Chap03 Tutorial Questions

IBF301 | Que Anh Nguyen
Chapter 3_Tutorial Questions

A. Eun Chap 3
1. The United States has experienced continuous current account deficits since the early
1980s. What do you think are the main causes for the deficits? What would be the
consequences of continuous U.S. current account deficits?
2. In contrast to the United States, Japan has realized continuous current account
surpluses. What could be the main causes for these surpluses? Is it desirable to have
continuous current account surpluses?
3. Describe the balance of payments identity and discuss its implications under the fixed
and flexible exchange rate regimes.
4. Explain how each of the following transactions will be classified and recorded in the debit
and credit of the U.S. balance of payments:
(1) A Japanese insurance company purchases U.S. Treasury bonds and pays out of its
bank account kept in New York City.
(2) A U.S. citizen consumes a meal at a restaurant in Paris and pays with her American
Express card.
(3) A Indian immigrant living in Los Angeles sends a check drawn on his L.A. bank
account as a gift to his parents living in Mumbai.
(4) A U.S. computer programmer is hired by a British company for consulting and gets
paid from the U.S. bank account maintained by the British company.
5. PROBLEM Examine the following summary of the U.S. balance of payments for 2017 (in
$ billion) and fill in the blank entries.
B. Additional MCQs
1. If the United States imports more than it exports, then this means that …..
A) the demand for dollars is likely to exceed the supply in the foreign exchange market, ceteris
paribus.
B) the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris
paribus.
C) the demand for dollars is likely to exceed the supply in the foreign exchange market, ceteris
paribus, and the U.S. dollar would be under pressure to appreciate against other currencies.
D) the U.S. dollar would be under pressure to appreciate against other currencies.
2. Generally speaking, any transaction that results in a receipt from foreigners ….
A) will be recorded as a credit, with a negative sign, in the U.S. balance of payments.
B) will be recorded as debit, with a positive sign, in the U.S. balance of payments.
C) will be recorded as credit, with a positive sign, in the U.S. balance of payments.
D) will be recorded as debit, with a negative sign, in the U.S. balance of payments.
3. A country experiencing a significant balance-of-payments surplus would be likely to …..
A) expand exports, offering international marketing opportunities for domestic enterprises.

B) expand imports, offering marketing opportunities for foreign enterprises, and refrain from
imposing foreign exchange restrictions.
C) refrain from imposing foreign exchange restrictions.
D) expand imports, offering marketing opportunities for foreign enterprises.
4. 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) 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.
D) will experience a reduction in the country's net foreign wealth.
5. The entries in the "current account" and the "capital account", combined, can be outlined (in
alphabetic order) as:
(i) direct investment
(ii) factor income
(iii) merchandise
(iv) official transfer
(v) other capital
(vi) portfolio investment
(vii) private transfer
(viii) services
Current account includes
A) (ii), (iii), and (vii)
B) (iv), (v), and (vii)
C) (i), (v), and (vi)
D) (ii), (ii), and (iii)
6. 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 trade balance's lack of responsiveness to the exchanges rate changes.
C) the initial improvement and the eventual depreciation of a country's trade balance following a
currency depreciation.
D) none of the options

7. A currency depreciation will begin to improve the trade balance immediately
A) if the demand for imports and exports are inelastic.
B) imports decrease and exports decrease.
C) the demand for imports and exports are elastic.
8. When a country's currency depreciates against the currencies of major trading partners, …..
A) the country's exports tend to fall and imports rise.
B) the country's exports rise and imports fall.
C) the country's exports and imports rise.
D) the country's exports fall and imports fall.
9. If the interest rate rises in the U.S. while other variables remain constant …..
A) capital inflows into the U.S. will increase.
B) will flow out of the U.S.
C) inflows into the U.S. may not materialize.
10. 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 a cross-border acquisition.
B) it would depend if they bought the shares from an American or a Canadian.
C) Nestlé would have been engaged in portfolio investment.
11. Since security returns tend to have low correlations among countries,
A) investors who have a domestically diversified portfolio, with exposures across industry types
will not gain much from diversifying abroad.
B) investors who diversify internationally will likely underperform investors who keep all their
investments in one country.
C) investors can reduce risk more effectively if they diversify their portfolio holdings
internationally rather than purely domestically.
12. 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) borrow anew from foreign central banks.
C) should either run down its official reserve assets (e.g., gold, foreign exchanges, and SDRs)
or borrow anew from foreign central banks.
D) should run down its official reserve assets (e.g., gold, foreign exchanges, and SDRs).
13. Which of the following would not count as a foreign-exchange reserve held by a central
bank?
A) SDRs
B) U.S. dollars
C) Euro
D) The local currency
14. 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 = í$86 billion
Balance on the reserves account = BRA =?
The balance on the reserves account (BRA), under the pure flexible exchange regime is……
A) $216 billion.
B) $44 billion.
C) -$44 billion.
15. 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
16. Under the fixed exchange rate regime,
A) a current account surplus or deficit must be matched by an official reserves deficit or surplus.
B) a capital account surplus or deficit must be matched by an official reserves deficit or surplus.
C) the balance on the current and capital accounts will be equal in size, but opposite in sign.
D) 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.

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IBF301 | Que Anh Nguyen

Chapter 3_Tutorial Questions

A) expand exports, offering international marketing opportunities for domestic enterprises.

D) none of the options

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