Chapter 03 - Balance of Payments

Chapter 03
Balance of Payments

True / False Questions

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


Multiple Choice Questions

". he current account balance# $hich is the difference bet$een a country's e%ports and
imports# is a component of the country's &'P. Other components of &'P include
A. consumption and investment and (overnment e%penditure.
B. consumption and (overnment e%penditure and net e%ports.
C. consumption and net e%ports and (overnment e%penditure.
). consumption less imports.

3. *f the +nited ,tates imports more than it e%ports# then this means that
A. the supply of dollars is li-ely to e%ceed the demand in the forei(n e%chan(e mar-et# ceteris
paribus.
B. the demand for dollars is li-ely to e%ceed the supply in the forei(n e%chan(e mar-et#
ceteris paribus.
C. the +.,. dollar $ould be under pressure to appreciate a(ainst other currencies.
). both b. and c. are correct

/. 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 boo--eepin(.
B. provides detailed information concernin( the demand and supply of a country's currency.
C. can be used to evaluate the performance of a country in international economic
competition.
). all of the above

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Chapter 03 - Balance of Payments
0. *f a country is (rapplin( $ith a ma1or balance-of-payment difficulty# it may not be able to
e%pand imports from the outside $orld. *nstead# the country may be tempted to
A. impose measures to restrict imports.
B. impose measures to discoura(e capital outflo$s.
C. Both a. and b.
). 'one of the above

2. *f the +nited ,tates imports more than it e%ports# then
A. the supply of dollars is li-ely to e%ceed the demand in the forei(n e%chan(e mar-et# ceteris
paribus.
B. one can infer that the +.,. dollar $ould be under pressure to depreciate a(ainst other
currencies.
C. a. and b.
). 'one of the above

3. &enerally spea-in(# any transaction that results in a receipt from forei(ners
A. $ill be recorded as a debit# $ith a ne(ative si(n# in the +.,. balance of payments.
B. $ill be recorded as a debit# $ith a positive si(n# in the +.,. balance of payments.
C. $ill be recorded as a credit# $ith a ne(ative si(n# in the +.,. balance of payments.
). $ill be recorded as a credit# $ith a positive si(n# in the +.,. balance of payments.

4. &enerally spea-in(# any transaction that results in a payment to forei(ners
A. $ill be recorded as a debit# $ith a ne(ative si(n# in the +.,. balance of payments.
B. $ill be recorded as a debit# $ith a positive si(n# in the +.,. balance of payments.
C. $ill be recorded as a credit# $ith a ne(ative si(n# in the +.,. balance of payments.
). $ill be recorded as a credit# $ith a positive si(n# in the +.,. balance of payments.

5. *f 6apan e%ports more than it imports# then
A. the supply of dollars is li-ely to e%ceed the demand in the forei(n e%chan(e mar-et# ceteris
paribus.
B. one can infer that the yen $ould be li-ely to appreciate a(ainst other currencies.
C. a. and b.
). 'one of the above

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Chapter 03 - Balance of Payments
10. he balance of payments records
A. only international trade# 7e%ports and imports..
B. only cross-border investments 7!)* and portfolio investment..
C. not only international trade# 7e%ports and imports. but also cross-border investments.
). none of the above

11. Credit entries in the +.,. balance of payments
A. result from forei(n sales of +.,. (oods and services# (ood$ill# financial claims# and real
assets.
B. result from +.,. purchases of forei(n (oods and services# (ood$ill# financial claims# and
real assets.
C. (ive rise to the demand for dollars.
). (ive rise to the supply of dollars.
8. both a. and c.

1". A country e%periencin( a si(nificant balance-of-payments surplus $ould be li-ely to
A. e%pand imports# offerin( mar-etin( opportunities for forei(n enterprises.
B. refrain from imposin( forei(n e%chan(e restrictions.
C. e%pand e%ports# offerin( international mar-etin( opportunities for domestic enterprises.
). Both a. and b.

13. ,uppose the 9c)onalds Corporation imports Canadian beef# payin( for it by transferrin(
the funds to a 'e$ :or- ban- account -ept by the Canadian Beef producer.
A. Payment by 9c)onalds $ill be recorded as a debit.
B. he deposit of the funds by the seller $ill be recorded as a debit.
C. Payment by 9c)onalds $ill be recorded as a credit.
). he deposit of the funds by the buyer $ill be credit.

1/. ,ince the balance of payments is presented as a system of double-entry boo--eepin(#
A. every credit in the account is balanced by a matchin( debit.
B. every debit in the account is balanced by a matchin( credit.
C. ans$ers a. and b. are both true
). none of the above

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Chapter 03 - Balance of Payments
10. ,uppose the *nBev Corporation 7a non-+.,. 9'C. buys the Anheuser-Busch Corporation#
payin( the +.,. shareholders cash.
A. Payment by *nBev $ill be recorded as a debit.
B. he deposit of the funds by the sellers $ill be recorded as a debit.
C. Payment by *nBev $ill be recorded as a credit.
). he deposit of the funds by the buyer $ill be credit.

12. he current account includes
A. the e%port and import of (oods and services.
B. all purchases and sales of assets such as stoc-s# bonds# ban- accounts# real estate# and
businesses.
C. all purchases and sales of international reserve assets such as dollars# forei(n e%chan(es#
(old# and special dra$in( ri(hts 7,);s..
). none of the above

13. A country $ith a current account surplus
A. ac<uires *O+s from forei(ners# thereby increasin( its net forei(n $ealth.
B. must borro$ from forei(ners or dra$ do$n on its previously accumulated forei(n $ealth.
C. $ill e%perience a reduction in the country's net forei(n $ealth.
). both b. and c.

14. he capital account includes
A. the e%port and import of (oods and services.
B. all purchases and sales of assets such as stoc-s# bonds# ban- accounts# real estate# and
businesses.
C. all purchases and sales of international reserve assets such as dollars# forei(n e%chan(es#
(old# and special dra$in( ri(hts 7,);s..
). none of the above

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Chapter 03 - Balance of Payments
15. he official reserve account includes
A. the e%port and import of (oods and services.
B. all purchases and sales of assets such as stoc-s# bonds# ban- accounts# real estate# and
businesses.
C. all purchases and sales of international reserve assets such as dollars# forei(n e%chan(es#
(old# and special dra$in( ri(hts 7,);s..
). none of the above

"0. A country's international transactions can be (rouped into the follo$in( three main types=
A. current account# medium term account# and lon( term capital account.
B. current account# lon( term capital account# and official reserve account.
C. current account# capital account# and official reserve account.
). capital account# official reserve account# trade account.

"1. *nvisible trade refers to
A. services that avoid ta% payments.
B. the under(round economy.
C. le(al# consultin(# and en(ineerin( services.
). tourist e%penditures# only.

"". A country that (ives forei(n aid to another country can be vie$ed as
A. importin( (ood$ill from the latter.
B. e%portin( (ood$ill to the latter.

"3. *n "003 the +nited ,tates had a current account deficit. he current account deficit implies
that the +nited ,tates
A. had a surplus on le(al consultin( and en(ineerin( services.
B. produced more output than it consumed.
C. consumed more output than it produced.
). none of the above

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Chapter 03 - Balance of Payments
"/. he current account is divided into four finer cate(ories=
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.
). merchandise trade# services# factor income# and direct investment.

"0. he factors of production are
A. land# labor# capital# and entrepreneurial ability.
B. interest# $a(es and dividends.
C. payments and receipts of interest# dividends# and other income on forei(n investments that
$ere previously made.
). none of the above

"2. !actor income
A. consists lar(ely of interest# dividends# and other income on forei(n investments.
B. is a theoretical construct of the factors of production# land# labor# capital# and
entrepreneurial ability.
C. is (enerally a very minor part of national income accountin(# smaller than the statistical
discrepancy.
). none of the above

he entries in the >current account> and the >capital account># combined to(ether# can be
outlined 7in alphabetic order. as=


"3. Current account includes
A. 7i.# 7ii.# and 7iii.
B. 7ii.# 7iii.# and 7vii.
C. 7iv.# 7v.# and 7vii.
). 7i.# 7v.# and 7vi.

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Chapter 03 - Balance of Payments
"4. Capital account includes
A. 7i.# 7ii.# and 7iii.
B. 7ii.# 7iii.# and 7vii.
C. 7iv.# 7v.# and 7vii.
). 7i.# 7v.# and 7vi.

