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Test Bank for International Economics, 9e

CHAPTER 11
THE BALANCE OF PAYMENTS

MULTIPLE-CHOICE QUESTIONS
1. On the balance-of-payments statements, merchandise imports are classified in the:
a.
Current account
b.
Capital account
c.
Unilateral transfer account
d.
Official settlements account
2. The balance of international indebtedness is a record of a country’s international:
a.
Investment position over a period of time
b.
Investment position at a fixed point in time
c.
Trade position over a period of time
d.
Trade position at a fixed point in time
3. Which balance-of-payments item does not directly enter into the calculation of the U.S. gross domestic
product?
a.
Merchandise imports
b.
Shipping and transportation receipts
c.
Direct foreign investment
d.
Service exports
4. Which of the following is considered a capital inflow?
a.
A sale of U.S. financial assets to a foreign buyer
b.
A loan from a U.S. bank to a foreign borrower
c.
A purchase of foreign financial assets by a U.S. buyer
d.
A U.S. citizen’s repayment of a loan from a foreign bank
5. Which of the following would call for inpayments to the United States?
a.
American imports of German steel
b.
Gold flowing out of the United States
c.
American unilateral transfers to less-developed countries
d.
American firms selling insurance to British shipping companies

net U. Based on the information provided in Table 11. Table 11.S. gifts to other countries c.S. –$20 billion .1. Foreign loans made by U. the goods and services balance equals: a. U. Compensation of employees Allocation of SDRs Travel and transportation receipts.S.S. U. companies Table 11. U. net Remittances.1. 9e 6. $20 billion d. $15 billion c.S. In a country’s balance of payments. –$15 billion d.S. –$5 billion b. transfers U.S. $25 billion 9.S. private assets abroad Merchandise exports Investment income.1. International Transactions. $5 billion b. net 110 –5 –20 –50 115 15 –5 25 –5 5 20 8.S. On the basis of this information. A flow of gold out of the U.183 Test Bank for International Economics. government grants (excluding military) Foreign private assets in the U. International Transactions Transaction Amount (billions of dollars) Merchandise imports Military transactions. pensions. Which of the following is classified as a credit in the U. Based on the information provided in Table 11. –$10 billion c. answer Questions 8 and 9. exports b. balance of payments? a. d. Securities are sold by domestic residents to nonresidents 7. the current account balance equals: a. Domestic bank balances owned by foreigners are decreased b. Foreign bank balances owned by domestic residents are decreased c. Assets owned by domestic residents are sold to nonresidents d.S. which of the following transactions are debits? a.1 gives hypothetical figures for U.

Official settlements account .S. U. If the United States government sells military hardware to Saudi Arabia. The current account of the balance of payments d.. The balance of international indebtedness 12. Merchandise trade account b. Exchange rates b. Concerning the U. balance of trade is determined by: a. the transaction would be recorded on the U. Growth of economies overseas c. Current account d. Inc. balance of payments as a: a. Current account credit 14.S. The U. Capital account debit b. Capital account credit c. balance of payments. Trade position of a country over a one-year period 11. Capital account c. Capital account 13. Current account debit b. Current account d.S. Merchandise trade account b.S. Current account debit d. the balance of international indebtedness indicates the international: a. military aid granted to foreign countries is entered in the: a. Trade position of a country at a given moment in time d. The capital account of the balance of payments c. Investment position of a country at a given moment in time b. Relative prices in world markets d. which account is defined in essentially the same way as the net export of goods and services. Capital account credit 15. Capital account debit d. Unlike the balance of payments. Which of the following indicates the international investment position of a country at a given moment in time? a. Goods and services account c. Current account credit c. which comprises part of the country’s gross domestic product? a. Investment position of a country over a one-year period c. a Japanese firm. the transaction would be recorded on the U.Chapter 11: The Balance of Payments 184 10. The balance of payments b. If an American receives dividends from the shares of stock she or he owns in Toyota.S. All of the above 16. balance of payments as a: a.

