Chapter 3: Balance of Payments

Chapter 3
Balance of Payments

1. Over half of all dollar bills in circulation are held outside American's borders.
True False

2. 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.

3. If the United States imports more than it exports, then this means that
A. the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus.
B. the demand for dollars is likely to exceed the supply in the foreign exchange market, ceteris paribus.
C. the U.S. dollar would be under pressure to appreciate against other currencies.
D. both b) and c) are correct

4. 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 above

5. 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.
B. impose measures to discourage capital outflows.
C. Both a) and b)
D. None of the above

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Chapter 3: Balance of Payments

6. If the United States imports more than it exports, then

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. a) and b)
D. None of the above

7. 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.

8. 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.

9. If Japan exports more than it imports, then

A. the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus.
B. one can infer that the yen would be likely to appreciate against other currencies.
C. a) and b)
D. None of the above

10. 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 above

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Chapter 3: Balance of Payments

11. 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. both a) and c)

12. A country experiencing a significant balance-of-payments surplus would be likely to

A. expand imports, offering marketing opportunities for foreign enterprises.
B. refrain from imposing foreign exchange restrictions.
C. expand exports, offering international marketing opportunities for domestic enterprises.
D. Both a) and b)

13. 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.

14. Since the balance of payments is presented as a system of double-entry bookkeeping,

A. every credit in the account is balanced by a matching debit.
B. every debit in the account is balanced by a matching credit.
C. answers a) and b) are both true
D. none of the above

15. 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.

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Chapter 3: Balance of Payments

16. 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. none of the above

17. A country with a current account surplus

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. both b) and c)

18. The capital 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. none of the above

19. 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. none of the above

20. A country's international transactions can be grouped into the following three main types:
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, and official reserve account.
D. capital account, official reserve account, trade account.

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Chapter 3: Balance of Payments

21. Invisible trade refers to

A. services that avoid tax payments.
B. the underground economy.
C. legal, consulting, and engineering services.
D. tourist expenditures, only.

22. 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.

23. In 2007 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. none of the above

24. The current account is divided into four finer categories:

A. merchandise trade, services, factor income, and statistical discrepancy.
B. merchandise trade, services, factor income, and unilateral transfers.
C. merchandise trade, services, portfolio investment, and unilateral transfers.
D. merchandise trade, services, factor income, and direct investment.

25. The factors of production are

A. land, labor, capital, and entrepreneurial ability.
B. interest, wages and dividends.
C. payments and receipts of interest, dividends, and other income on foreign investments that were previously
made.
D. none of the above

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Chapter 3: Balance of Payments

26. Factor income

A. consists largely of interest, dividends, and other income on foreign investments.
B. is a theoretical construct of the factors of production, land, labor, capital, and entrepreneurial ability.
C. is generally a very minor part of national income accounting, smaller than the statistical discrepancy.
D. none of the above

The entries in the "current account" and the "capital account", combined together, can be outlined (in
alphabetic order) as:

27. Current account includes

A. (i), (ii), and (iii)
B. (ii), (iii), and (vii)
C. (iv), (v), and (vii)
D. (i), (v), and (vi)

28. Capital account includes

A. (i), (ii), and (iii)
B. (ii), (iii), and (vii)
C. (iv), (v), and (vii)
D. (i), (v), and (vi)

29. 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 above

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Chapter 3: Balance of Payments

30. The "J-curve effect"

A. happens most of the time, in the short run.
B. actually only occurs in about 40 percent of the cases according to a study by Sebastian Edwards.
C. is a long-run phenomenon, not a short-run one.
D. none of the above.

31. The J-curve effect received wide attention when

A. the British trade balance worsened after a strengthening of the pound in 1967.
B. the British trade balance worsened after a devaluation of the pound in 1967.
C. the British trade balance improved after a devaluation of the pound in 1967.
D. none of the above

32. 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. none of the above

33. 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.

34. 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. b) and c)

35. 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.

