a) The supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus.
b) One can infer that the yen would be likely to appreciate against other currencies c) a) and b)
d) None of the above Answer: b
4 Generally speaking, any transaction that results in a receipt from foreigners
a) Will be recorded as a debit, with a negative sign, in the U.S. balance of payments b) Will be recorded as a debit, with a positive sign, in the U.S. balance of payments c) Will be recorded as a credit, with a negative sign, in the U.S. balance of payments d) Will be recorded as a credit, with a positive sign, in the U.S. balance of payments Answer d
5 Generally speaking, any transaction that results in a payment to foreigners
a) Will be recorded as a debit, with a negative sign, in the U.S. balance of payments b) Will be recorded as a debit, with a positive sign, in the U.S. balance of payments c) Will be recorded as a credit, with a negative sign, in the U.S. balance of payments d) Will be recorded as a credit, with a positive sign, in the U.S. balance of payments Answer a.
6 Suppose the McDonalds Corporation imports 100 tons of Canadian beef, paying for it by transferring the funds to a New York bank account kept by the Canadian Beef Conglomerate.
a) Payment by McDonalds will be recorded as a debit
b) The deposit of the funds by the seller will be recorded as a debit c) Payment by McDonalds will be recorded as a credit d) The deposit of the funds by the buyer will be credit Answer: a.
7 Since the balance of payments is presented as a system of double-entry bookkeeping,
a) Every credit in the account is balanced by a matching debit b) Every debit in the account is balanced by a matching credit c) a) and b) are both true d) None of the above Answer c
Balance of Payments Accounts
8 A country’s international transactions can be grouped into the following three main types:
a) current account, medium term account, and long term capital account b) current account, long term capital account, and official reserve account c) current account, capital account, and official reserve account d) capital account, official reserve account, trade account Answer: c
9 Invisible trade refers to:
a) services that avoid tax payments
b) underground economy
c) legal, consulting, and engineering services d) tourist expenditures, only Answer: c
The Current Account
10 The current account is divided into four finer categories:
a) Merchandise trade, services, factor income, and statistical discrepancy. b) Merchandise trade, services, factor income, and unilateral transfers
c) Merchandise trade, services, portfolio investment, and unilateral transfers d) Merchandise trade, services, factor income, and direct investment Answer: b.
11 Factor income
a) Consists largely of interest, dividends, and other income on foreign investments. b) Is a theoretical construct of the factors of production, land, labor, capital, and entrepreneurial ability.
c) Is generally a very minor part of national income accounting, smaller than the statistical discrepancy. d) None of the above Answer: a
USE THE FOLLOWING INFORMATION TO ANSWER THE NEXT TWO QUESTIONS
The entries in the ―current account‖ and the ―capital account‖, combined together, can be outlined (in alphabetic order) as: (i)- direct investment (ii)- factor income (iii)- merchandise (iv)- official transfer (v)- other capital
(vi)- portfolio investment (vii)- private transfer (viii)- services
12 Current account includes a) (i), (ii), and (iii) b) (ii), (iii), and (vii) c) (iv), (v), and (vii) d) (i), (v), and (vi) Answer: b
13 Capital account includes a) (i), (ii), and (iii) b) (ii), (iii), and (vii) c) (iv), (v), and (vii) d) (i), (v), and (vi) Answer: d
14 A depreciation will begin to improve the trade balance immediately if
a) Imports and exports are responsive to the exchange rate changes. b) Imports and exports are inelastic to the exchange rate changes. c) Consumers exhibit brand loyalty and price inelasticity d) b) and c) Answer: a.
15 In the long run, both exports and imports tend to be a) Unresponsive to changes in exchange rates b) Responsive to changes in exchange rates c) Both a) and b) d) None of the above Answer: b.
The Capital Account
16 The difference between Foreign Direct Investment and Portfolio Investment is that:
a) Portfolio Investment mostly represents the sale and purchase of foreign financial assets such as stocks and bonds that do not involve a transfer of control.
b) Foreign Direct Investment mostly represents the sale and purchase of foreign financial assets such as stocks whereas Portfolio Investment mostly involves the sales and purchase of foreign bonds.
c) Foreign direct investment is about buying land and building factories, whereas portfolio investment is about buying stocks and bonds. d) All of the above Answer: a.
