the
financial and popular press?
2) 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?
3.4 BOP Impacts on Key Macroeconomic Rates
1) Construct, in a static (accounting) form the equation for a nations GDP as presented by the
authors. Identify each term (e.g., r = interest rate). How does a positive BOP account balance
affect a country’s GDP?
3.5 Trade Balances and Exchange Rates
1) Identify and explain the three stages of the J-curve adjustment path of the trade balance
adjustment process.
3.6 Capital Mobility
1) Your authors identify five primary mechanisms by which capital may be moved from one
country to another. Identify and briefly explain/define three of those methods.