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Chapter 3: Balance of Payments

36. What is the correct label for the vertical axis in the J-curve?

A. Time
B. Change in the Trade Balance
C. Size of Trade Balance
D. Size of Merchandise Trade Balance

37. In the long run, both exports and imports tend to be

A. unresponsive to changes in exchange rates.
B. responsive to changes in exchange rates.
C. both a) and b)
D. none of the above

38. With regard to the capital account

A. the capital account balance measures the difference between U.S. sales of assets to foreigners and U.S.
purchases of foreign assets.
B. U.S. sales (or exports) of assets are recorded as credits, as they result in capital inflow.
C. U.S. purchases (imports) of foreign assets are recorded as debits, as they lead to capital outflow.
D. all of the above

39. 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. Foreign Direct Investment is about buying land and building factories, whereas portfolio investment is about
buying stocks and bonds.
D. All of the above

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Chapter 3: Balance of Payments

40. 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 above

41. International portfolio investments have boomed in recent years, as a result of

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 above

42. 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 above

43. If for a particular county an increase in the interest rate is more or less matched by an expected depreciation
in the local currency,
A. traders will probably be tempted to find another country to invest in.
B. the interest rate increase per se will not be enough to spark capital flow into the country.
C. both a) and b) are true
D. capital will glow out of the country as the disgruntled citizens riot and go to war with the neighbors.

44. The capital 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 above

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Chapter 3: Balance of Payments

45. 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 above.

46. 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. are usually responsible for converting trade surpluses and oil revenues into foreign exchange reserves.
D. none of the above

47. 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)

48. The capital 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.

49. 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,
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 above

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Chapter 3: Balance of Payments

50. 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.

51. 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 above

52. The world's largest debtor nation and creditor nation, respectively, are
A. Japan and the U.S.
B. The U.S. and Japan.
C. The U.S. and Canada.
D. Great Britain and Mexico.

53. 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 above

54. 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 since some transactions (illegal transactions?) occur "off the books".
C. represents omitted and misrecorded transactions.
D. all of the above

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Chapter 3: Balance of Payments

55. Which of the following is most indicative of the pressure that a country's currency faces for depreciation or
appreciation?
A. The current account
B. The capital account
C. The statistical discrepancies
D. The official settlement balance

56. The United States is considered

A. a net creditor nation.
B. a net debtor nation.

57. 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 capital 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. a) and b)

58. 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 above—the U.S. does not have a central bank.

59. When a country must make a net payment to foreigners because of a balance-of-payments deficit, the
central bank of the country
A. should do nothing.
B. should run down its official reserve assets (e.g. gold, foreign exchanges, and SDRs).
C. should borrow anew from foreign central banks.
D. either b) or c) will work.

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Chapter 3: Balance of Payments

60. 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 above

61. 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.

62. International reserve assets include "foreign exchanges". These are

A. Special Drawing Rights (SDRs) at the IMF.
B. reserve positions in the International Monetary Fund (IMF).
C. foreign currency held by a country's central bank.
D. none of the above

63. 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).

64. The "one word that haunts the dollar" is

A. (Central bank) diversification.
B. Reunification (Korean).
C. Euro.
D. (Current account) deficit.

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Chapter 3: Balance of Payments

65. The vast majority of the foreign-exchange reserves held by central banks are denominated in
A. local currencies.
B. U.S. dollars.
C. Yen.
D. Euro.

66. Among IMF member countries, the dollar's dominant position in the world's reserve holdings may decline to
a certain extent as the euro becomes a "known quantity" and its external value becomes more stable. In fact, the
euro's share has increased
A. from zero percent in 1999 to 25.8 percent in 2006.
B. from 13.5 percent in 1999 to 25.8 percent in 2006.
C. from 13.5 percent in 1999 to 52.8 percent in 2006.
D. none of the above

67. Which of the following would not count as a foreign-exchange reserve held by a central bank?
A. The local currency
B. U.S. dollars
C. SDRs
D. Euro

68. The balance of payments identity is given by BCA + BKA + BRA = 0. Rearrange the identity for a country
with a pure flexible exchange rate regime.
A. BCA + BKA + BRA = 0
B. BCA = -BKA
C. BCA + BKA = -BRA
D. BRA = -BCA

Assume that the balance-of-payments accounts for a country are recorded correctly.
Balance on the current account = BCA = $130 billion
Balance on the capital account = BKA = -$86 billion
Balance on the reserves account = BRA = ?

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Chapter 3: Balance of Payments

69. The balance on the reserves account (BRA), under the fixed exchange regime is
A. -$44 billion
B. $44 billion
C. $216 billion
D. none of the above

70. The balance on the reserves account (BRA), under the pure flexible exchange regime is
A. -$44 billion.
B. $44 billion.
C. $216 billion.
D. none of the above

71. In a pure flexible exchange rate regime, a country's central banks will not need to maintain official reserves.
Under this regime
A. -BCA = BKA.
B. BCA = - BRA = 0.
C. BKA = -BRA.
D. BSA = BCA.

