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Student name:__________
1) The current account balance, which is the difference between a country’s exports and
imports, is a component of the country’s GNP. Other components of GNP include
A) consumption and investment and government expenditure.
B) consumption and government expenditure and net exports.
C) consumption and net exports and government expenditure.
D) consumption less imports.
2) Balance of payments
A) is defined as the statistical record of a country’s international transactions over a
certain period of time presented in the form of a double-entry bookkeeping.
B) provides detailed information concerning the demand and supply of a country’s
currency.
C) can be used to evaluate the performance of a country in international economic
competition.
D) all of the options
3) If a country is grappling with a major balance-of-payment difficulty, it may not be able to
expand imports from the outside world. Instead, the country may be tempted to
A) impose measures to restrict imports but encourage capital outflows.
B) impose measures to discourage capital outflows but encourage imports.
C) impose measures to restrict imports and discourage capital outflows.
D) none of the options
4) If the United States imports more than it exports, then
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A) the supply of dollars is likely to exceed the demand in the foreign exchange market,
ceteris paribus.
B) one can infer that the U.S. dollar would be under pressure to depreciate against other
currencies.
C) both options are correct
D) none of the options
5) Generally speaking, any transaction that results in a receipt from foreigners
A) will be recorded as a debit, with a negative sign, in the U.S. balance of payments.
B) will be recorded as a debit, with a positive sign, in the U.S. balance of payments.
C) will be recorded as a credit, with a negative sign, in the U.S. balance of payments.
D) will be recorded as a credit, with a positive sign, in the U.S. balance of payments.
6) Generally speaking, any transaction that results in a payment to foreigners
A) will be recorded as a debit, with a negative sign, in the U.S. balance of payments.
B) will be recorded as a debit, with a positive sign, in the U.S. balance of payments.
C) will be recorded as a credit, with a negative sign, in the U.S. balance of payments.
D) will be recorded as a credit, with a positive sign, in the U.S. balance of payments.
7) The balance of payments records
A) only international trade, (exports and imports).
B) only cross-border investments (FDI and portfolio investment).
C) not only international trade, (exports and imports) but also cross-border investments.
D) none of the options
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8) Credit entries in the U.S. balance of payments
A) result from foreign sales of U.S. goods and services, goodwill, financial claims, and
real assets.
B) result from U.S. purchases of foreign goods and services, goodwill, financial claims,
and real assets.
C) give rise to the demand for dollars.
D) give rise to the supply of dollars.
E) result from foreign sales of U.S. goods and services, goodwill, financial claims, and
real assets, and give rise to the demand for dollars.
9) A country experiencing a significant balance-of-payments surplus would be likely to
A) expand imports, offering marketing opportunities for domestic enterprises.
B) encourage imposing foreign exchange restrictions.
C) expand exports, offering international marketing opportunities for domestic
enterprises.
D) expand imports, offering marketing opportunities for foreign enterprises, and
encourage imposing foreign exchange restrictions.
10) Suppose the McDonalds Corporation imports Canadian beef, paying for it by transferring
the funds to a New York bank account kept by the Canadian beef producer.
A) Payment by McDonalds will be recorded as a debit.
B) The deposit of the funds by the seller will be recorded as a debit.
C) Payment by McDonalds will be recorded as a credit.
D) The deposit of the funds by the buyer will be credit.
11) Since the balance of payments is presented as a system of double-entry bookkeeping,
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A) every credit in the account is balanced by a double-matching debit.
B) every debit in the account is balanced by a double-matching credit.
C) every credit in the account is balanced by a matching debit and every debit in the
account is balanced by a matching credit.
D) none of the options
12) Suppose the InBev Corporation (a non-U.S. MNC) buys the Anheuser-Busch
Corporation, paying the U.S. shareholders cash.
A) Payment by InBev will be recorded as a debit.
B) The deposit of the funds by the sellers will be recorded as a debit.
C) Payment by InBev will be recorded as a credit.
D) The deposit of the funds by the buyer will be credit.
13) The current account includes
A) the export and import of goods and services.
B) all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and
businesses.
C) all purchases and sales of international reserve assets such as dollars, foreign
exchanges, gold, and special drawing rights (SDRs).
D) capital transfers and the cross-border acquisition and disposal of nonproduced
non¬financial assets such as natural resources and marketing assets
14) A country with a current account surplus
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A) acquires IOUs from foreigners, thereby increasing its net foreign wealth.
B) must borrow from foreigners or draw down on its previously accumulated foreign
wealth.
