Chapter 2—International Flow of Funds

1. A high home inflation rate relative to other countries would ____ the home country's current account
balance, other things equal. A high growth in the home income level relative to other countries would
____ the home country's current account balance, other things equal.
a. increase; increase
b. increase; decrease
c. decrease; decrease
d. decrease; increase

2. 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 are possible

3. An increase in the current account deficit will place ____ pressure on the home currency value, other
things equal.
a. upward
b. downward
c. No
d. upward or downward (depending on the size
of the deficit)

4. If the home currency begins to appreciate against other currencies, this should ____ the current
account balance, other things equal (assume that substitutes are readily available in the 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

5. 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.
 6. 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 national
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 reaction of a country's currency to initially
depreciate after the country's inflation rate
declines.

7. 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.

8. The U.S. typically has a balance of trade surplus in its trade with ____.
a. China
b. Japan
c. A and B
d. none of the above

9. According to the text, international trade (exports plus imports combined) as a percentage of GDP is:
a. higher in the U.S. than in European countries.
b. lower in the U.S. than in European countries.
c. higher in the U.S. than in about half the
European countries, and lower in the U.S.
than the others.
d. about the same in the U.S. as in European
countries.

10. 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

11. The primary component of the current account is the:

a. balance of trade.
b. balance of money market flows.
c. balance of capital market flows.
d. unilateral transfers.

12. As a result of the European Union, restrictions on exports between ____ were reduced or eliminated.
a. member countries and the U.S.
b. member countries
c. member countries and European non-
members
d. none of the above

13. A General Agreement on Tariffs and Trade (GATT) accord in 1993 called for:
a. increased trade restrictions outside of North
America.
b. lower trade restrictions around the world.
c. uniform environmental standards around the
world.
d. uniform worker health laws.

14. 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. It could attempt to reduce its home currency's
value.
b. The government could require firms to engage
in outsourcing.
c. The government could require that its local
firms pursue outsourcing.
d. All of the above are mentioned.

15. The demand for U.S. exports tends to increase when:

a. economic growth in foreign countries
decreases.
b. the currencies of foreign countries strengthen
 against the dollar.
c. U.S. inflation rises.
d. none of the above.

16. "Dumping" is used in the text to represent the:

a. exporting of goods that do not meet quality
standards.
b. sales of junk bonds to foreign countries.
c. removal of foreign subsidiaries by the host
government.
d. exporting of goods at prices below cost.

17. ____ is (are) income received by investors on foreign investments in financial assets (securities).
a. Portfolio income
b. Direct foreign income
c. Unilateral transfers
d. Factor income

18. 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.

19. Like the International Monetary Fund (IMF), the ____ is composed of a collection 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 Financial Corporation (IFC)
c. World Trade Organization (WTO)
d. International Development Association (IDA)
e. Bank for International Settlements (BIS)

20. 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.

21. Also known as the "central banks' central bank," the ____ attempts to facilitate cooperation among
countries with regard to international transactions and provides assistance to countries experiencing a
financial crisis.
a. World Bank
b. International Financial Corporation (IFC)
c. World Trade Organization
d. International Development Association (IDA)
e. Bank for International Settlements (BIS)

22. Direct foreign investment into a country represents a ____.

a. capital inflow
b. trade inflow
c. capital outflow
d. trade outflow

23. A balance of trade surplus indicates an excess of imports over exports.

a. True
b. False

24. A weakening of the U.S. dollar with respect to the British pound would likely reduce the U.S. exports
to Britain and increase U.S. imports from Britain over time.
a. True
b. False

25. The balance of payments is a measurement of all transactions between domestic and foreign residents
over a specified period of time.
a. True
b. False

26. Changes in country ownership of long-term and short-term assets are measured in the balance of
payments with the capital account.
a. True
b. False

27. 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
28. The current account represents the investment in fixed assets in foreign countries that can be used to
conduct business operations.
a. True
b. False

29. Portfolio investments represent 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

30. A country's net outflow of funds ____ affect its interest rates, and ____ affect its economic conditions.
a. does; does
b. does; does not
c. does not; does not
d. does not; does

31. 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

32. Regarding the U.S. balance of payments, capital account items are relatively minor compared to the
financial account items.
a. True
b. False

33. 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

34. Without the international capital flows, there would be ____ funding available in the U.S. 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

35. The primary component of the capital account is the balance of trade.
a. True
b. False
36. A balance of trade surplus indicates an excess of merchandise imports over merchandise exports.
a. True
b. False

37. 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.
a. True
b. False

38. A weakening of the U.S. dollar with respect to the British pound would likely reduce U.S. exports to
the U.K. and increase U.S. imports from the U.K.
a. True
b. False

39. 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

40. Which of the following will probably not result in an increase in a country's current account balance
(assuming everything else 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.

41. Which of the following factors probably does not directly affect a country's capital account and its
components?
a. Inflation
b. Interest rates
c. Withholding taxes on foreign income
d. Exchange rate movements
e. All of the above will directly affect a country's
capital account.
42. 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

43. 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.

44. 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.

45. Which of the following would increase the current account of Country X? Country Y is Country X's
sole trading partner.
a. Inflation increases in countries X and Y by
comparable amounts.
b. Country X's and Country Y's currencies
depreciate by the same amount.
c. Country X imposes tariffs on imports from
Country Y, and Country Y retaliates by
imposing an identical tax on X's exports.
 d. The central banks of Country X and Country
Y reduce the money supply to increase
interest rates.
e. Country X imposes a quota on imports, and
Country Y retaliates by imposing an identical
quota on X's exports.

46. ____ represent aid, grants, and gifts from one country to another.
a. Transfer payments
b. Factor income
c. The balance of trade
d. The balance of payments
e. The capital account