Merchandise exports and imports c.S.S. Investment income b. Unilateral transfers account d. The current account of the U.S. Spender d. The official settlements account b. The U. balance of payments does not include: a. Capital account Using the data of Table 11. Exporter . private assets $800 billion $200 billion Foreign assets in the U. The sale of securities to foreigners d.S. Either the official settlements account or the capital account d. Current account b. balance of payments? a. Merchandise exports exceed its merchandise imports b. has a balance of trade deficit when its: a. Consider Table 11. Creditor c. Goods and services imports exceed its goods and services exports 20. Merchandise imports exceed its merchandise exports c. Table 11.2. Debtor b.2. Unilateral transfers 19.S. it must run a surplus on: a. Both the official settlements account and the capital account 18. assets abroad U. Foreign official assets Foreign private assets $600 billion $300 billion 21.S. government assets U.S.185 Test Bank for International Economics. International Investment Position of the United States U. Goods and services exports exceed its goods and services imports d. balance of international indebtedness suggests that the United States is a net: a. faces a balance-of-payments deficit on the current account. The U. Trade account c.S. answer Question 21. 9e 17. The capital account c.2. The value to American residents of income earned from overseas investments shows up in which account in the U.S. If the U.

A loss of funds to trading partners overseas d. Decreases the domestic money supply d. Creditor 23. Involves receipts from foreigners b. Involves payments to foreigners c. Merchandise exports c. Private gifts to foreign residents 29. In the balance of payments. For the first time since World War I. which leads to lower domestic investment c. Private gifts to foreigners d. When all of the debit or credit items in the balance of payments are combined: a. Importer c. Services exports equal services imports d. Obtain an accurate account of a balance-of-payments surplus 28. Merchandise imports equal merchandise exports b. A decrease in its services exports to other countries 24. in 1985 the United States became a net international: a. Ensure that the sum of all debits matches the sum of all credits b. Merchandise exports c. except: a. Foreign aid granted to other nations 186 . All of the following are credit items in the balance of payments. Obtain an accurate account of a balance-of-payments deficit d. Exporter b. Decreases the demand for foreign exchange 26. Involves payments to foreigners c. A country that is a net international debtor initially experiences: a. Capital outflows b. An augmented savings pool available to finance domestic spending b. The total surplus or deficit equals zero 27. Increases the domestic money supply d. Capital imports equal capital exports c. the statistical discrepancy is used to: a. Increases the demand for foreign exchange 25. Credit (+) items in the balance of payments correspond to anything that: a. Involves receipts from foreigners b. Payments for American services to foreigners d. Investment inflows b. All of the following are debit items in the balance of payments. Ensure that trade imports equal the value of trade exports c. Debtor d.Chapter 11: The Balance of Payments 22. Debt (–) items in the balance of payments correspond to anything that: a. except: a. A higher interest rate.

Increase the government’s deficit and decrease private investment relative to saving c. Capital flows 31. a. Increase private investment relative to saving 33. Services flows c. Increase the government’s deficit and decrease private investment relative to saving c. Decrease the government’s deficit and decrease private investment relative to saving 35. Small or shrinking trade deficits and current account surpluses 36. The role of __________ is to direct one nation’s savings into another nation’s investments. The burden of a current account deficit would be the least if a nation uses what it borrows to finance: a. Reducing a current account surplus requires a country to: a. Reducing a current account deficit requires a country to: a. Small or shrinking trade deficits and current account deficits d. Decrease the government’s deficit and decrease private investment relative to saving 34. Merchandise trade flows b. Unemployment compensation benefits b. Large or growing trade deficits and current account surpluses c. It realizes an excess of imports over exports on goods and services d. It becomes a net demander of funds from other countries c. It becomes a net supplier of funds to other countries 32. Increase private consumption relative to saving c. Social Security benefits c. When a country realizes a deficit on its current account: a. rapid growth of production and employment is commonly associated with: a. Increase the government’s deficit and increase private investment relative to saving b. Reducing a current account deficit requires a country to: a. Large or growing trade deficits and current account deficits b. Concerning a country’s business cycle. Expenditures on food and recreation d. Increase the government’s deficit and increase private investment relative to saving b. 9e 30. Investment on plant and equipment . Current account flows d. Decrease the government’s deficit increase private investment relative to saving d. Increase private saving relative to investment b.187 Test Bank for International Economics. Decrease the government’s deficit and increase private investment relative to saving d. Increase private investment relative to consumption d. Its net foreign investment position becomes positive b.