C) will experience a reduction in the country’s net foreign wealth.
D) must borrow from foreigners or draw down on its previously accumulated foreign
wealth and will experience a reduction in the country’s net foreign wealth.
15) The capital account includes
A) the export and import of goods and services.
B) capital transfers and acquisitions and disposals of nonpro¬duced, nonfinancial assets
between U.S. residents and foreigners.
C) all purchases and sales of international reserve assets such as dollars, foreign
exchanges, gold, and special drawing rights (SDRs).
D) goods trade, services, primary income, and secondary income
16) The official reserve account includes
A) the export and import of goods and services.
B) all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and
businesses.
C) all purchases and sales of international reserve assets such as dollars, foreign
exchanges, gold, and special drawing rights (SDRs).
D) capital transfers and the cross-border acquisition and disposal of nonproduced
non¬financial assets such as natural resources and marketing assets
17) A country’s international transactions can be grouped into the following three main types:
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A) current account, medium term account, and long term capital account.
B) current account, long term capital account, and official reserve account.
C) current account, capital account, financial account and official reserve account.
D) capital account, official reserve account, trade account.
18) Invisible trade:refers to
A) services that avoid tax payments.
B) the underground economy.
C) trades in legal, consulting, and engineering services.
D) the export and import of tangible goods.
19) A country that gives foreign aid to another country can be viewed as
A) importing goodwill from the latter.
B) exporting goodwill to the latter.
20) In 2012, the United States had a current account deficit. The current account deficit
implies that the United States
A) had a surplus on legal consulting and engineering services.
B) produced more output than it consumed.
C) consumed more output than it produced.
D) had a financial account surplus
21) The current account is divided into four finer categories:
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A) goods trade, services, primary incom, and statistical discrepancy.
B) goods trade, services, primary income and secondary income
C) goods trade, services, foreign direct investment, and portfolio investment.
D) goods trade, services, factor income, and direct investment.
22) Primary income
A) consists largely of payments and receipts of interest, dividends, and other income on
foreign investments.
B) involve “unrequited payments” such as foreign aid and gifts.
C) do not generally involve commercial entities.
D) includes payments and receipts for legal, consulting, financial and engineering
services.
23) The “J-curve effect” shows
A) the initial deterioration and the eventual improvement of a country’s trade balance
following a currency depreciation.
B) the initial improvement and the eventual depreciation of a country’s trade balance
following a currency depreciation.
C) the trade balance’s lack of responsiveness to the exchanges rate changes.
D) none of the options
24) A currency depreciation will begin to improve the trade balance immediately
A) if the demand for imports and exports are inelastic.
B) if the demand for imports and exports are elastic.
C) if imports decrease and exports decrease.
D) if imports and exports increase
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25) When a country’s currency depreciates against the currencies of major trading partners,
A) the country’s exports tend to rise and imports fall.
B) the country’s exports tend to fall and imports rise.
C) the country’s exports tend to rise and imports rise.
D) the country’s exports tend to fall and imports fall.
26) A depreciation will begin to improve the trade balance immediately if
A) imports and exports are responsive to the exchange rate changes.
B) imports and exports are inelastic to the exchange rate changes.
C) consumers exhibit brand loyalty and price inelasticity.
D) imports and exports are inelastic to the exchange rate changes and consumers exhibit
brand loyalty and price inelasticity.
27) In the short run a currency depreciation can make a trade balance worse if
A) there is no domestic producer of an import.
B) there is no domestic buyer for an import.
C) there is no export market for a country’s output.
D) none of the options
28) In the long run, both exports and imports tend to be
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A) unresponsive to changes in exchange rates.
B) responsive to changes in exchange rates.
C) negative influences on the trade balance.
D) of no influence to the trade balance.
29) The difference between Foreign Direct Investment and Portfolio Investment is that
A) Portfolio Investment mostly represents the sale and purchase of foreign financial
assets such as stocks and bonds that do not involve a transfer of control.
B) Foreign Direct Investment mostly represents the sale and purchase of foreign
financial assets such as stocks whereas Portfolio Investment mostly involves the sales and
purchase of foreign bonds.
C) Portfolio Investment takes place as firms attempt to take advantage of various market
imperfections.
D) all of the options
30) In the latter half of the 1980s, with a strong yen, Japanese firms
A) faced difficulty exporting.
B) could better afford to acquire U.S. assets that had become less expensive in terms of
yen.
C) financed a sharp increase in Japanese FDI in the United States.