72. When the balance-of-payments accounts are recorded correctly, the combined balance of the current
account, the capital 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 above

73. The balance of payments identity is given by BCA + BKA + BRA = 0. Rearrange the identity to solve for
the statistical discrepancy.
A. The statistical discrepancy = (BCA + BKA) - BRA
B. The statistical discrepancy = BCA - BKA + BRA
C. The statistical discrepancy = BCA - BKA - BRA
D. The statistical discrepancy = BCA + BKA + BRA

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Chapter 3: Balance of Payments

74. BCA stands for

A. the balance on the current account.
B. the balance on the capital account.
C. the balance on the official reserves.
D. net imports.

75. BKA stands for

A. the balance on the current account.
B. the balance on the capital account.
C. the balance on the official reserves.
D. net imports.

76. 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. this would have the result of a weakening in the value of the dollar.
C. this would not have much impact, as the information would be lost in the day-to-day volatility of exchange
rates.

77. The economic theory of mercantilism holds that

A. a continuing trade surplus should be a government's major policy goal.
B. the main source of wealth of a country is its productive capacity.
C. free trade is the result of countries exploiting their comparative advantage.
D. none of the above

78. The U.S. Trade Deficit

A. is a capital account surplus.
B. is a current account deficit.
C. is both a capital account surplus and a current account deficit.
D. none of the above

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Chapter 3: Balance of Payments

79. As of 2007 gold accounting 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 2 percent of the total reserve assets held by IMF member countries.

80. The most popular reserve currency is now the

A. U.S. dollar.
B. Euro.
C. Japanese Yen.

81. 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 above

82. The capital 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 above

83. The capital account is divided into three subcategories: direct investment, portfolio investment, and other
investment. Portfolio 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 above

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Chapter 3: Balance of Payments

84. The capital 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 above

85. 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.

86. If a country must make a net payment to foreigners because of a balance-of-payments deficit, the country
should
A. either increase its official reserve assets or borrow anew from foreigners.
B. either run down its official reserve assets or borrow anew from foreigners.
C. either run down its official reserve assets or lend more foreigners.
D. none of the above

87. Under the fixed exchange rate regime

A. the combined balance on the current and capital accounts will be equal in size, but opposite in sign, to the
change in the official reserves.
B. the balance on the current and capital 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 capital account surplus or deficit must be matched by an official reserves deficit or surplus.

88. Under the pure flexible exchange rate regime

A. the combined balance on the current and capital accounts will be equal in size, but opposite in sign, to the
change in the official reserves.
B. the balance on the current and capital 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 capital account surplus or deficit must be matched by an official reserves deficit or surplus.

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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 3: Balance of Payments

89. More important than the absolute size of a country's balance-of-payments disequilibrium
A. is the nature and cause of the disequilibrium.
B. is whether it is a trade surplus or deficit.
C. is whether the local government is mercantilist or not.
D. Nothing is more important than the absolute size of a country's balance-of-payments disequilibrium.

For questions in this section, the notation is

Y = GNP = national income
C = consumption
I = private investment
G = government spending
X = exports
M = imports

90. The current account balance is given by

A. C + I + G + X + M
B. X - M
C. I + X + M
D. M - X

91. The difference between a country's savings and investment is given by

A. S - I
B. I  S
C. X - M
D. GNP - Y

92. If the difference between tax revenue and government expenditures is negative, it implies that
A. tax revenue is insufficient to cover government spending.
B. a government budget deficit exists.
C. the government will be issuing new debt securities.
D. all of the above

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whole or part.
Chapter 3: Balance of Payments

93. National income, or Gross National Product is given by

A. GNP  Y  C + I + G + X + M
B. GNP  Y  C + I + G + X - M
C. GNP  I  C + Y + G + X - M
D. GNP  Y  C + I + X + M - G

94. Which of the following is a true statement?

A. BCA  X - M
B. BKA  X - M
C. BKA - BCA X - M
D. BKA  X - M

95. 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, 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. both a) and b) are true
D. none of the above

96. 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. both a) and b) are true
D. none of the above

97. 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, 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 above are true

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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 3: Balance of Payments

98. 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 an/or part of domestic investment are
being finance with foreign-controlled capital.
D. All of the above are true.