"5. he >6-curve effect> sho$s
A. the initial deterioration and the eventual improvement of a country's trade balance
follo$in( a currency depreciation.
B. the initial improvement and the eventual depreciation of a country's trade balance
follo$in( a currency depreciation.
C. the trade balance's lac- of responsiveness to the e%chan(es rate chan(es.
). none of the above

30. he >6-curve effect>
A. happens most of the time# in the short run.
B. actually only occurs in about /0 percent of the cases accordin( to a study by ,ebastian
8d$ards.
C. is a lon(-run phenomenon# not a short-run one.
). none of the above.

31. he 6-curve effect received $ide attention $hen
A. the British trade balance $orsened after a stren(thenin( of the pound in 1523.
B. the British trade balance $orsened after a devaluation of the pound in 1523.
C. the British trade balance improved after a devaluation of the pound in 1523.
). none of the above

3". A currency depreciation $ill be(in to improve the trade balance immediately
A. if the demand for imports and e%ports are inelastic.
B. if the demand for imports and e%ports are elastic.
C. if imports decrease and e%ports decrease.
). none of the above

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Chapter 03 - Balance of Payments
33. ?hen a country's currency depreciates a(ainst the currencies of ma1or tradin( partners#
A. the country's e%ports tend to rise and imports fall.
B. the country's e%ports tend to fall and imports rise.
C. the country's e%ports tend to rise and imports rise.
). the country's e%ports tend to fall and imports fall.

3/. A depreciation $ill be(in to improve the trade balance immediately if
A. imports and e%ports are responsive to the e%chan(e rate chan(es.
B. imports and e%ports are inelastic to the e%chan(e rate chan(es.
C. consumers e%hibit brand loyalty and price inelasticity.
). b. and c.

30. *n the short run a currency depreciation can ma-e a trade balance $orse if
A. there is no domestic producer of an import.
B. there is no domestic buyer for an import.
C. there is no e%port mar-et for a country's output.

32. ?hat is the correct label for the vertical a%is in the 6-curve@

A. ime
B. Chan(e in the rade Balance
C. ,iAe of rade Balance
). ,iAe of 9erchandise rade Balance

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Chapter 03 - Balance of Payments
33. *n the lon( run# both e%ports and imports tend to be
A. unresponsive to chan(es in e%chan(e rates.
B. responsive to chan(es in e%chan(e rates.
C. both a. and b.
). none of the above

34. ?ith re(ard to the capital account
A. the capital account balance measures the difference bet$een +.,. sales of assets to
forei(ners and +.,. purchases of forei(n assets.
B. +.,. sales 7or e%ports. of assets are recorded as credits# as they result in capital inflo$.
C. +.,. purchases 7imports. of forei(n assets are recorded as debits# as they lead to capital
outflo$.
). all of the above

35. he difference bet$een !orei(n )irect *nvestment and Portfolio *nvestment is that
A. Portfolio *nvestment mostly represents the sale and purchase of forei(n financial assets
such as stoc-s and bonds that do not involve a transfer of control.
B. !orei(n )irect *nvestment mostly represents the sale and purchase of forei(n financial
assets such as stoc-s $hereas Portfolio *nvestment mostly involves the sales and purchase of
forei(n bonds.
C. !orei(n )irect *nvestment is about buyin( land and buildin( factories# $hereas portfolio
investment is about buyin( stoc-s and bonds.
). All of the above

/0. *n the latter half of the 1540s# $ith a stron( yen# 6apanese firms
A. faced difficulty e%portin(.
B. could better afford to ac<uire +.,. assets that had become less e%pensive in terms of yen.
C. financed a sharp increase in 6apanese !)* in the +nited ,tates.
). all of the above

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Chapter 03 - Balance of Payments
/1. *nternational portfolio investments have boomed in recent years# as a result of
A. a depreciatin( +.,. dollar.
B. increased (asoline and other commodity prices.
C. the (eneral rela%ation of capital controls and re(ulation in many countries.
). none of the above

/". *f the interest rate rises in the +.,. $hile other variables remain constant
A. capital inflo$s into the +.,. $ill increase.
B. capital inflo$s into the +.,. may not materialiAe.
C. capital $ill flo$ out of the +.,.
). none of the above

/3. *f for a particular county an increase in the interest rate is more or less matched by an
e%pected depreciation in the local currency#
A. traders $ill probably be tempted to find another country to invest in.
B. the interest rate increase per se $ill not be enou(h to spar- capital flo$ into the country.
C. both a. and b. are true
). capital $ill (lo$ out of the country as the dis(runtled citiAens riot and (o to $ar $ith the
nei(hbors.

//. he capital account measures
A. the sum of +.,. sales of assets to forei(ners and +.,. purchases of forei(n assets.
B. the difference bet$een +.,. sales of assets to forei(ners and +.,. purchases of forei(n
assets.
C. the difference bet$een +.,. sales of manufactured (oods to forei(ners and +.,. purchases
of forei(n products.
). none of the above

/0. ?hen Bonda# a 6apanese auto ma-er# built a factory in Ohio#
A. it $as en(a(ed in forei(n direct investment.
B. it $as en(a(ed in portfolio investment.
C. it $as en(a(ed in a cross-border ac<uisition.
). none of the above.

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Chapter 03 - Balance of Payments
/2. &overnment controlled investment funds# -no$n as soverei(n $ealth funds#
A. are playin( a less-important role in international finance follo$in( the end of the fi%ed
e%chan(e rate era.
B. are mostly domiciled in Asian and 9iddle 8astern countries.
C. are usually responsible for convertin( trade surpluses and oil revenues into forei(n
e%chan(e reserves.
). none of the above

/3. !orei(n direct investment 7!)*. occurs
A. $hen an investor ac<uires a measure of control of a forei(n business.
B. $hen there is an ac<uisition# by a forei(n entity in the +.,.# of 10 percent or more of the
votin( shares of a business.
C. $ith sales and purchases of forei(n stoc-s and bonds that do not involve a transfer of
control.
). both a. and b.

/4. he capital account may be divided into three cate(ories=
A. cross-border mer(ers and ac<uisitions# portfolio investment# and other investment.
B. direct investment# portfolio investment# and Cross-border mer(ers and ac<uisitions.
C. direct investment# mer(ers and ac<uisitions# and other investment.
). direct investment# portfolio investment# and other investment.

/5. ?hen 'estlC# a ,$iss firm# bou(ht the American firm Carnation# it $as en(a(ed in
forei(n direct investment. *f 'estlC had only bou(ht a non-controllin( number of shares of the
firm#
A. 'estlC $ould have been en(a(ed in portfolio investment.
B. 'estlC $ould have been en(a(ed in a cross-border ac<uisition.
C. it $ould depend if they bou(ht the shares from an American or a Canadian.
). none of the above

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Chapter 03 - Balance of Payments
00. ransactions in currency# ban- deposits and so forth
A. tend to be insensitive to both chan(es in relative interest rates and the anticipated chan(e in
e%chan(e rate.
B. tend to be sensitive to both chan(es in relative interest rates and the anticipated chan(e in
e%chan(e rate.
C. tend to be sensitive to chan(es in relative interest rates but insensitive to the anticipated
chan(e in e%chan(e rate.
). tend to be insensitive to chan(es in relative interest rates but sensitive to the anticipated
chan(e in e%chan(e rate.

01. ,ince security returns tend to have lo$ correlations amon( countries#
A. investors can reduce ris- more effectively if they diversify their portfolio holdin(s
internationally rather than purely domestically.
B. investors $ho have a domestically diversified portfolio# $ith e%posures across industry
types $ill not (ain much from diversifyin( abroad.
C. investors $ho diversify internationally $ill li-ely underperform investors $ho -eep all
their investments in one country.
). none of the above

0". he $orld's lar(est debtor nation and creditor nation# respectively# are
A. 6apan and the +.,.
B. he +.,. and 6apan.
C. he +.,. and Canada.
). &reat Britain and 9e%ico.

03. ,tatistical discrepancy# $hich by definition represents errors and omissions
A. cannot be calculated directly.
B. is calculated by ta-in( into account the balance-of-payments identity.
C. probably has some elements that are honest mista-es# it can't all be money launderin( and
dru(s.
). all of the above

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Chapter 03 - Balance of Payments
0/. he statistical discrepancy in the balance-of-payments accounts
A. arise since recordin(s of payments and receipts are done at different times# in different
places# possibly usin( different methods.
B. arise since some transactions 7ille(al transactions@. occur >off the boo-s>.
C. represents omitted and misrecorded transactions.
). all of the above

00. ?hich of the follo$in( is most indicative of the pressure that a country's currency faces
for depreciation or appreciation@
A. he current account
B. he capital account
C. he statistical discrepancies
). he official settlement balance

02. he +nited ,tates is considered
A. a net creditor nation.
B. a net debtor nation.