D) all of the options
31) International portfolio investments have boomed in recent years, as a result of
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A) a depreciating U.S. dollar.
B) increased gasoline and other commodity prices.
C) the general relaxation of capital controls and regulation in many countries.
D) none of the options
32) If the interest rate rises in the U.S. while other variables remain constant
A) capital inflows into the U.S. will increase.
B) capital inflows into the U.S. may not materialize.
C) capital will flow out of the U.S.
D) none of the options
33) The financial account measures
A) the sum of U.S. sales of assets to foreigners and U.S. purchases of foreign assets.
B) the difference between U.S. sales of assets to foreigners and U.S. purchases of
foreign assets.
C) the difference between U.S. sales of manufactured goods to foreigners and U.S.
purchases of foreign products.
D) none of the options
34) When Honda, a Japanese auto maker, built a factory in Ohio,
A) it was engaged in foreign direct investment.
B) it was engaged in portfolio investment.
C) it was engaged in a cross-border acquisition.
D) none of the options.
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35) Government controlled investment funds, known as sovereign wealth funds,
A) are playing a less-important role in international finance following the end of the
fixed exchange rate era.
B) are mostly domiciled in Asian and Middle Eastern countries.
C) do not play a positive role in stabilizing the global banking system
D) none of the options
36) Foreign direct investment (FDI) occurs
A) when an investor acquires a measure of control of a foreign business.
B) when there is an acquisition, by a foreign entity in the U.S., of 10 percent or more of
the voting shares of a business.
C) with sales and purchases of foreign stocks and bonds that do not involve a transfer of
control.
D) Both A and B.
37) The financial account may be divided into three categories—
A) cross-border mergers and acquisitions, portfolio investment, and other investment.
B) direct investment, portfolio investment, and cross-border mergers and acquisitions.
C) direct investment, mergers and acquisitions, and other investment.
D) direct investment, portfolio investment, and other investment.
38) When Nestlé, a Swiss firm, bought the American firm Carnation, it was engaged in
foreign direct investment. If Nestlé had only bought a non-controlling number of shares of the
firm,
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A) Nestlé would have been engaged in portfolio investment.
B) Nestlé would have been engaged in a cross-border acquisition.
C) it would depend if they bought the shares from an American or a Canadian.
D) none of the options
39) Transactions in currency, bank deposits and so forth
A) tend to be insensitive to both changes in relative interest rates and the anticipated
change in exchange rate.
B) tend to be sensitive to both changes in relative interest rates and the anticipated
change in exchange rate.
C) tend to be sensitive to changes in relative interest rates but insensitive to the
anticipated change in exchange rate.
D) tend to be insensitive to changes in relative interest rates but sensitive to the
anticipated change in exchange rate.
40) Since security returns tend to have low correlations among countries,
A) investors can reduce risk more effectively if they diversify their portfolio holdings
internationally rather than purely domestically.
B) investors who have a domestically diversified portfolio, with exposures across
industry types will not gain much from diversifying abroad.
C) investors who diversify internationally will likely underperform investors who keep
all their investments in one country.
D) none of the options
41) The world’s largest debtor nation and creditor nation, respectively, are
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A) Japan and the U.S.
B) The U.S. and Japan.
C) The U.S. and Canada.
D) Great Britain and Mexico.
42) Statistical discrepancy, which, by definition, represents errors and omissions,
A) cannot be calculated directly.
B) is calculated by taking into account the balance-of-payments identity.
C) probably has some elements that are honest mistakes, it can’t all be money laundering
and drugs.
D) all of the options
43) The statistical discrepancy in the balance-of-payments accounts
A) arise since recordings of payments and receipts are done at different times, in
different places, possibly using different methods.
B) arise because some transactions (illegal transactions) occur “off the books.”
C) represents omitted and misreported transactions.
D) all of the options
44) Which of the following is significant because it indicates a country’s international
payment gap that must be accommodated with a government’s official reserve transactions?
A) The current account
B) The capital account
C) The statistical discrepancies
D) The official settlement balance
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45) The United States is considered
A) a net creditor nation.
B) a net debtor nation.
46) Regarding the statistical discrepancy in the balance-of-payments accounts,
A) there is some evidence that financial transactions may be mainly responsible for the
discrepancy.
B) the sum of the balance on the financial account and the statistical discrepancy is very
close to the balance of the current account in magnitude.
C) it tends to be positive one year and negative in others, so it’s safe to ignore it.
D) Both A and B.
47) The central bank of the United States is
A) the New York Fed.
