Chapter 03 Test Bank
Chapter 03 Test Bank
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
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2. Award: 10.00 points
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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Balance of payments
provides detailed information concerning the demand and supply of a country's currency.
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4. Award: 10.00 points
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
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the supply of dollars is likely to exceed the demand in the foreign exchange market,
ceteris paribus.
one can infer that the U.S. dollar would be under pressure to depreciate against other
currencies.
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6. Award: 10.00 points
will be recorded as a debit, with a negative sign, in the U.S. balance of payments.
will be recorded as a debit, with a positive sign, in the U.S. balance of payments.
will be recorded as a credit, with a negative sign, in the U.S. balance of payments.
will be recorded as a credit, with a positive sign, in the U.S. balance of payments.
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will be recorded as a debit, with a negative sign, in the U.S. balance of payments.
will be recorded as a debit, with a positive sign, in the U.S. balance of payments.
will be recorded as a credit, with a negative sign, in the U.S. balance of payments.
will be recorded as a credit, with a positive sign, in the U.S. balance of payments.
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8. Award: 10.00 points
not only international trade, (exports and imports) but also cross-border investments.
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result from foreign sales of U.S. goods and services, goodwill, financial claims, and real
assets.
result from U.S. purchases of foreign goods and services, goodwill, financial claims, and
real assets.
result from foreign sales of U.S. goods and services, goodwill, financial claims, and real
assets, and give rise to the demand for dollars.
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10. Award: 10.00 points
expand imports, offering marketing opportunities for foreign enterprises, and encourage
imposing foreign exchange restrictions.
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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.
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12. Award: 10.00 points
every credit in the account is balanced by a matching debit and every debit in the account
is balanced by a matching credit.
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Suppose the InBev Corporation (a non-U.S. MNC) buys the Anheuser-Busch Corporation, paying the
U.S. shareholders cash.
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14. Award: 10.00 points
all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and
businesses.
all purchases and sales of international reserve assets such as dollars, foreign exchanges,
gold, and special drawing rights (SDRs).
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acquires IOUs from foreigners, thereby increasing its net foreign wealth.
must borrow from foreigners or draw down on its previously accumulated foreign wealth.
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.
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16. Award: 10.00 points
all purchases and sales of international reserve assets such as dollars, foreign exchanges,
gold, and special drawing rights (SDRs).
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all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and
businesses.
all purchases and sales of international reserve assets such as dollars, foreign exchanges,
gold, and special drawing rights (SDRs).
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18. Award: 10.00 points
A country's international transactions can be grouped into the following three main types:
current account, medium term account, and long term capital account.
current account, long term capital account, and official reserve account.
current account, capital account, financial account and official reserve account.
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Invisible trade:refers to
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20. Award: 10.00 points
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In 2012, the United States had a current account deficit. The current account deficit implies that the
United States
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22. Award: 10.00 points
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Primary income
consists largely of payments and receipts of interest, dividends, and other income on
foreign investments.
includes payments and receipts for legal, consulting, financial and engineering services.
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24. Award: 10.00 points
the initial deterioration and the eventual improvement of a country's trade balance
following a currency depreciation.
the initial improvement and the eventual depreciation of a country's trade balance
following a currency depreciation.
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26. Award: 10.00 points
When a country's currency depreciates against the currencies of major trading partners,
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imports and exports are inelastic to the exchange rate changes and consumers exhibit
brand loyalty and price inelasticity.
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28. Award: 10.00 points
In the short run a currency depreciation can make a trade balance worse if
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30. Award: 10.00 points
The difference between Foreign Direct Investment and Portfolio Investment is that
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.
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.
Portfolio Investment takes place as firms attempt to take advantage of various market
imperfections.
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In the latter half of the 1980s, with a strong yen, Japanese firms
could better afford to acquire U.S. assets that had become less expensive in terms of yen.
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32. Award: 10.00 points
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If the interest rate rises in the U.S. while other variables remain constant
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34. Award: 10.00 points
the sum of U.S. sales of assets to foreigners and U.S. purchases of foreign assets.
the difference between U.S. sales of assets to foreigners and U.S. purchases of foreign
assets.
the difference between U.S. sales of manufactured goods to foreigners and U.S.
purchases of foreign products.
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36. Award: 10.00 points
are playing a less-important role in international finance following the end of the fixed
exchange rate era.
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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.
with sales and purchases of foreign stocks and bonds that do not involve a transfer of
control.
Both A and B.
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38. Award: 10.00 points
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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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40. Award: 10.00 points
tend to be insensitive to both changes in relative interest rates and the anticipated change
in exchange rate.
tend to be sensitive to both changes in relative interest rates and the anticipated change
in exchange rate.
tend to be sensitive to changes in relative interest rates but insensitive to the anticipated
change in exchange rate.
tend to be insensitive to changes in relative interest rates but sensitive to the anticipated
change in exchange rate.