03. ;e(ardin( 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 ma(nitude.
C. it tends to be positive one year and ne(ative in others# so it's safe to i(nore it.
). a. and b.

04. he central ban- of the +nited ,tates is
A. the 'e$ :or- !ed.
B. the !ederal ;eserve ,ystem.
C. the 8D*9 ban-.
). none of the aboveEthe +.,. does not have a central ban-.

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Chapter 03 - Balance of Payments
05. ?hen a country must ma-e a net payment to forei(ners because of a balance-of-payments
deficit# the central ban- of the country
A. should do nothin(.
B. should run do$n its official reserve assets 7e.(. (old# forei(n e%chan(es# and ,);s..
C. should borro$ ane$ from forei(n central ban-s.
). either b. or c. $ill $or-.

20. Continued +.,. trade deficits coupled $ith forei(ners' desire to diversify their currency
holdin(s a$ay from +.,. dollars
A. could further diminish the position of the dollar as the dominant reserve currency.
B. could affect the value of +.,. dollar 7e.(. throu(h the currency diversification decisions of
Asian central ban-s..
C. could lend steam to the emer(ence of the euro as a credible reserve currency.
). all of the above

21. Currently# international reserve assets are comprised of
A. (old# platinum# forei(n e%chan(es# and special dra$in( ri(hts 7,);s..
B. (old# forei(n e%chan(es# special dra$in( ri(hts 7,);s.# and reserve positions in the
*nternational 9onetary !und 7*9!..
C. (old# diamonds# forei(n e%chan(es# and special dra$in( ri(hts 7,);s..
). reserve positions in the *nternational 9onetary !und 7*9!.# only.

2". *nternational reserve assets include >forei(n e%chan(es>. hese are
A. ,pecial )ra$in( ;i(hts 7,);s. at the *9!.
B. reserve positions in the *nternational 9onetary !und 7*9!..
C. forei(n currency held by a country's central ban-.
). none of the above

23. he most important international reserve asset# comprisin( 5/ percent of the total reserve
assets held by *9! member countries is
A. (old.
B. forei(n e%chan(es.
C. special )ra$in( ;i(hts 7,);s..
). reserve positions in the *nternational 9onetary !und 7*9!..

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Chapter 03 - Balance of Payments
2/. he >one $ord that haunts the dollar> is
A. 7Central ban-. diversification.
B. ;eunification 7Forean..
C. 8uro.
). 7Current account. deficit.

20. he vast ma1ority of the forei(n-e%chan(e reserves held by central ban-s are denominated
in
A. local currencies.
B. +.,. dollars.
C. :en.
). 8uro.

22. Amon( *9! member countries# the dollar's dominant position in the $orld's reserve
holdin(s may decline to a certain e%tent as the euro becomes a >-no$n <uantity> and its
e%ternal value becomes more stable. *n fact# the euro's share has increased
A. from Aero percent in 1555 to "0.4 percent in "002.
B. from 13.0 percent in 1555 to "0.4 percent in "002.
C. from 13.0 percent in 1555 to 0".4 percent in "002.
). none of the above

23. ?hich of the follo$in( $ould not count as a forei(n-e%chan(e reserve held by a central
ban-@
A. he local currency
B. +.,. dollars
C. ,);s
). 8uro

24. he balance of payments identity is (iven by BCA G BFA G B;A H 0. ;earran(e the
identity for a country $ith a pure fle%ible e%chan(e rate re(ime.
A. BCA G BFA G B;A H 0
B. BCA H -BFA
C. BCA G BFA H -B;A
). B;A H -BCA

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Chapter 03 - Balance of Payments
Assume that the balance-of-payments accounts for a country are recorded correctly.
Balance on the current account H BCA H I130 billion
Balance on the capital account H BFA H -I42 billion
Balance on the reserves account H B;A H @

25. he balance on the reserves account 7B;A.# under the fi%ed e%chan(e re(ime is
A. -I// billion
B. I// billion
C. I"12 billion
). none of the above

30. he balance on the reserves account 7B;A.# under the pure fle%ible e%chan(e re(ime is
A. -I// billion.
B. I// billion.
C. I"12 billion.
). none of the above

31. *n a pure fle%ible e%chan(e rate re(ime# a country's central ban-s $ill not need to maintain
official reserves. +nder this re(ime
A. -BCA H BFA.
B. BCA H - B;A H 0.
C. BFA H -B;A.
). B,A H BCA.

3". ?hen 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. e<ual in ma(nitude to the country's national debt.
B. Aero.
C. e<ual in ma(nitude to the rade )eficit or ,urplus.
). none of the above

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Chapter 03 - Balance of Payments
33. he balance of payments identity is (iven by BCA G BFA G B;A H 0. ;earran(e the
identity to solve for the statistical discrepancy.
A. he statistical discrepancy H 7BCA G BFA. - B;A
B. he statistical discrepancy H BCA - BFA G B;A
C. he statistical discrepancy H BCA - BFA - B;A
). he statistical discrepancy H BCA G BFA G B;A

3/. BCA stands for
A. the balance on the current account.
B. the balance on the capital account.
C. the balance on the official reserves.
). net imports.

30. BFA stands for
A. the balance on the current account.
B. the balance on the capital account.
C. the balance on the official reserves.
). net imports.

32. *f the central ban-s of the $orld chose to diversify their forei(n-e%chan(e reserves a$ay
from the dollar and into the euro#
A. this $ould have the result of a stren(thenin( of the value of the dollar.
B. this $ould have the result of a $ea-enin( in the value of the dollar.
C. this $ould not have much impact# as the information $ould be lost in the day-to-day
volatility of e%chan(e rates.

33. he economic theory of mercantilism holds that
A. a continuin( trade surplus should be a (overnment's ma1or policy (oal.
B. the main source of $ealth of a country is its productive capacity.
C. free trade is the result of countries e%ploitin( their comparative advanta(e.
). none of the above

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Chapter 03 - Balance of Payments
34. he +.,. rade )eficit
A. is a capital account surplus.
B. is a current account deficit.
C. is both a capital account surplus and a current account deficit.
). none of the above

35. As of "003 (old accountin( for
A. 50 percent of the total reserve assets held by *9! member countries.
B. 30 percent of the total reserve assets held by *9! member countries.
C. appro%imately 00 percent of the total reserve assets held by *9! member countries.
). less than " percent of the total reserve assets held by *9! member countries.

40. he most popular reserve currency is no$ the
A. +.,. dollar.
B. 8uro.
C. 6apanese :en.

41. ,uppose a country is currently e%periencin( a trade deficit. *n the lon( run# this could be
self correctin( if
A. the deficit e%ists because of the import demand for capital (oods.
B. the deficit e%ists because of the import demand for consumption (oods.
C. the deficit e%ists because forei(ners $ant to buy the country's currency as an investment.
). none of the above

4". he capital account is divided into three subcate(ories= direct investment# portfolio
investment# and other investment. )irect investment involves.
A. ac<uisitions of controllin( interests in forei(n businesses.
B. investments in forei(n stoc-s and bonds that do not involve ac<uisitions of control.
C. ban- deposits# currency investment# trade credit# and the li-e.
). all of the above

3-14
Chapter 03 - Balance of Payments
43. he capital account is divided into three subcate(ories= direct investment# portfolio
investment# and other investment. Portfolio investment involves
A. ac<uisitions of controllin( interests in forei(n businesses.
B. investments in forei(n stoc-s and bonds that do not involve ac<uisitions of control.
C. ban- deposits# currency investment# trade credit# and the li-e.
). all of the above

4/. he capital account is divided into three subcate(ories= direct investment# portfolio
investment# and other investment. >Other> investment involves
A. ac<uisitions of controllin( interests in forei(n businesses.
B. investments in forei(n stoc-s and bonds that do not involve ac<uisitions of control.
C. ban- deposits# currency investment# trade credit# and the li-e.
). all of the above

40. Over the last several years the +.,. has run persistent
A. balance-of-payments deficits.
B. balance-of-payments surpluses.
C. current account deficits.
). capital account deficits.