B) the Federal Reserve System.
C) the EXIM bank.
D) none of the options—the U.S. does not have a central bank.
48) When a country must make a net payment to foreigners because of a balance-of-
payments deficit, the central bank of the country
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A) should do nothing.
B) should run down its official reserve assets (e.g., gold, foreign exchanges, and SDRs)
only.
C) should borrow anew from foreign central banks only.
D) should either run down its official reserve assets (e.g., gold, foreign exchanges, and
SDRs) or borrow anew from foreign central banks.
49) Continued U.S. trade deficits coupled with foreigners’ desire to diversify their currency
holdings away from U.S. dollars
A) could further diminish the position of the dollar as the dominant reserve currency.
B) could affect the value of U.S. dollar (e.g., through the currency diversification
decisions of Asian central banks).
C) could lend steam to the emergence of the euro as a credible reserve currency.
D) all of the options
50) Currently, international reserve assets are comprised of
A) gold, platinum, foreign exchanges, and special drawing rights (SDRs).
B) gold, foreign exchanges, special drawing rights (SDRs), and reserve positions in the
International Monetary Fund (IMF).
C) gold, diamonds, foreign exchanges, and special drawing rights (SDRs).
D) reserve positions in the International Monetary Fund (IMF), only.
51) International reserve assets include “foreign exchanges”. These are
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A) Special Drawing Rights (SDRs) at the IMF.
B) reserve positions in the International Monetary Fund (IMF).
C) foreign currencies held by a country’s central bank.
D) none of the options
52) The most important international reserve asset, comprising 94 percent of the total reserve
assets held by IMF member countries is
A) gold.
B) foreign exchanges.
C) special Drawing Rights (SDRs).
D) reserve positions in the International Monetary Fund (IMF).
53) The vast majority of the foreign exchange reserves held by central banks are denominated
in
A) local currencies.
B) U.S. dollars.
C) Japanese Yen.
D) Euro.
54) Which of the following would not count as a foreign exchange reserve held by a central
bank?
A) The local currency
B) U.S. dollar
C) Euro
D) None of the above
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55) When the balance-of-payments accounts are recorded correctly, the combined balance of
the current account, the capital account, the financial account, and the reserves account must be
zero and are illustrated by the equation:
A) BCA + BKA + BFA + BRA = 0
B) BCA + BFA = −BKA
C) BCA + BKA + BFA = BRA
D) BRA = −BCA
56) Under the fixed exchange rate regime, the combined balance on the current accounts will
be equal in size, but opposite in sign and are illustrated by the equation:
A) BCA + BKA + BFA − BRA = 0
B) BCA + BKA + BFA = −BRA
C) BCA + BKA + BFA = BRA
D) BRA = −BCA
57) When the balance-of-payments accounts are recorded correctly, the combined balance of
the current account, the capital account, the financial account and the reserves account must be
A) equal in magnitude to the country’s national debt.
B) zero.
C) equal in magnitude to the trade deficit or surplus.
D) none of the options
58) Under the pure flexible exchange rate regime, a current account surplus or deficit
(assuming the capital account is negligible) must be matched by a financial account deficit or
surplus, and vice versa. this is illustrated by the equation:
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A) BCA + BKA + BFA + BRA = 0
B) BCA + BKA + BFA = −BRA
C) BCA + BKA = −BFA
D) BRA = −BCA
59) If the central banks of the world chose to diversify their foreign exchange reserves away
from the dollar and into the euro,
A) this would have the result of a strengthening of the value of the dollar.
B) could further diminish the position of the U.S. dollar as the dominant reserve
currency
C) this would not have much impact, as the information would be lost in the day-to-day
volatility of exchange rates.
D) none of the options
60) The U.S. trade deficit
A) is a capital account surplus only.
B) is a current account deficit only.
C) is both a capital account surplus and a current account deficit.
D) none of the options
61) As of 2018, gold accounted for
A) 90 percent of the total reserve assets held by IMF member countries.
B) 70 percent of the total reserve assets held by IMF member countries.
C) approximately 50 percent of the total reserve assets held by IMF member countries.
D) less than one percent of the total reserve assets held by IMF member countries.
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62) The most dominant currency in the World’s Foerign Exchange Reserves is:
A) U.S. dollar.
B) Euro.
C) Japanese Yen.
D) none of the options
63) Suppose a country is currently experiencing a trade deficit. In the long run, this could be
self-correcting if
A) the deficit exists because of the import demand for capital goods.
B) the deficit exists because of the import demand for consumption goods.