99. 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 above would work to reduce a BCA deficit.

100. 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, 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 above would work to reduce a BCA deficit.

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whole or part.
Chapter 3: Balance of Payments

ch3 Key

1. Over half of all dollar bills in circulation are held outside American's borders.
TRUE

Eun - Chapter 03 #1
Topic: Balance of Payments Trends in Major Countries

2. 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.

Eun - Chapter 03 #2
Topic: Balance of Payments Accounting

3. If the United States imports more than it exports, then this means that
A. the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus.
B. the demand for dollars is likely to exceed the supply in the foreign exchange market, ceteris paribus.
C. the U.S. dollar would be under pressure to appreciate against other currencies.
D. both b) and c) are correct

Eun - Chapter 03 #3
Topic: Balance of Payments Accounting

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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 3: Balance of Payments

4. 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 above

Eun - Chapter 03 #4
Topic: Balance of Payments Accounting

5. 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.
B. impose measures to discourage capital outflows.
C. Both a) and b)
D. None of the above

Eun - Chapter 03 #5
Topic: Balance of Payments Accounting

6. If the United States imports more than it exports, then

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. a) and b)
D. None of the above

Eun - Chapter 03 #6
Topic: Balance of Payments Accounting

7. 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.

Eun - Chapter 03 #7
Topic: Balance of Payments Accounting

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whole or part.
Chapter 3: Balance of Payments

8. 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.

Eun - Chapter 03 #8
Topic: Balance of Payments Accounting

9. If Japan exports more than it imports, then

A. the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus.
B. one can infer that the yen would be likely to appreciate against other currencies.
C. a) and b)
D. None of the above

Eun - Chapter 03 #9
Topic: Balance of Payments Accounting

10. 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 above

Eun - Chapter 03 #10

Topic: Balance of Payments Accounting

11. 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. both a) and c)

Eun - Chapter 03 #11

Topic: Balance of Payments Accounting

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whole or part.
Chapter 3: Balance of Payments

12. A country experiencing a significant balance-of-payments surplus would be likely to

A. expand imports, offering marketing opportunities for foreign enterprises.
B. refrain from imposing foreign exchange restrictions.
C. expand exports, offering international marketing opportunities for domestic enterprises.
D. Both a) and b)

Eun - Chapter 03 #12

Topic: Balance of Payments Accounting

13. 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.

Eun - Chapter 03 #13

Topic: Balance of Payments Accounting

14. Since the balance of payments is presented as a system of double-entry bookkeeping,

A. every credit in the account is balanced by a matching debit.
B. every debit in the account is balanced by a matching credit.
C. answers a) and b) are both true
D. none of the above

Eun - Chapter 03 #14

Topic: Balance of Payments Accounting

15. 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.

Eun - Chapter 03 #15

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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 3: Balance of Payments

16. 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. none of the above

Eun - Chapter 03 #16

Topic: Balance of Payments Accounts

17. A country with a current account surplus

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. both b) and c)

Eun - Chapter 03 #17

Topic: Balance of Payments Accounts

18. The capital 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. none of the above

Eun - Chapter 03 #18

Topic: Balance of Payments Accounts

19. 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. none of the above

Eun - Chapter 03 #19

Topic: Balance of Payments Accounts

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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 3: Balance of Payments

20. A country's international transactions can be grouped into the following three main types:
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, and official reserve account.
D. capital account, official reserve account, trade account.

Eun - Chapter 03 #20

Topic: Balance of Payments Accounts

21. Invisible trade refers to

A. services that avoid tax payments.
B. the underground economy.
C. legal, consulting, and engineering services.
D. tourist expenditures, only.

Eun - Chapter 03 #21

Topic: Balance of Payments Accounts

22. 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.

Eun - Chapter 03 #22

Topic: Balance of Payments Accounts

23. In 2007 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. none of the above

Eun - Chapter 03 #23

Topic: The Current Account

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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 3: Balance of Payments

24. The current account is divided into four finer categories:

A. merchandise trade, services, factor income, and statistical discrepancy.
B. merchandise trade, services, factor income, and unilateral transfers.
C. merchandise trade, services, portfolio investment, and unilateral transfers.
D. merchandise trade, services, factor income, and direct investment.