42. *f a country must ma-e a net payment to forei(ners because of a balance-of-payments
deficit# the country should
A. either increase its official reserve assets or borro$ ane$ from forei(ners.
B. either run do$n its official reserve assets or borro$ ane$ from forei(ners.
C. either run do$n its official reserve assets or lend more forei(ners.
). none of the above

3-15
Chapter 03 - Balance of Payments
43. +nder the fi%ed e%chan(e rate re(ime
A. the combined balance on the current and capital accounts $ill be e<ual in siAe# but opposite
in si(n# to the chan(e in the official reserves.
B. the balance on the current and capital accounts $ill be e<ual in siAe# but opposite in si(n.
C. a current account surplus or deficit must be matched by an official reserves deficit or
surplus.
). a capital account surplus or deficit must be matched by an official reserves deficit or
surplus.

44. +nder the pure fle%ible e%chan(e rate re(ime
A. the combined balance on the current and capital accounts $ill be e<ual in siAe# but opposite
in si(n# to the chan(e in the official reserves.
B. the balance on the current and capital accounts $ill be e<ual in siAe# but opposite in si(n.
C. a current account surplus or deficit must be matched by an official reserves deficit or
surplus.
). a capital account surplus or deficit must be matched by an official reserves deficit or
surplus.

45. 9ore important than the absolute siAe of a country's balance-of-payments dise<uilibrium
A. is the nature and cause of the dise<uilibrium.
B. is $hether it is a trade surplus or deficit.
C. is $hether the local (overnment is mercantilist or not.
). 'othin( is more important than the absolute siAe of a country's balance-of-payments
dise<uilibrium.

!or <uestions in this section# the notation is
: H &'P H national income
C H consumption
* H private investment
& H (overnment spendin(
D H e%ports
9 H imports

3-"0
Chapter 03 - Balance of Payments
50. he current account balance is (iven by
A. C G * G & G D G 9
B. D - 9
C. * G D G 9
). 9 - D

51. he difference bet$een a country's savin(s and investment is (iven by
A. , - *
B. * × ,
C. D - 9
). &'P - :

5". *f the difference bet$een ta% revenue and (overnment e%penditures is ne(ative# it implies
that
A. ta% revenue is insufficient to cover (overnment spendin(.
B. a (overnment bud(et deficit e%ists.
C. the (overnment $ill be issuin( ne$ debt securities.
). all of the above

53. 'ational income# or &ross 'ational Product is (iven by
A. &'P ≡ : ≡ C G * G & G D G 9
B. &'P ≡ : ≡ C G * G & G D - 9
C. &'P ≡ * ≡ C G : G & G D - 9
). &'P ≡ : ≡ C G * G D G 9 - &

5/. ?hich of the follo$in( is a true statement@
A. BCA ≡ D - 9
B. BFA ≡ D - 9
C. BFA - BCA ≡D - 9
). BFA ≡ D - 9

3-"1
Chapter 03 - Balance of Payments
50. here is an intimate relationship bet$een a country's BCA and ho$ the country finances
its domestic investment and pays for (overnment e%penditures. his relationship is (iven by
BCA ≡ D - 9 ≡ 7, - *. G 7 - &.. &iven this# $hich of the follo$in( is a true statement@
A. *f 7, - *. J 0# it implies that a country's domestic savin(s is insufficient to finance domestic
investment.
B. *f 7 - &. J 0# it implies that a country's ta% revenue is insufficient to finance (overnment
spendin(.
C. both a. and b. are true
). none of the above

52. here is an intimate relationship bet$een a country's BCA and ho$ the country finances
its domestic investment and pays for (overnment e%penditures. &iven this# $hich of the
follo$in( is a true statement@
A. *f 7, - *. J 0# it implies that a country's domestic savin(s is insufficient to finance domestic
investment.
B. *f 7 - &. J 0# it implies that a country's ta% revenue is insufficient to finance (overnment
spendin(.
C. both a. and b. are true
). none of the above

53. here is an intimate relationship bet$een a country's BCA and ho$ the country finances
its domestic investment and pays for (overnment e%penditures. his relationship is (iven by
BCA ≡ D - 9 ≡ 7, - *. G 7 - &.. &iven this# $hich of the follo$in( is a true statement@
A. *f 7, - *. J 0# it implies that a country's domestic savin(s is insufficient to finance domestic
investment.
B. *f 7 - &. J 0# it implies that a country's ta% revenue is insufficient to finance (overnment
spendin(.
C. ?hen BCA is ne(ative# it implies that (overnment bud(et deficits andKor part of domestic
investment are bein( finance $ith forei(n-controlled capital.
). All of the above are true

3-""
Chapter 03 - Balance of Payments
54. here is an intimate relationship bet$een a country's BCA and ho$ the country finances
its domestic investment and pays for (overnment e%penditures. &iven this# $hich of the
follo$in( is a true statement@
A. *f 7, - *. J 0# it implies that a country's domestic savin(s is insufficient to finance domestic
investment.
B. *f 7 - &. J 0# it implies that a country's ta% revenue is insufficient to finance (overnment
spendin(.
C. ?hen BCA is ne(ative# it implies that (overnment bud(et deficits anKor part of domestic
investment are bein( finance $ith forei(n-controlled capital.
). All of the above are true.

55. here is an intimate relationship bet$een a country's BCA and ho$ the country finances
its domestic investment and pays for (overnment e%penditures. his relationship is (iven by
BCA ≡ D - 9 ≡ 7, - *. G 7 - &.. &iven this# in order for a country to reduce a BCA deficit#
$hich of the follo$in( must occur@
A. !or a (iven level of , and *# the (overnment bud(et deficit 7 - &. must be reduced.
B. !or a (iven level of * and 7 - &.# , must be increased.
C. !or a (iven level of , and 7 - &.# * must fall.
). All of the above $ould $or- to reduce a BCA deficit.

100. here is an intimate relationship bet$een a country's BCA and ho$ the country finances
its domestic investment and pays for (overnment e%penditures. &iven this# in order for a
country to reduce a BCA deficit# $hich of the follo$in( must occur@
A. !or a (iven level of , and *# the (overnment bud(et deficit 7 - &. must be reduced.
B. !or a (iven level of * and 7 - &.# , must be increased.
C. !or a (iven level of , and 7 - &.# * must fall.
). All of the above $ould $or- to reduce a BCA deficit.

3-"3
Chapter 03 - Balance of Payments
Chapter 03 Balance of Payments Ans$er Fey


True / False Questions

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

Topic: Balance of Payments Trends in Major Countries


Multiple Choice Questions

". he current account balance# $hich is the difference bet$een a country's e%ports and
imports# is a component of the country's &'P. Other components of &'P include
A consumption and investment and (overnment e%penditure.
B. consumption and (overnment e%penditure and net e%ports.
C. consumption and net e%ports and (overnment e%penditure.
). consumption less imports.

Topic: Balance of Payments Accounting

3. *f the +nited ,tates imports more than it e%ports# then this means that
A the supply of dollars is li-ely to e%ceed the demand in the forei(n e%chan(e mar-et# ceteris
paribus.
B. the demand for dollars is li-ely to e%ceed the supply in the forei(n e%chan(e mar-et#
ceteris paribus.
C. the +.,. dollar $ould be under pressure to appreciate a(ainst other currencies.
). both b. and c. are correct

Topic: Balance of Payments Accounting

3-"/
Chapter 03 - Balance of Payments
/. 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 boo--eepin(.
B. provides detailed information concernin( the demand and supply of a country's currency.
C. can be used to evaluate the performance of a country in international economic
competition.
! all of the above

Topic: Balance of Payments Accounting

0. *f a country is (rapplin( $ith a ma1or balance-of-payment difficulty# it may not be able to
e%pand imports from the outside $orld. *nstead# the country may be tempted to
A. impose measures to restrict imports.
B. impose measures to discoura(e capital outflo$s.
C Both a. and b.
). 'one of the above

Topic: Balance of Payments Accounting

2. *f the +nited ,tates imports more than it e%ports# then
A. the supply of dollars is li-ely to e%ceed the demand in the forei(n e%chan(e mar-et# ceteris
paribus.
B. one can infer that the +.,. dollar $ould be under pressure to depreciate a(ainst other
currencies.
C a. and b.
). 'one of the above

Topic: Balance of Payments Accounting

3. &enerally spea-in(# any transaction that results in a receipt from forei(ners
A. $ill be recorded as a debit# $ith a ne(ative si(n# in the +.,. balance of payments.
B. $ill be recorded as a debit# $ith a positive si(n# in the +.,. balance of payments.
C. $ill be recorded as a credit# $ith a ne(ative si(n# in the +.,. balance of payments.
! $ill be recorded as a credit# $ith a positive si(n# in the +.,. balance of payments.