17 In the latter half of the 1980s, with a strong yen, Japanese firms a) Faced difficulty exporting
b) Could better afford to acquire U.S. assets that had become less expensive in terms of yen.
c) Financed a sharp increase in Japanese FDI in the United States d) All of the above Answer: d.
18 International portfolio investments have boomed in recent years, as a result of a) A depreciating U.S. dollar
b) Increased gasoline and other commodity prices.
c) The general relaxation of capital controls and regulation in many countries d) None of the above Answer: c.
19 If the interest rate rises in the U.S. while other variables remain constant a) Capital inflows into the U.S. will increase
b) Capital inflows into the U.S. may not materialize c) Capital will flow out of the U.S. d) None of the above Answer: a.
20 If for a particular county an increase in the interest rate is more or less matched by an expected depreciation in the local currency.
a) Traders will probably be tempted to find another country to invest in
b) The interest rate increase per se will not be enough to spark capital flow into the country
c) Both a) and b) are true
d) Capital will glow out of the country as the disgruntled citizens riot and go to war with the neighbors. Answer: c.
21 The capital account measures
a) The sum of U.S. sales of assets to foreigners and U.S. purchases of foreign assets. b) The difference between U.S. sales of assets to foreigners and U.S. purchases of foreign assets.
c) The difference between U.S. sales of manufactured goods to foreigners and U.S. purchases of foreign products. d) None of the above Answer: b
22 When Honda, a Japanese auto maker, built a factory in Ohio, a) It was engaged in foreign direct investment b) It was engaged in portfolio investment
c) It was engaged in a cross-border acquisition d) None of the above. Answer: a.
23 The capital account may be divided into three categories:
a) Cross-border mergers and acquisitions, portfolio investment, and other investment
b) Direct investment, portfolio investment, and Cross-border mergers and acquisitions
c) Direct investment, mergers and acquisitions, and other investment d) Direct investment, portfolio investment, and other investment Answer: d
24 When Nestlé, a Swiss firm, bought the American firm Carnation, it was engaged in foreign direct investment. If Nestlé had only bought a non-controlling number of shares of the firm a) Nestlé would have been engaged in portfolio investment b) Nestlé would have been engaged in a cross-border acquisition
c) It would depend if they bought the shares from an American or a Canadian d) None of the above. Answer: a.
25 Transactions in currency, bank deposits and so forth
a) Tend to be insensitive to both changes in relative interest rates and the anticipated change in exchange rate.
b) Tend to be sensitive to both changes in relative interest rates and the anticipated change in exchange rate.
c) Tend to be sensitive to changes in relative interest rates but insensitive to the anticipated change in exchange rate.
d) Tend to be insensitive to changes in relative interest rates but sensitive to the anticipated change in exchange rate. Answer: b.
26 Since security returns tend to have low correlations among countries,
a) Investors can reduce risk more effectively if they diversify their portfolio holdings internationally rather than purely domestically.
b) Investors who have a domestically diversified portfolio, with exposures across industry types will not gain much from diversifying abroad.\\
c) Investors who diversify internationally will likely underperform investors who keep all their investments in one country. d) None of the above Answer: a.
27 Foreign direct investment (FDI) occurs
a) when an investor acquires a measure of control of a foreign business
b) when there is an acquisition, by a foreign entity in the U.S., of 10 percent or more of the voting shares of a business
c) with sales and purchases of foreign stocks and bonds that do not involve a transfer of control d) a and b Answer: d
Statistical Discrepancy
28 Statistical discrepancy, which by definition represents errors and omissions a) Cannot be calculated directly
b) Is calculated by taking into account the balance-of-payments identity
c) Probably has some elements that are honest mistakes, it can’t all be money laundering and drugs. d) All of the above Answer: d.
29 The statistical discrepancy in the balance-of-payments accounts
a) Arise since recordings of payments and receipts are done at different times, in different places, possibly using different methods.
b) Arise since some transactions (illegal transactions?) occur ―off the books‖. c) Represents omitted and misrecorded transactions. d) All of the above Answer: d.
30 Regarding the statistical discrepancy in the balance-of-payments accounts
a) There is some evidence that financial transactions may be mainly responsible for the discrepancy.
b) The sum of the balance on the capital account and the statistical discrepancy is very close to the balance of the current account in magnitude.
c) It tends to be positive one year and negative in others, so it’s safe to ignore it d) a) and b) Answer: d.
Official Reserve Account