Eun - Chapter 03 #24

Topic: The Current Account

25. The factors of production are

A. land, labor, capital, and entrepreneurial ability.
B. interest, wages and dividends.
C. payments and receipts of interest, dividends, and other income on foreign investments that were previously
made.
D. none of the above

Eun - Chapter 03 #25

Topic: The Current Account

26. Factor income

A. consists largely of interest, dividends, and other income on foreign investments.
B. is a theoretical construct of the factors of production, land, labor, capital, and entrepreneurial ability.
C. is generally a very minor part of national income accounting, smaller than the statistical discrepancy.
D. none of the above

Eun - Chapter 03 #26

Topic: The Current Account

The entries in the "current account" and the "capital account", combined together, can be outlined (in
alphabetic order) as:

Eun - Chapter 03

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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 3: Balance of Payments

27. Current account includes

A. (i), (ii), and (iii)
B. (ii), (iii), and (vii)
C. (iv), (v), and (vii)
D. (i), (v), and (vi)

Eun - Chapter 03 #27

Topic: The Current Account

28. Capital account includes

A. (i), (ii), and (iii)
B. (ii), (iii), and (vii)
C. (iv), (v), and (vii)
D. (i), (v), and (vi)

Eun - Chapter 03 #28

Topic: The Current Account

29. 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 above

Eun - Chapter 03 #29

Topic: The Current Account

30. The "J-curve effect"

A. happens most of the time, in the short run.
B. actually only occurs in about 40 percent of the cases according to a study by Sebastian Edwards.
C. is a long-run phenomenon, not a short-run one.
D. none of the above.

Eun - Chapter 03 #30

Topic: The Current Account

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Chapter 3: Balance of Payments

31. The J-curve effect received wide attention when

A. the British trade balance worsened after a strengthening of the pound in 1967.
B. the British trade balance worsened after a devaluation of the pound in 1967.
C. the British trade balance improved after a devaluation of the pound in 1967.
D. none of the above

Eun - Chapter 03 #31

Topic: The Current Account

32. 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. none of the above

Eun - Chapter 03 #32

Topic: The Current Account

33. 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.

Eun - Chapter 03 #33

Topic: The Current Account

34. 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. b) and c)

Eun - Chapter 03 #34

Topic: The Current Account

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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
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Chapter 3: Balance of Payments

35. 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.

Eun - Chapter 03 #35

36. What is the correct label for the vertical axis in the J-curve?

A. Time
B. Change in the Trade Balance
C. Size of Trade Balance
D. Size of Merchandise Trade Balance

Eun - Chapter 03 #36

Topic: The Current Account

37. In the long run, both exports and imports tend to be

A. unresponsive to changes in exchange rates.
B. responsive to changes in exchange rates.
C. both a) and b)
D. none of the above

Eun - Chapter 03 #37

Topic: The Current Account

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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
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Chapter 3: Balance of Payments

38. With regard to the capital account

A. the capital account balance measures the difference between U.S. sales of assets to foreigners and U.S.
purchases of foreign assets.
B. U.S. sales (or exports) of assets are recorded as credits, as they result in capital inflow.
C. U.S. purchases (imports) of foreign assets are recorded as debits, as they lead to capital outflow.
D. all of the above

Eun - Chapter 03 #38

Topic: The Capital Account

39. 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. Foreign Direct Investment is about buying land and building factories, whereas portfolio investment is about
buying stocks and bonds.
D. All of the above

Eun - Chapter 03 #39

Topic: The Capital Account

40. 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 above

Eun - Chapter 03 #40

Topic: The Capital Account

41. International portfolio investments have boomed in recent years, as a result of

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 above

Eun - Chapter 03 #41

Topic: The Capital Account

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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 3: Balance of Payments

42. 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 above

Eun - Chapter 03 #42

Topic: The Capital Account

43. If for a particular county an increase in the interest rate is more or less matched by an expected depreciation
in the local currency,
A. traders will probably be tempted to find another country to invest in.
B. the interest rate increase per se will not be enough to spark capital flow into the country.
C. both a) and b) are true
D. capital will glow out of the country as the disgruntled citizens riot and go to war with the neighbors.

Eun - Chapter 03 #43

Topic: The Capital Account

44. The capital 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 above

Eun - Chapter 03 #44

Topic: The Capital Account

45. 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 above.