Topic: Balance of Payments Accounting

3-"0
Chapter 03 - Balance of Payments
4. &enerally spea-in(# any transaction that results in a payment to forei(ners
A $ill be recorded as a debit# $ith a ne(ative si(n# in the +.,. balance of payments.
B. $ill be recorded as a debit# $ith a positive si(n# in the +.,. balance of payments.
C. $ill be recorded as a credit# $ith a ne(ative si(n# in the +.,. balance of payments.
). $ill be recorded as a credit# $ith a positive si(n# in the +.,. balance of payments.

Topic: Balance of Payments Accounting

5. *f 6apan e%ports more than it imports# then
A. the supply of dollars is li-ely to e%ceed the demand in the forei(n e%chan(e mar-et# ceteris
paribus.
B one can infer that the yen $ould be li-ely to appreciate a(ainst other currencies.
C. a. and b.
). 'one of the above

Topic: Balance of Payments Accounting

10. he balance of payments records
A. only international trade# 7e%ports and imports..
B. only cross-border investments 7!)* and portfolio investment..
C not only international trade# 7e%ports and imports. but also cross-border investments.
). none of the above

Topic: Balance of Payments Accounting

11. Credit entries in the +.,. balance of payments
A. result from forei(n sales of +.,. (oods and services# (ood$ill# financial claims# and real
assets.
B. result from +.,. purchases of forei(n (oods and services# (ood$ill# financial claims# and
real assets.
C. (ive rise to the demand for dollars.
). (ive rise to the supply of dollars.
E both a. and c.

Topic: Balance of Payments Accounting

3-"2
Chapter 03 - Balance of Payments
1". A country e%periencin( a si(nificant balance-of-payments surplus $ould be li-ely to
A. e%pand imports# offerin( mar-etin( opportunities for forei(n enterprises.
B. refrain from imposin( forei(n e%chan(e restrictions.
C. e%pand e%ports# offerin( international mar-etin( opportunities for domestic enterprises.
! Both a. and b.

Topic: Balance of Payments Accounting

13. ,uppose the 9c)onalds Corporation imports Canadian beef# payin( for it by transferrin(
the funds to a 'e$ :or- ban- account -ept by the Canadian Beef producer.
A Payment by 9c)onalds $ill be recorded as a debit.
B. he deposit of the funds by the seller $ill be recorded as a debit.
C. Payment by 9c)onalds $ill be recorded as a credit.
). he deposit of the funds by the buyer $ill be credit.

Topic: Balance of Payments Accounting

1/. ,ince the balance of payments is presented as a system of double-entry boo--eepin(#
A. every credit in the account is balanced by a matchin( debit.
B. every debit in the account is balanced by a matchin( credit.
C ans$ers a. and b. are both true
). none of the above

Topic: Balance of Payments Accounting

10. ,uppose the *nBev Corporation 7a non-+.,. 9'C. buys the Anheuser-Busch Corporation#
payin( the +.,. shareholders cash.
A. Payment by *nBev $ill be recorded as a debit.
B. he deposit of the funds by the sellers $ill be recorded as a debit.
C Payment by *nBev $ill be recorded as a credit.
). he deposit of the funds by the buyer $ill be credit.

3-"3
Chapter 03 - Balance of Payments
12. he current account includes
A the e%port and import of (oods and services.
B. all purchases and sales of assets such as stoc-s# bonds# ban- accounts# real estate# and
businesses.
C. all purchases and sales of international reserve assets such as dollars# forei(n e%chan(es#
(old# and special dra$in( ri(hts 7,);s..
). none of the above

Topic: Balance of Payments Accounts

13. A country $ith a current account surplus
A ac<uires *O+s from forei(ners# thereby increasin( its net forei(n $ealth.
B. must borro$ from forei(ners or dra$ do$n on its previously accumulated forei(n $ealth.
C. $ill e%perience a reduction in the country's net forei(n $ealth.
). both b. and c.

Topic: Balance of Payments Accounts

14. he capital account includes
A. the e%port and import of (oods and services.
B all purchases and sales of assets such as stoc-s# bonds# ban- accounts# real estate# and
businesses.
C. all purchases and sales of international reserve assets such as dollars# forei(n e%chan(es#
(old# and special dra$in( ri(hts 7,);s..
). none of the above

Topic: Balance of Payments Accounts

3-"4
Chapter 03 - Balance of Payments
15. he official reserve account includes
A. the e%port and import of (oods and services.
B. all purchases and sales of assets such as stoc-s# bonds# ban- accounts# real estate# and
businesses.
C all purchases and sales of international reserve assets such as dollars# forei(n e%chan(es#
(old# and special dra$in( ri(hts 7,);s..
). none of the above

Topic: Balance of Payments Accounts

"0. A country's international transactions can be (rouped into the follo$in( three main types=
A. current account# medium term account# and lon( term capital account.
B. current account# lon( term capital account# and official reserve account.
C current account# capital account# and official reserve account.
). capital account# official reserve account# trade account.

Topic: Balance of Payments Accounts

"1. *nvisible trade refers to
A. services that avoid ta% payments.
B. the under(round economy.
C le(al# consultin(# and en(ineerin( services.
). tourist e%penditures# only.

Topic: Balance of Payments Accounts

"". A country that (ives forei(n aid to another country can be vie$ed as
A importin( (ood$ill from the latter.
B. e%portin( (ood$ill to the latter.

Topic: Balance of Payments Accounts

3-"5
Chapter 03 - Balance of Payments
"3. *n "003 the +nited ,tates had a current account deficit. he current account deficit implies
that the +nited ,tates
A. had a surplus on le(al consultin( and en(ineerin( services.
B. produced more output than it consumed.
C consumed more output than it produced.
). none of the above

Topic: The Current Account

"/. he current account is divided into four finer cate(ories=
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.
). merchandise trade# services# factor income# and direct investment.

Topic: The Current Account

"0. he factors of production are
A land# labor# capital# and entrepreneurial ability.
B. interest# $a(es and dividends.
C. payments and receipts of interest# dividends# and other income on forei(n investments that
$ere previously made.
). none of the above

Topic: The Current Account

"2. !actor income
A consists lar(ely of interest# dividends# and other income on forei(n investments.
B. is a theoretical construct of the factors of production# land# labor# capital# and
entrepreneurial ability.
C. is (enerally a very minor part of national income accountin(# smaller than the statistical
discrepancy.
). none of the above

Topic: The Current Account

3-30
Chapter 03 - Balance of Payments
he entries in the >current account> and the >capital account># combined to(ether# can be
outlined 7in alphabetic order. as=


"3. Current account includes
A. 7i.# 7ii.# and 7iii.
B 7ii.# 7iii.# and 7vii.
C. 7iv.# 7v.# and 7vii.
). 7i.# 7v.# and 7vi.

Topic: The Current Account

"4. Capital account includes
A. 7i.# 7ii.# and 7iii.
B. 7ii.# 7iii.# and 7vii.
C. 7iv.# 7v.# and 7vii.
! 7i.# 7v.# and 7vi.

Topic: The Current Account

"5. he >6-curve effect> sho$s
A the initial deterioration and the eventual improvement of a country's trade balance
follo$in( a currency depreciation.
B. the initial improvement and the eventual depreciation of a country's trade balance
follo$in( a currency depreciation.
C. the trade balance's lac- of responsiveness to the e%chan(es rate chan(es.
). none of the above

Topic: The Current Account

3-31
Chapter 03 - Balance of Payments
30. he >6-curve effect>
A. happens most of the time# in the short run.
B actually only occurs in about /0 percent of the cases accordin( to a study by ,ebastian
8d$ards.
C. is a lon(-run phenomenon# not a short-run one.
). none of the above.

Topic: The Current Account

31. he 6-curve effect received $ide attention $hen
A. the British trade balance $orsened after a stren(thenin( of the pound in 1523.
B the British trade balance $orsened after a devaluation of the pound in 1523.
C. the British trade balance improved after a devaluation of the pound in 1523.
). none of the above

Topic: The Current Account

3". A currency depreciation $ill be(in to improve the trade balance immediately
A. if the demand for imports and e%ports are inelastic.
B if the demand for imports and e%ports are elastic.
C. if imports decrease and e%ports decrease.
). none of the above

Topic: The Current Account

33. ?hen a country's currency depreciates a(ainst the currencies of ma1or tradin( partners#
A the country's e%ports tend to rise and imports fall.
B. the country's e%ports tend to fall and imports rise.
C. the country's e%ports tend to rise and imports rise.
). the country's e%ports tend to fall and imports fall.