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investors can reduce risk more effectively if they diversify their portfolio holdings
internationally rather than purely domestically.
investors who have a domestically diversified portfolio, with exposures across industry
types will not gain much from diversifying abroad.
investors who diversify internationally will likely underperform investors who keep all their
investments in one country.
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42. Award: 10.00 points
The world's largest debtor nation and creditor nation, respectively, are
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probably has some elements that are honest mistakes, it can't all be money laundering and
drugs.
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44. Award: 10.00 points
arise since recordings of payments and receipts are done at different times, in different
places, possibly using different methods.
arise because some transactions (illegal transactions) occur "off the books."
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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?
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46. Award: 10.00 points
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there is some evidence that financial transactions may be mainly responsible for the
discrepancy.
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.
it tends to be positive one year and negative in others, so it's safe to ignore it.
Both A and B.
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48. Award: 10.00 points
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When a country must make a net payment to foreigners because of a balance-of-payments deficit,
the central bank of the country
should do nothing.
should run down its official reserve assets (e.g., gold, foreign exchanges, and SDRs) only.
should either run down its official reserve assets (e.g., gold, foreign exchanges, and SDRs)
or borrow anew from foreign central banks.
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50. Award: 10.00 points
Continued U.S. trade deficits coupled with foreigners' desire to diversify their currency holdings
away from U.S. dollars
could further diminish the position of the dollar as the dominant reserve currency.
could affect the value of U.S. dollar (e.g., through the currency diversification decisions of
Asian central banks).
could lend steam to the emergence of the euro as a credible reserve currency.
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gold, foreign exchanges, special drawing rights (SDRs), and reserve positions in the
International Monetary Fund (IMF).
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52. Award: 10.00 points
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The most important international reserve asset, comprising 94 percent of the total reserve assets
held by IMF member countries is
gold.
foreign exchanges.
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54. Award: 10.00 points
The vast majority of the foreign exchange reserves held by central banks are denominated in
local currencies.
U.S. dollars.
Japanese Yen.
Euro.
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Which of the following would not count as a foreign exchange reserve held by a central bank?
U.S. dollar
Euro
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56. Award: 10.00 points
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:
BRA = −BCA
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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:
BRA = −BCA
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58. Award: 10.00 points
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.
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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:
BRA = −BCA
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60. Award: 10.00 points
If the central banks of the world chose to diversify their foreign exchange reserves away from the
dollar and into the euro,
this would have the result of a strengthening of the value of the dollar.
could further diminish the position of the U.S. dollar as the dominant reserve currency
this would not have much impact, as the information would be lost in the day-to-day
volatility of exchange rates.
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62. Award: 10.00 points
approximately 50 percent of the total reserve assets held by IMF member countries.
less than one percent of the total reserve assets held by IMF member countries.
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The most dominant currency in the World’s Foerign Exchange Reserves is:
U.S. dollar.
Euro.
Japanese Yen.
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64. Award: 10.00 points
Suppose a country is currently experiencing a trade deficit. In the long run, this could be self-
correcting if
the deficit exists because of the import demand for capital goods.
the deficit exists because of the import demand for consumption goods.
the deficit exists because foreigners want to buy the country's currency as an investment.
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The financial account is divided into three subcategories: direct investment, portfolio investment,
and other investment. Direct investment involves
investments in foreign stocks and bonds that do not involve acquisitions of control.
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66. Award: 10.00 points
The financial account is divided into three subcategories: direct investment, portfolio investment,
and other investment. Portfolio investment involves
investments in foreign stocks and bonds that do not involve acquisitions of control.
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The financial account is divided into three subcategories: direct investment, portfolio investment,
and other investment. Other investment involves
investments in foreign stocks and bonds that do not involve acquisitions of control.
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68. Award: 10.00 points
Which of the following statements are true regarding the 2017 Tax Cuts and Jobs Act?
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Over the last several years, the U.S. has run persistent
balance-of-payments deficits.
balance-of-payments surpluses.
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70. Award: 10.00 points
a current account surplus or deficit will not be matched by a financial account deficit or
surplus
the balance on the current and financial accounts will be equal in size, but opposite in sign.
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The notation is
Y = GNP = national income
C = consumption
I = private investment
G = government spending
X = exports
M = imports
T = taxes
C+I+G+X+M
X−M
I+X+M
M−X
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The notation is
Y = GNP = national income
C = consumption
I = private investment
G = government spending
X = exports
M = imports
T = taxes
BCA ≡ X − M
BKA ≡ X − M
BKA − BCA ≡ X − M
BKA ≡ M − X
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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?
When BCA is negative, it implies that government budget deficits and/or part of domestic
investment are being finance with foreign-controlled capital.
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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?
For a given level of S and I, the government budget deficit (T − G) must be reduced.
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75. Award: 10.00 points
Which country does the United States currently maintain the largest trade deficit with?
Canada
Mexico
China
United Kingdom
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Secondary income
examples include foreign aid, reparations, official and private grants, and gifts.
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77. Award: 10.00 points
Which of the following statements regarding the 2018 U.S. current account are not true?
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