Eun - Chapter 03 #45

Topic: The Capital Account

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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 3: Balance of Payments

46. 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. are usually responsible for converting trade surpluses and oil revenues into foreign exchange reserves.
D. none of the above

Eun - Chapter 03 #46

Topic: The Capital Account

47. 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)

Eun - Chapter 03 #47

Topic: The Capital Account

48. The capital 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.

Eun - Chapter 03 #48

Topic: The Capital Account

49. 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,
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 above

Eun - Chapter 03 #49

Topic: The Capital Account

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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 3: Balance of Payments

50. 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.

Eun - Chapter 03 #50

Topic: The Capital Account

51. 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 above

Eun - Chapter 03 #51

Topic: The Capital Account

52. The world's largest debtor nation and creditor nation, respectively, are
A. Japan and the U.S.
B. The U.S. and Japan.
C. The U.S. and Canada.
D. Great Britain and Mexico.

Eun - Chapter 03 #52

Topic: The Capital Account

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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 3: Balance of Payments

53. 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 above

Eun - Chapter 03 #53

Topic: Statistical Discrepancy

54. 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 since some transactions (illegal transactions?) occur "off the books".
C. represents omitted and misrecorded transactions.
D. all of the above

Eun - Chapter 03 #54

Topic: Statistical Discrepancy

55. Which of the following is most indicative of the pressure that a country's currency faces for depreciation or
appreciation?
A. The current account
B. The capital account
C. The statistical discrepancies
D. The official settlement balance

Eun - Chapter 03 #55

Topic: Statistical Discrepancy

56. The United States is considered

A. a net creditor nation.
B. a net debtor nation.

Eun - Chapter 03 #56

Topic: Statistical Discrepancy

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whole or part.
Chapter 3: Balance of Payments

57. 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 capital 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. a) and b)

Eun - Chapter 03 #57

Topic: Statistical Discrepancy

58. 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 above—the U.S. does not have a central bank.

Eun - Chapter 03 #58

Topic: Official Reserve Account

59. When a country must make a net payment to foreigners because of a balance-of-payments deficit, the
central bank of the country
A. should do nothing.
B. should run down its official reserve assets (e.g. gold, foreign exchanges, and SDRs).
C. should borrow anew from foreign central banks.
D. either b) or c) will work.

Eun - Chapter 03 #59

Topic: Official Reserve Account

60. 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 above

Eun - Chapter 03 #60

Topic: Official Reserve Account

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whole or part.
Chapter 3: Balance of Payments

61. 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.

Eun - Chapter 03 #61

Topic: Official Reserve Account

62. International reserve assets include "foreign exchanges". These are

A. Special Drawing Rights (SDRs) at the IMF.
B. reserve positions in the International Monetary Fund (IMF).
C. foreign currency held by a country's central bank.
D. none of the above

Eun - Chapter 03 #62

Topic: Official Reserve Account

63. 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).

Eun - Chapter 03 #63

Topic: Official Reserve Account

64. The "one word that haunts the dollar" is

A. (Central bank) diversification.
B. Reunification (Korean).
C. Euro.
D. (Current account) deficit.

Eun - Chapter 03 #64

Topic: Official Reserve Account

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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 3: Balance of Payments

65. The vast majority of the foreign-exchange reserves held by central banks are denominated in
A. local currencies.
B. U.S. dollars.
C. Yen.
D. Euro.

Eun - Chapter 03 #65

Topic: Official Reserve Account

66. Among IMF member countries, the dollar's dominant position in the world's reserve holdings may decline to
a certain extent as the euro becomes a "known quantity" and its external value becomes more stable. In fact, the
euro's share has increased
A. from zero percent in 1999 to 25.8 percent in 2006.
B. from 13.5 percent in 1999 to 25.8 percent in 2006.
C. from 13.5 percent in 1999 to 52.8 percent in 2006.
D. none of the above

Eun - Chapter 03 #66

Topic: Official Reserve Account

67. Which of the following would not count as a foreign-exchange reserve held by a central bank?
A. The local currency
B. U.S. dollars
C. SDRs
D. Euro

Eun - Chapter 03 #67

Topic: Official Reserve Account

68. The balance of payments identity is given by BCA + BKA + BRA = 0. Rearrange the identity for a country
with a pure flexible exchange rate regime.
A. BCA + BKA + BRA = 0
B. BCA = -BKA
C. BCA + BKA = -BRA
D. BRA = -BCA

Eun - Chapter 03 #68

Topic: The Balance of Payments Identity

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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 3: Balance of Payments

Assume that the balance-of-payments accounts for a country are recorded correctly.
Balance on the current account = BCA = $130 billion
Balance on the capital account = BKA = -$86 billion
Balance on the reserves account = BRA = ?