Topic: The Current Account

3-3"
Chapter 03 - Balance of Payments
3/. A depreciation $ill be(in to improve the trade balance immediately if
A imports and e%ports are responsive to the e%chan(e rate chan(es.
B. imports and e%ports are inelastic to the e%chan(e rate chan(es.
C. consumers e%hibit brand loyalty and price inelasticity.
). b. and c.

Topic: The Current Account

30. *n the short run a currency depreciation can ma-e a trade balance $orse if
A there is no domestic producer of an import.
B. there is no domestic buyer for an import.
C. there is no e%port mar-et for a country's output.

32. ?hat is the correct label for the vertical a%is in the 6-curve@

A. ime
B Chan(e in the rade Balance
C. ,iAe of rade Balance
). ,iAe of 9erchandise rade Balance

Topic: The Current Account

3-33
Chapter 03 - Balance of Payments
33. *n the lon( run# both e%ports and imports tend to be
A. unresponsive to chan(es in e%chan(e rates.
B responsive to chan(es in e%chan(e rates.
C. both a. and b.
). none of the above

Topic: The Current Account

34. ?ith re(ard to the capital account
A. the capital account balance measures the difference bet$een +.,. sales of assets to
forei(ners and +.,. purchases of forei(n assets.
B. +.,. sales 7or e%ports. of assets are recorded as credits# as they result in capital inflo$.
C. +.,. purchases 7imports. of forei(n assets are recorded as debits# as they lead to capital
outflo$.
! all of the above

Topic: The Capital Account

35. he difference bet$een !orei(n )irect *nvestment and Portfolio *nvestment is that
A Portfolio *nvestment mostly represents the sale and purchase of forei(n financial assets
such as stoc-s and bonds that do not involve a transfer of control.
B. !orei(n )irect *nvestment mostly represents the sale and purchase of forei(n financial
assets such as stoc-s $hereas Portfolio *nvestment mostly involves the sales and purchase of
forei(n bonds.
C. !orei(n )irect *nvestment is about buyin( land and buildin( factories# $hereas portfolio
investment is about buyin( stoc-s and bonds.
). All of the above

Topic: The Capital Account

3-3/
Chapter 03 - Balance of Payments
/0. *n the latter half of the 1540s# $ith a stron( yen# 6apanese firms
A. faced difficulty e%portin(.
B. could better afford to ac<uire +.,. assets that had become less e%pensive in terms of yen.
C. financed a sharp increase in 6apanese !)* in the +nited ,tates.
! all of the above

Topic: The Capital Account

/1. *nternational portfolio investments have boomed in recent years# as a result of
A. a depreciatin( +.,. dollar.
B. increased (asoline and other commodity prices.
C the (eneral rela%ation of capital controls and re(ulation in many countries.
). none of the above

Topic: The Capital Account

/". *f the interest rate rises in the +.,. $hile other variables remain constant
A capital inflo$s into the +.,. $ill increase.
B. capital inflo$s into the +.,. may not materialiAe.
C. capital $ill flo$ out of the +.,.
). none of the above

Topic: The Capital Account

/3. *f for a particular county an increase in the interest rate is more or less matched by an
e%pected depreciation in the local currency#
A. traders $ill probably be tempted to find another country to invest in.
B. the interest rate increase per se $ill not be enou(h to spar- capital flo$ into the country.
C both a. and b. are true
). capital $ill (lo$ out of the country as the dis(runtled citiAens riot and (o to $ar $ith the
nei(hbors.

Topic: The Capital Account

3-30
Chapter 03 - Balance of Payments
//. he capital account measures
A. the sum of +.,. sales of assets to forei(ners and +.,. purchases of forei(n assets.
B the difference bet$een +.,. sales of assets to forei(ners and +.,. purchases of forei(n
assets.
C. the difference bet$een +.,. sales of manufactured (oods to forei(ners and +.,. purchases
of forei(n products.
). none of the above

Topic: The Capital Account

/0. ?hen Bonda# a 6apanese auto ma-er# built a factory in Ohio#
A it $as en(a(ed in forei(n direct investment.
B. it $as en(a(ed in portfolio investment.
C. it $as en(a(ed in a cross-border ac<uisition.
). none of the above.

Topic: The Capital Account

/2. &overnment controlled investment funds# -no$n as soverei(n $ealth funds#
A. are playin( a less-important role in international finance follo$in( the end of the fi%ed
e%chan(e rate era.
B are mostly domiciled in Asian and 9iddle 8astern countries.
C. are usually responsible for convertin( trade surpluses and oil revenues into forei(n
e%chan(e reserves.
). none of the above

Topic: The Capital Account

3-32
Chapter 03 - Balance of Payments
/3. !orei(n direct investment 7!)*. occurs
A. $hen an investor ac<uires a measure of control of a forei(n business.
B. $hen there is an ac<uisition# by a forei(n entity in the +.,.# of 10 percent or more of the
votin( shares of a business.
C. $ith sales and purchases of forei(n stoc-s and bonds that do not involve a transfer of
control.
! both a. and b.

Topic: The Capital Account

/4. he capital account may be divided into three cate(ories=
A. cross-border mer(ers and ac<uisitions# portfolio investment# and other investment.
B. direct investment# portfolio investment# and Cross-border mer(ers and ac<uisitions.
C. direct investment# mer(ers and ac<uisitions# and other investment.
! direct investment# portfolio investment# and other investment.

Topic: The Capital Account

/5. ?hen 'estlC# a ,$iss firm# bou(ht the American firm Carnation# it $as en(a(ed in
forei(n direct investment. *f 'estlC had only bou(ht a non-controllin( number of shares of the
firm#
A 'estlC $ould have been en(a(ed in portfolio investment.
B. 'estlC $ould have been en(a(ed in a cross-border ac<uisition.
C. it $ould depend if they bou(ht the shares from an American or a Canadian.
). none of the above

Topic: The Capital Account

3-33
Chapter 03 - Balance of Payments
00. ransactions in currency# ban- deposits and so forth
A. tend to be insensitive to both chan(es in relative interest rates and the anticipated chan(e in
e%chan(e rate.
B tend to be sensitive to both chan(es in relative interest rates and the anticipated chan(e in
e%chan(e rate.
C. tend to be sensitive to chan(es in relative interest rates but insensitive to the anticipated
chan(e in e%chan(e rate.
). tend to be insensitive to chan(es in relative interest rates but sensitive to the anticipated
chan(e in e%chan(e rate.

Topic: The Capital Account

01. ,ince security returns tend to have lo$ correlations amon( countries#
A investors can reduce ris- more effectively if they diversify their portfolio holdin(s
internationally rather than purely domestically.
B. investors $ho have a domestically diversified portfolio# $ith e%posures across industry
types $ill not (ain much from diversifyin( abroad.
C. investors $ho diversify internationally $ill li-ely underperform investors $ho -eep all
their investments in one country.
). none of the above

Topic: The Capital Account

0". he $orld's lar(est debtor nation and creditor nation# respectively# are
A. 6apan and the +.,.
B he +.,. and 6apan.
C. he +.,. and Canada.
). &reat Britain and 9e%ico.

Topic: The Capital Account

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Chapter 03 - Balance of Payments
03. ,tatistical discrepancy# $hich by definition represents errors and omissions
A. cannot be calculated directly.
B. is calculated by ta-in( into account the balance-of-payments identity.
C. probably has some elements that are honest mista-es# it can't all be money launderin( and
dru(s.
! all of the above

Topic: Statistical iscrepancy

0/. he statistical discrepancy in the balance-of-payments accounts
A. arise since recordin(s of payments and receipts are done at different times# in different
places# possibly usin( different methods.
B. arise since some transactions 7ille(al transactions@. occur >off the boo-s>.
C. represents omitted and misrecorded transactions.
! all of the above

Topic: Statistical iscrepancy

00. ?hich of the follo$in( is most indicative of the pressure that a country's currency faces
for depreciation or appreciation@
A. he current account
B. he capital account
C. he statistical discrepancies
! he official settlement balance

Topic: Statistical iscrepancy

02. he +nited ,tates is considered
A. a net creditor nation.
B a net debtor nation.

Topic: Statistical iscrepancy

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Chapter 03 - Balance of Payments
03. ;e(ardin( 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 ma(nitude.
C. it tends to be positive one year and ne(ative in others# so it's safe to i(nore it.
! a. and b.