C) the deficit exists because foreigners want to buy the country’s currency as an
investment.
D) none of the options
64) The financial account is divided into three subcategories: direct investment, portfolio
investment, and other investment. Direct investment involves
A) acquisitions of controlling interests in foreign businesses.
B) investments in foreign stocks and bonds that do not involve acquisitions of control.
C) bank deposits, currency investment, trade credit, and the like.
D) all of the options
65) The financial account is divided into three subcategories: direct investment, portfolio
investment, and other investment. Portfolio investment involves
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A) acquisitions of controlling interests in foreign businesses.
B) investments in foreign stocks and bonds that do not involve acquisitions of control.
C) bank deposits, currency investment, trade credit, and the like.
D) all of the options
66) The financial account is divided into three subcategories: direct investment, portfolio
investment, and other investment. Other investment involves
A) acquisitions of controlling interests in foreign businesses.
B) investments in foreign stocks and bonds that do not involve acquisitions of control.
C) bank deposits, currency investment, trade credit, and the like.
D) all of the options
67) Which of the following statements are true regarding the 2017 Tax Cuts and Jobs Act?
A) generally eliminated taxes on repatriated earnings
B) illustrated a net decrease of direct investment in 2018 due to the repatriation of
accumulated prior earnings of foreign affiliates by their US parent companies
C) neither A or B are true.
D) both A or B are true.
68) Over the last several years, the U.S. has run persistent
A) balance-of-payments deficits.
B) balance-of-payments surpluses.
C) current account deficits.
D) capital account deficits.
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69) Under the pure flexible exchange rate regime,
A) a current account surplus or deficit will not be matched by a financial account deficit
or surplus
B) the balance on the current and financial accounts will be equal in size, but opposite in
sign.
C) a current account surplus or deficit must be matched by an official reserves deficit or
surplus.
D) a financial account surplus or deficit must be matched by an official reserves deficit
or surplus.
70) The notation is
Y = GNP = national income
C = consumption
I = private investment
G = government spending
X = exports
M = imports
T = taxes
The current account balance is given by
A) C + I + G + X + M
B) X − M
C) I + X + M
D) M − X
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71) The notation is
Y = GNP = national income
C = consumption
I = private investment
G = government spending
X = exports
M = imports
T = taxes
Which of the following is a true statement?
A) BCA ≡ X − M
B) BKA ≡ X − M
C) BKA − BCA ≡ X − M
D) BKA ≡ M − X
72) The notation is
Y = GNP = national income
C = consumption
I = private investment
G = government spending
X = exports
M = imports
T = taxes
There is an intimate relationship between a country’s BCA and how the country finances its
domestic investment and pays for government expenditures. Given this, which of the following
is a true statement?
A) If (S − I) < 0, it implies that a country’s domestic savings is insufficient to finance
domestic investment.
B) If (T − G) < 0, it implies that a country’s tax revenue is insufficient to finance
government spending.
C) When BCA is negative, it implies that government budget deficits and/or part of
domestic investment are being finance with foreign-controlled capital.
D) All of the options
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73) The notation is
Y = GNP = national income
C = consumption
I = private investment
G = government spending
X = exports
M = imports
T = taxes
There is an intimate relationship between a country’s BCA and how the country finances its
domestic investment and pays for government expenditures. This relationship is given by BCA ≡
X − M ≡ (S − I) + (T − G). Given this, in order for a country to reduce a BCA deficit, which of
the following must occur?
A) For a given level of S and I, the government budget deficit (T − G) must be reduced.
B) For a given level of I and (T − G), S must be increased.
C) For a given level of S and (T − G), I must fall.
D) All of the options would work to reduce a BCA deficit.
74) Which country does the United States currently maintain the largest trade deficit with?
A) Canada
B) Mexico
C) China
D) United Kingdom
75) Secondary income
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A) is the fourth category of the current account
B) involves “unrequited” payments called current transfers
C) examples include foreign aid, reparations, official and private grants, and gifts.
D) all of the above
76) Which of the following statements regarding the 2018 U.S. current account are not true?
A) The U.S. maintains a surplus on trade in services.
B) The U.S. maintains a deficit on trade in goods.
C) The U.S. maintains a deficit on the overall trade balance.
D) The U.S. maintains a deficit on trade in services.
77) If the United States imports more than it exports, one possible outcome is the supply of
dollars is likely to exceed the demand in the foreign exchange market, ceteris parius.
⊚ true
⊚ false
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Answer Key
Test name: chapter 3
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