the loss of jobs associated with a deficit in the current account tends to be: a. government grants (excluding military) Changes in foreign assets in the U. net Merchandise exports U. International Transactions of the United States Transaction Amount (billions of dollars) Allocation of SDRs Changes in U. .3.3. Of no long-run economic consequence for workers who lose their jobs TRUE-FALSE QUESTIONS Table 11. __________ is commonly associated with large or growing current account deficits: a. transfers Travel and transportation receipts.S. net Military transactions. dollars. Rapid growth rates of production and employment b.S. assets abroad Statistical discrepancy Merchandise imports Payments on foreign assets in U. T F 2. net Investment income. The services balance registered a surplus of $100 billion.188 Chapter 11: The Balance of Payments 37. Other services. Falling interest rates on corporate securities 38. A threat to the level of employment for the economy as a whole d. Slow growth rates of production and employment c. Remittances. Offset by the increase of jobs associated with a surplus in the capital account b. According to researchers at the Federal Reserve.S. Answer the next seven questions on the basis of this information. Table 11. Consider Table 11. Consider Table 11.3. net Receipts on U.3 shows hypothetical transactions. Falling interest rates on government securities d. in billions of U. Reinforced by the decrease of jobs associated with a surplus in the capital account c. that took place during a year.S. pensions. The merchandise-trade balance registered a deficit of $50 billion.S.S. investments abroad Compensation of employees 10 100 –15 –400 –20 –60 30 –10 100 350 –20 190 80 30 –10 T F 1. Concerning a country’s business cycle.

3. An increase in import restrictions by the U.S. Services transactions on Canada’s balance-of-payments statement would include Canadian ships transporting lumber to Japan. and unilateral transfers. The payments data suggest that the United States was a “net demander” of $30 billion from the rest of the world.3. balance-of-payments statement. transportation receipts. T F 16. and assets between residents of one country and those abroad. dividend and interest income are classified as capitalaccount transactions. gross domestic product registered $–110 billion. T F 13. an international transaction refers to the exchange of goods. Referring to the balance-of-payments statement. On the U. Consider Table 11. Consider Table 11. T F 14. services. government tends to promote a merchandisetrade surplus.S. services. income received from investments abroad. and overseas investments by U. merchandise exports will always be in balance with merchandise imports. Because the balance of payments utilizes double-entry accounting. T F 9. The “goods and services” account of the balance of payments shows the monetary value of international flows associated with transactions in goods. On the balance-of-payments statement.3. the following transactions are debits. T F 4. leading to payments to foreigners: merchandise imports. T F 5. leading to the receipt of dollars from foreigners: merchandise exports. the following transactions are credits.S. balance of payments. T F 17. T F 11. . T F 8. Consider Table 11. and investments in the United States by foreign residents. gifts to foreign residents. Consider Table 11.3.3. A surplus on Germany’s goods-and-services balance indicates that Germany has sold more goods and services to foreigners than it has bought from them over a one-year period. T F 10. On the U. foreign tourists spending money in Canada. residents. T F 18. The goods-and-services balance registered a surplus of $50 billion.189 Test Bank for International Economics. The unilateral-transfers balance registered a deficit of $40 billion. 9e T F 3. Consider Table 11.S. The current-account balance registered a surplus of $30 billion. The “net exports” component of the U. and Canadian engineers designing bridges in China. T F 15. T F 6. The balance of payments refers to the stock of trade and investment transactions that exists at a particular point in time. The balance of payments includes international transactions of households and businesses. but not government. travel expenditures.S. T F 12. T F 7.

balance-of-payments statement. If Toyota Inc. the Japanese capital account would register an outflow.S. and commercial bank loans made abroad. capital account would register an inflow. T F 32. as well as governmental transfers. such as church contributions to alleviate starvation in Africa. of Japan builds an automobile assembly plant in the United States. T F 23. the capital account registers a surplus. a current-account surplus means an excess of exports over imports of goods. T F 29. T F 25. the U. T F 26. In the balance-of-payments statement. Concerning the balance of payments. If Bank of America receives repayment for a loan it made to a Mexican firm. government. The capital account of the balance of payments includes private-sector transactions as well as official-settlements transactions of the home country’s central bank. T F 21. and vice versa. The merchandise-trade account on the balance-of-payments statement is defined the same way as “net exports” which constitutes part of the nation’s gross domestic product. merchandise trade has generally constituted the largest portion of its goods-and-services account. A positive balance on the goods-and-services account of the balance of payments indicates an excess of exports over imports which must be added to the nation’s gross domestic product. For the United States. T F 22. T F 34. Concerning the balance of payments. On the balance-of-payments statement. Current-account transactions include direct foreign investment. Unilateral transfers refer to two-sided transactions. T F 31. it becomes a net supplier of funds to the rest of the world. services. a capital inflow can be likened to the import of goods and services. T F 27. Unilateral transfers consist of private-sector transfers. T F 28. a capital inflow would occur if a Swiss resident purchases the securities of the U. reflecting the movement of goods and services in one direction with corresponding payments in the other direction. and unilateral transfers. investment income. such as foreign aid.Chapter 11: The Balance of Payments 190 T F 19. If a country realizes a current-account deficit in its balance of payments. T F 30. . purchases of foreign government securities. T F 33.S. If the current account of the balance of payments registers a deficit. T F 20. On the U.S. statistical discrepancy is treated as part of the merchandise trade account because merchandise transactions are generally the most frequent source of error. a current-account deficit results in a worsening of a country’s net foreign investment position. T F 24.