Topic: Statistical iscrepancy

04. he central ban- of the +nited ,tates is
A. the 'e$ :or- !ed.
B the !ederal ;eserve ,ystem.
C. the 8D*9 ban-.
). none of the aboveEthe +.,. does not have a central ban-.

Topic: !fficial "eserve Account

05. ?hen a country must ma-e a net payment to forei(ners because of a balance-of-payments
deficit# the central ban- of the country
A. should do nothin(.
B. should run do$n its official reserve assets 7e.(. (old# forei(n e%chan(es# and ,);s..
C. should borro$ ane$ from forei(n central ban-s.
! either b. or c. $ill $or-.

Topic: !fficial "eserve Account

20. Continued +.,. trade deficits coupled $ith forei(ners' desire to diversify their currency
holdin(s a$ay from +.,. dollars
A. could further diminish the position of the dollar as the dominant reserve currency.
B. could affect the value of +.,. dollar 7e.(. throu(h the currency diversification decisions of
Asian central ban-s..
C. could lend steam to the emer(ence of the euro as a credible reserve currency.
! all of the above

Topic: !fficial "eserve Account

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Chapter 03 - Balance of Payments
21. Currently# international reserve assets are comprised of
A. (old# platinum# forei(n e%chan(es# and special dra$in( ri(hts 7,);s..
B (old# forei(n e%chan(es# special dra$in( ri(hts 7,);s.# and reserve positions in the
*nternational 9onetary !und 7*9!..
C. (old# diamonds# forei(n e%chan(es# and special dra$in( ri(hts 7,);s..
). reserve positions in the *nternational 9onetary !und 7*9!.# only.

Topic: !fficial "eserve Account

2". *nternational reserve assets include >forei(n e%chan(es>. hese are
A. ,pecial )ra$in( ;i(hts 7,);s. at the *9!.
B. reserve positions in the *nternational 9onetary !und 7*9!..
C forei(n currency held by a country's central ban-.
). none of the above

Topic: !fficial "eserve Account

23. he most important international reserve asset# comprisin( 5/ percent of the total reserve
assets held by *9! member countries is
A. (old.
B forei(n e%chan(es.
C. special )ra$in( ;i(hts 7,);s..
). reserve positions in the *nternational 9onetary !und 7*9!..

Topic: !fficial "eserve Account

2/. he >one $ord that haunts the dollar> is
A 7Central ban-. diversification.
B. ;eunification 7Forean..
C. 8uro.
). 7Current account. deficit.

Topic: !fficial "eserve Account

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Chapter 03 - Balance of Payments
20. he vast ma1ority of the forei(n-e%chan(e reserves held by central ban-s are denominated
in
A. local currencies.
B +.,. dollars.
C. :en.
). 8uro.

Topic: !fficial "eserve Account

22. Amon( *9! member countries# the dollar's dominant position in the $orld's reserve
holdin(s may decline to a certain e%tent as the euro becomes a >-no$n <uantity> and its
e%ternal value becomes more stable. *n fact# the euro's share has increased
A. from Aero percent in 1555 to "0.4 percent in "002.
B from 13.0 percent in 1555 to "0.4 percent in "002.
C. from 13.0 percent in 1555 to 0".4 percent in "002.
). none of the above

Topic: !fficial "eserve Account

23. ?hich of the follo$in( $ould not count as a forei(n-e%chan(e reserve held by a central
ban-@
A he local currency
B. +.,. dollars
C. ,);s
). 8uro

Topic: !fficial "eserve Account

24. he balance of payments identity is (iven by BCA G BFA G B;A H 0. ;earran(e the
identity for a country $ith a pure fle%ible e%chan(e rate re(ime.
A. BCA G BFA G B;A H 0
B BCA H -BFA
C. BCA G BFA H -B;A
). B;A H -BCA

Topic: The Balance of Payments #dentity

3-/"
Chapter 03 - Balance of Payments
Assume that the balance-of-payments accounts for a country are recorded correctly.
Balance on the current account H BCA H I130 billion
Balance on the capital account H BFA H -I42 billion
Balance on the reserves account H B;A H @

25. he balance on the reserves account 7B;A.# under the fi%ed e%chan(e re(ime is
A -I// billion
B. I// billion
C. I"12 billion
). none of the above

Topic: The Balance of Payments #dentity

30. he balance on the reserves account 7B;A.# under the pure fle%ible e%chan(e re(ime is
A. -I// billion.
B. I// billion.
C. I"12 billion.
! none of the above

Topic: The Balance of Payments #dentity

31. *n a pure fle%ible e%chan(e rate re(ime# a country's central ban-s $ill not need to maintain
official reserves. +nder this re(ime
A -BCA H BFA.
B. BCA H - B;A H 0.
C. BFA H -B;A.
). B,A H BCA.

Topic: The Balance of Payments #dentity

3-/3
Chapter 03 - Balance of Payments
3". ?hen 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. e<ual in ma(nitude to the country's national debt.
B Aero.
C. e<ual in ma(nitude to the rade )eficit or ,urplus.
). none of the above

Topic: The Balance of Payments #dentity

33. he balance of payments identity is (iven by BCA G BFA G B;A H 0. ;earran(e the
identity to solve for the statistical discrepancy.
A. he statistical discrepancy H 7BCA G BFA. - B;A
B. he statistical discrepancy H BCA - BFA G B;A
C. he statistical discrepancy H BCA - BFA - B;A
! he statistical discrepancy H BCA G BFA G B;A

Topic: The Balance of Payments #dentity

3/. BCA stands for
A the balance on the current account.
B. the balance on the capital account.
C. the balance on the official reserves.
). net imports.

Topic: The Balance of Payments #dentity

30. BFA stands for
A. the balance on the current account.
B the balance on the capital account.
C. the balance on the official reserves.
). net imports.

Topic: The Balance of Payments #dentity

3-//
Chapter 03 - Balance of Payments
32. *f the central ban-s of the $orld chose to diversify their forei(n-e%chan(e reserves a$ay
from the dollar and into the euro#
A. this $ould have the result of a stren(thenin( of the value of the dollar.
B this $ould have the result of a $ea-enin( in the value of the dollar.
C. this $ould not have much impact# as the information $ould be lost in the day-to-day
volatility of e%chan(e rates.

Topic: The Balance of Payments #dentity

33. he economic theory of mercantilism holds that
A a continuin( trade surplus should be a (overnment's ma1or policy (oal.
B. the main source of $ealth of a country is its productive capacity.
C. free trade is the result of countries e%ploitin( their comparative advanta(e.
). none of the above

Topic: Balance of Payments Trends in Major Countries

34. he +.,. rade )eficit
A. is a capital account surplus.
B. is a current account deficit.
C is both a capital account surplus and a current account deficit.
). none of the above

Topic: Balance of Payments Trends in Major Countries

35. As of "003 (old accountin( for
A. 50 percent of the total reserve assets held by *9! member countries.
B. 30 percent of the total reserve assets held by *9! member countries.
C. appro%imately 00 percent of the total reserve assets held by *9! member countries.
! less than " percent of the total reserve assets held by *9! member countries.

Topic: Balance of Payments Trends in Major Countries

3-/0
Chapter 03 - Balance of Payments
40. he most popular reserve currency is no$ the
A +.,. dollar.
B. 8uro.
C. 6apanese :en.

Topic: Balance of Payments Trends in Major Countries

41. ,uppose a country is currently e%periencin( a trade deficit. *n the lon( run# this could be
self correctin( if
A the deficit e%ists because of the import demand for capital (oods.
B. the deficit e%ists because of the import demand for consumption (oods.
C. the deficit e%ists because forei(ners $ant to buy the country's currency as an investment.
). none of the above

Topic: Balance of Payments Trends in Major Countries

4". he capital account is divided into three subcate(ories= direct investment# portfolio
investment# and other investment. )irect investment involves.
A ac<uisitions of controllin( interests in forei(n businesses.
B. investments in forei(n stoc-s and bonds that do not involve ac<uisitions of control.
C. ban- deposits# currency investment# trade credit# and the li-e.
). all of the above

Topic: Balance of Payments Trends in Major Countries

43. he capital account is divided into three subcate(ories= direct investment# portfolio
investment# and other investment. Portfolio investment involves
A. ac<uisitions of controllin( interests in forei(n businesses.
B investments in forei(n stoc-s and bonds that do not involve ac<uisitions of control.
C. ban- deposits# currency investment# trade credit# and the li-e.
). all of the above

Topic: Balance of Payments Trends in Major Countries

3-/2
Chapter 03 - Balance of Payments
4/. he capital account is divided into three subcate(ories= direct investment# portfolio
investment# and other investment. >Other> investment involves
A. ac<uisitions of controllin( interests in forei(n businesses.
B. investments in forei(n stoc-s and bonds that do not involve ac<uisitions of control.
C ban- deposits# currency investment# trade credit# and the li-e.
). all of the above

Topic: Balance of Payments Trends in Major Countries

40. Over the last several years the +.,. has run persistent
A. balance-of-payments deficits.
B. balance-of-payments surpluses.
C current account deficits.
). capital account deficits.