Eun - Chapter 03

69. The balance on the reserves account (BRA), under the fixed exchange regime is
A. -$44 billion
B. $44 billion
C. $216 billion
D. none of the above

Eun - Chapter 03 #69

Topic: The Balance of Payments Identity

70. The balance on the reserves account (BRA), under the pure flexible exchange regime is
A. -$44 billion.
B. $44 billion.
C. $216 billion.
D. none of the above

Eun - Chapter 03 #70

Topic: The Balance of Payments Identity

71. In a pure flexible exchange rate regime, a country's central banks will not need to maintain official reserves.
Under this regime
A. -BCA = BKA.
B. BCA = - BRA = 0.
C. BKA = -BRA.
D. BSA = BCA.

Eun - Chapter 03 #71

Topic: The Balance of Payments Identity

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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 3: Balance of Payments

72. When the balance-of-payments accounts are recorded correctly, the combined balance of the current
account, the capital 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 above

Eun - Chapter 03 #72

Topic: The Balance of Payments Identity

73. The balance of payments identity is given by BCA + BKA + BRA = 0. Rearrange the identity to solve for
the statistical discrepancy.
A. The statistical discrepancy = (BCA + BKA) - BRA
B. The statistical discrepancy = BCA - BKA + BRA
C. The statistical discrepancy = BCA - BKA - BRA
D. The statistical discrepancy = BCA + BKA + BRA

Eun - Chapter 03 #73

Topic: The Balance of Payments Identity

74. BCA stands for

A. the balance on the current account.
B. the balance on the capital account.
C. the balance on the official reserves.
D. net imports.

Eun - Chapter 03 #74

Topic: The Balance of Payments Identity

75. BKA stands for

A. the balance on the current account.
B. the balance on the capital account.
C. the balance on the official reserves.
D. net imports.

Eun - Chapter 03 #75

Topic: The Balance of Payments Identity

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whole or part.
Chapter 3: Balance of Payments

76. 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. this would have the result of a weakening in the value of the dollar.
C. this would not have much impact, as the information would be lost in the day-to-day volatility of exchange
rates.

Eun - Chapter 03 #76

Topic: The Balance of Payments Identity

77. The economic theory of mercantilism holds that

A. a continuing trade surplus should be a government's major policy goal.
B. the main source of wealth of a country is its productive capacity.
C. free trade is the result of countries exploiting their comparative advantage.
D. none of the above

Eun - Chapter 03 #77

Topic: Balance of Payments Trends in Major Countries

78. The U.S. Trade Deficit

A. is a capital account surplus.
B. is a current account deficit.
C. is both a capital account surplus and a current account deficit.
D. none of the above

Eun - Chapter 03 #78

Topic: Balance of Payments Trends in Major Countries

79. As of 2007 gold accounting 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 2 percent of the total reserve assets held by IMF member countries.

Eun - Chapter 03 #79

Topic: Balance of Payments Trends in Major Countries

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whole or part.
Chapter 3: Balance of Payments

80. The most popular reserve currency is now the

A. U.S. dollar.
B. Euro.
C. Japanese Yen.

Eun - Chapter 03 #80

Topic: Balance of Payments Trends in Major Countries

81. 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 above

Eun - Chapter 03 #81

Topic: Balance of Payments Trends in Major Countries

82. The capital 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 above

Eun - Chapter 03 #82

Topic: Balance of Payments Trends in Major Countries

83. The capital account is divided into three subcategories: direct investment, portfolio investment, and other
investment. Portfolio 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 above

Eun - Chapter 03 #83

Topic: Balance of Payments Trends in Major Countries

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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 3: Balance of Payments

84. The capital 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 above

Eun - Chapter 03 #84

Topic: Balance of Payments Trends in Major Countries

85. 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.

Eun - Chapter 03 #85

Topic: Balance of Payments Trends in Major Countries

86. If a country must make a net payment to foreigners because of a balance-of-payments deficit, the country
should
A. either increase its official reserve assets or borrow anew from foreigners.
B. either run down its official reserve assets or borrow anew from foreigners.
C. either run down its official reserve assets or lend more foreigners.
D. none of the above

Eun - Chapter 03 #86

Topic: Balance of Payments Trends in Major Countries

87. Under the fixed exchange rate regime

A. the combined balance on the current and capital accounts will be equal in size, but opposite in sign, to the
change in the official reserves.
B. the balance on the current and capital 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 capital account surplus or deficit must be matched by an official reserves deficit or surplus.