T F 38. the merchandise trade account of the U.191 Test Bank for International Economics.S. Although the United States has realized merchandise trade deficits since the early 1970s. If a country consistently realizes a current-account surplus in its balance of payments.S. The United States would be a “net creditor” if the value of U. Because a large number of international transactions fail to get recorded. In the past two decades. T F 42. that the United States achieved in its balance of international indebtedness by the mid-1980s. balance of payments has registered deficit. T F 44. T F 48. the United States had evolved from the status of a net-creditor nation to a net-debtor nation in its balance of international indebtedness. the U.S. T F 41. T F 49. 9e T F 35. That U. the goods-and-services balance is commonly referred to as the “trade balance” by the news media. Although a net-debtor country may initially benefit from an inflow of savings from abroad. to ensure that total debits equal total credits. That German investors collect interest income on their holdings of U. T F 37. Concerning the balance of payments. The official reserve assets of the United States consist of holdings of gold and foreign corporate securities.S. Because the balance of payments is a record of the economic transactions of a country over a period of time. balance of payments. .S. reflected the continuous current-account surplus that the United States attained in its balance of payments during the 1970s. T F 39. services balance has generally registered surplus. T F 45. its goods-and-services balance has always registered surplus. The U. balance of payments. it likely will become a “net debtor” in its balance of international indebtedness. Treasury bills constitutes a credit transaction on the U. over the long run continued borrowing results in growing dividend payments to foreigners and a drain on the debtor country’s economic resources. T F 36. charities donate funds to combat starvation in Africa constitutes a debit transaction on the U. T F 47. statisticians insert a residual. it is a “flow” concept. T F 46.S. T F 40.S.S. Since the 1970s. T F 50.S. balance of payments. unilateral-transfers balance has consistently registered surplus in the past two decades. T F 43.S. That U. importers purchase bananas from Brazil constitutes a debit transaction on the U. The net-debtor status. assets abroad exceeded the value of foreign assets in the United States. known as statistical discrepancy. By the mid-1980s.

. Most economists contend that any reduction in the current account deficit is better achieved through increased national saving than through reduced domestic investment. Rapid growth of production and employment is commonly associated with large or growing trade surpluses and current account surpluses. T F 55. a consequence of its current account deficit is a growing foreign ownership of the capital stock of the United States and a rising fraction of U. T F 57. income that must be diverted abroad in the form of interest and dividends to foreigners. T F 52. countries realizing rapid economic growth rates possess long-run current account deficits. Most economists belief that in the 1980s.Chapter 11: The Balance of Payments 192 T F 51. To reduce a current account deficit. For the United States. a country should either decrease the budget deficit of its government or reduce investment spending relative to saving.S. Often. T F 56. T F 53. a massive outflow of capital caused a current account deficit for the United States. A current account deficit for the United States necessarily reduces the standard of living for American households. T F 54.

23. 2. 11. 19. 9e ANSWERS Answers to Multiple-Choice Questions 1. 19. 29. 7. 6. 36. T F T T F T F T T F T F . 7. d a a d a a 25. 9. 28. 8. 40. 18. 14. 5. 16. 27. 27. 35. 12. 6. 20. 10. 34. 47. 43. 20. 41. 4. 37. 42. 12. 50. 30. 52. 22. T T T F F F F F T F F T 13. 31. 15. 16. 31. 53. 5. 48. 35. 55. 21. 54. 2. 14. 56. 34.193 Test Bank for International Economics. b d a d b d b a 33. 23. 29. 26. 32. T F T F T T F T F T F T 49. 15. 44. T T T F T T T F T F T T 37. 21. 32. a b c a d a a c 9. 26. 4. 13. 57. 45. c c b a b c a a 25. 38. 11. 24. F T T F F F T T T Answers to True-False Questions 1. 30. 39. 33. 51. 10. 17. 38. 3. 46. 22. 36. 24. 28. 8. 3. 18. c a d b d b d c 17.