Topic: Balance of Payments Trends in Major Countries

42. *f a country must ma-e a net payment to forei(ners because of a balance-of-payments
deficit# the country should
A. either increase its official reserve assets or borro$ ane$ from forei(ners.
B either run do$n its official reserve assets or borro$ ane$ from forei(ners.
C. either run do$n its official reserve assets or lend more forei(ners.
). none of the above

Topic: Balance of Payments Trends in Major Countries

43. +nder the fi%ed e%chan(e rate re(ime
A the combined balance on the current and capital accounts $ill be e<ual in siAe# but opposite
in si(n# to the chan(e in the official reserves.
B. the balance on the current and capital accounts $ill be e<ual in siAe# but opposite in si(n.
C. a current account surplus or deficit must be matched by an official reserves deficit or
surplus.
). a capital account surplus or deficit must be matched by an official reserves deficit or
surplus.

Topic: Balance of Payments Trends in Major Countries

3-/3
Chapter 03 - Balance of Payments
44. +nder the pure fle%ible e%chan(e rate re(ime
A. the combined balance on the current and capital accounts $ill be e<ual in siAe# but opposite
in si(n# to the chan(e in the official reserves.
B the balance on the current and capital accounts $ill be e<ual in siAe# but opposite in si(n.
C. a current account surplus or deficit must be matched by an official reserves deficit or
surplus.
). a capital account surplus or deficit must be matched by an official reserves deficit or
surplus.

Topic: Balance of Payments Trends in Major Countries

45. 9ore important than the absolute siAe of a country's balance-of-payments dise<uilibrium
A is the nature and cause of the dise<uilibrium.
B. is $hether it is a trade surplus or deficit.
C. is $hether the local (overnment is mercantilist or not.
). 'othin( is more important than the absolute siAe of a country's balance-of-payments
dise<uilibrium.

Topic: Balance of Payments Trends in Major Countries

!or <uestions in this section# the notation is
: H &'P H national income
C H consumption
* H private investment
& H (overnment spendin(
D H e%ports
9 H imports

50. he current account balance is (iven by
A. C G * G & G D G 9
B D - 9
C. * G D G 9
). 9 - D

Topic: Appendi$ %A: The "elationship bet&een Balance of Payments and 'ational #ncome Accounting

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Chapter 03 - Balance of Payments
51. he difference bet$een a country's savin(s and investment is (iven by
A , - *
B. * × ,
C. D - 9
). &'P - :

Topic: Appendi$ %A: The "elationship bet&een Balance of Payments and 'ational #ncome Accounting

5". *f the difference bet$een ta% revenue and (overnment e%penditures is ne(ative# it implies
that
A. ta% revenue is insufficient to cover (overnment spendin(.
B. a (overnment bud(et deficit e%ists.
C. the (overnment $ill be issuin( ne$ debt securities.
! all of the above

Topic: Appendi$ %A: The "elationship bet&een Balance of Payments and 'ational #ncome Accounting

53. 'ational income# or &ross 'ational Product is (iven by
A. &'P ≡ : ≡ C G * G & G D G 9
B &'P ≡ : ≡ C G * G & G D - 9
C. &'P ≡ * ≡ C G : G & G D - 9
). &'P ≡ : ≡ C G * G D G 9 - &

Topic: Appendi$ %A: The "elationship bet&een Balance of Payments and 'ational #ncome Accounting

5/. ?hich of the follo$in( is a true statement@
A BCA ≡ D - 9
B. BFA ≡ D - 9
C. BFA - BCA ≡D - 9
). BFA ≡ D - 9

Topic: Appendi$ %A: The "elationship bet&een Balance of Payments and 'ational #ncome Accounting

3-/5
Chapter 03 - Balance of Payments
50. here is an intimate relationship bet$een a country's BCA and ho$ the country finances
its domestic investment and pays for (overnment e%penditures. his relationship is (iven by
BCA ≡ D - 9 ≡ 7, - *. G 7 - &.. &iven this# $hich of the follo$in( is a true statement@
A. *f 7, - *. J 0# it implies that a country's domestic savin(s is insufficient to finance domestic
investment.
B. *f 7 - &. J 0# it implies that a country's ta% revenue is insufficient to finance (overnment
spendin(.
C both a. and b. are true
). none of the above

Topic: Appendi$ %A: The "elationship bet&een Balance of Payments and 'ational #ncome Accounting

52. here is an intimate relationship bet$een a country's BCA and ho$ the country finances
its domestic investment and pays for (overnment e%penditures. &iven this# $hich of the
follo$in( is a true statement@
A. *f 7, - *. J 0# it implies that a country's domestic savin(s is insufficient to finance domestic
investment.
B. *f 7 - &. J 0# it implies that a country's ta% revenue is insufficient to finance (overnment
spendin(.
C both a. and b. are true
). none of the above

Topic: Appendi$ %A: The "elationship bet&een Balance of Payments and 'ational #ncome Accounting

53. here is an intimate relationship bet$een a country's BCA and ho$ the country finances
its domestic investment and pays for (overnment e%penditures. his relationship is (iven by
BCA ≡ D - 9 ≡ 7, - *. G 7 - &.. &iven this# $hich of the follo$in( is a true statement@
A. *f 7, - *. J 0# it implies that a country's domestic savin(s is insufficient to finance domestic
investment.
B. *f 7 - &. J 0# it implies that a country's ta% revenue is insufficient to finance (overnment
spendin(.
C. ?hen BCA is ne(ative# it implies that (overnment bud(et deficits andKor part of domestic
investment are bein( finance $ith forei(n-controlled capital.
! All of the above are true

Topic: Appendi$ %A: The "elationship bet&een Balance of Payments and 'ational #ncome Accounting

3-00
Chapter 03 - Balance of Payments
54. here is an intimate relationship bet$een a country's BCA and ho$ the country finances
its domestic investment and pays for (overnment e%penditures. &iven this# $hich of the
follo$in( is a true statement@
A. *f 7, - *. J 0# it implies that a country's domestic savin(s is insufficient to finance domestic
investment.
B. *f 7 - &. J 0# it implies that a country's ta% revenue is insufficient to finance (overnment
spendin(.
C. ?hen BCA is ne(ative# it implies that (overnment bud(et deficits anKor part of domestic
investment are bein( finance $ith forei(n-controlled capital.
! All of the above are true.

Topic: Appendi$ %A: The "elationship bet&een Balance of Payments and 'ational #ncome Accounting

55. here is an intimate relationship bet$een a country's BCA and ho$ the country finances
its domestic investment and pays for (overnment e%penditures. his relationship is (iven by
BCA ≡ D - 9 ≡ 7, - *. G 7 - &.. &iven this# in order for a country to reduce a BCA deficit#
$hich of the follo$in( must occur@
A. !or a (iven level of , and *# the (overnment bud(et deficit 7 - &. must be reduced.
B. !or a (iven level of * and 7 - &.# , must be increased.
C. !or a (iven level of , and 7 - &.# * must fall.
! All of the above $ould $or- to reduce a BCA deficit.

Topic: Appendi$ %A: The "elationship bet&een Balance of Payments and 'ational #ncome Accounting

100. here is an intimate relationship bet$een a country's BCA and ho$ the country finances
its domestic investment and pays for (overnment e%penditures. &iven this# in order for a
country to reduce a BCA deficit# $hich of the follo$in( must occur@
A. !or a (iven level of , and *# the (overnment bud(et deficit 7 - &. must be reduced.
B. !or a (iven level of * and 7 - &.# , must be increased.
C. !or a (iven level of , and 7 - &.# * must fall.
! All of the above $ould $or- to reduce a BCA deficit.

Topic: Appendi$ %A: The "elationship bet&een Balance of Payments and 'ational #ncome Accounting

3-01