Eun - Chapter 03 #87

Topic: Balance of Payments Trends in Major Countries

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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 3: Balance of Payments

88. Under the pure flexible exchange rate regime

A. the combined balance on the current and capital accounts will be equal in size, but opposite in sign, to the
change in the official reserves.
B. the balance on the current and capital 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 capital account surplus or deficit must be matched by an official reserves deficit or surplus.

Eun - Chapter 03 #88

Topic: Balance of Payments Trends in Major Countries

89. More important than the absolute size of a country's balance-of-payments disequilibrium
A. is the nature and cause of the disequilibrium.
B. is whether it is a trade surplus or deficit.
C. is whether the local government is mercantilist or not.
D. Nothing is more important than the absolute size of a country's balance-of-payments disequilibrium.

Eun - Chapter 03 #89

Topic: Balance of Payments Trends in Major Countries

For questions in this section, the notation is

Y = GNP = national income
C = consumption
I = private investment
G = government spending
X = exports
M = imports

Eun - Chapter 03

90. The current account balance is given by

A. C + I + G + X + M
B. X - M
C. I + X + M
D. M - X

Eun - Chapter 03 #90

Topic: Appendix 3A: The Relationship between Balance of Payments and National Income Accounting

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whole or part.
Chapter 3: Balance of Payments

91. The difference between a country's savings and investment is given by

A. S - I
B. I  S
C. X - M
D. GNP - Y

Eun - Chapter 03 #91

Topic: Appendix 3A: The Relationship between Balance of Payments and National Income Accounting

92. If the difference between tax revenue and government expenditures is negative, it implies that
A. tax revenue is insufficient to cover government spending.
B. a government budget deficit exists.
C. the government will be issuing new debt securities.
D. all of the above

Eun - Chapter 03 #92

Topic: Appendix 3A: The Relationship between Balance of Payments and National Income Accounting

93. National income, or Gross National Product is given by

A. GNP  Y  C + I + G + X + M
B. GNP  Y  C + I + G + X - M
C. GNP  I  C + Y + G + X - M
D. GNP  Y  C + I + X + M - G

Eun - Chapter 03 #93

Topic: Appendix 3A: The Relationship between Balance of Payments and National Income Accounting

94. Which of the following is a true statement?

A. BCA  X - M
B. BKA  X - M
C. BKA - BCA X - M
D. BKA  X - M

Eun - Chapter 03 #94

Topic: Appendix 3A: The Relationship between Balance of Payments and National Income Accounting

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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 3: Balance of Payments

95. 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, 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. both a) and b) are true
D. none of the above

Eun - Chapter 03 #95

Topic: Appendix 3A: The Relationship between Balance of Payments and National Income Accounting

96. 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. both a) and b) are true
D. none of the above

Eun - Chapter 03 #96

Topic: Appendix 3A: The Relationship between Balance of Payments and National Income Accounting

97. 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, 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 above are true

Eun - Chapter 03 #97

Topic: Appendix 3A: The Relationship between Balance of Payments and National Income Accounting

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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 3: Balance of Payments

98. 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 an/or part of domestic investment are
being finance with foreign-controlled capital.
D. All of the above are true.

Eun - Chapter 03 #98

Topic: Appendix 3A: The Relationship between Balance of Payments and National Income Accounting

99. 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 above would work to reduce a BCA deficit.

Eun - Chapter 03 #99

Topic: Appendix 3A: The Relationship between Balance of Payments and National Income Accounting

100. 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, 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 above would work to reduce a BCA deficit.

Eun - Chapter 03 #100

Topic: Appendix 3A: The Relationship between Balance of Payments and National Income Accounting

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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.
Chapter 3: Balance of Payments

ch3 Summary

Category # of Questions
Eun - Chapter 03 103
Topic: Appendix 3A: The Relationship between Balance of Payments and National Income Accounting 11
Topic: Balance of Payments Accounting 13
Topic: Balance of Payments Accounts 7
Topic: Balance of Payments Trends in Major Countries 14
Topic: Official Reserve Account 10
Topic: Statistical Discrepancy 5
Topic: The Balance of Payments Identity 9
Topic: The Capital Account 15
Topic: The Current Account 14

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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in
whole or part.