Chapter 3-BOP Intl Finance

capital account may be divided into three categories

FDI, portfolio and other

the most important international reserve asset, comprimising 94% of the total reserve assets held by IMF member countries is gold SDR Foreign Exchange Reserve in IMF

FX

most popular reserve currency is now the

US dollar

united states is considered

a net debtor nation

BKA stands for

balance of capital account

over the last several years, the US has run persistent

current account deficits

A currency depreciation will begin to improve the trade balance immediately

if demand for imports and exports are elastic

the US trade defecit

is a capital account surplus and current account deficit

as of 2011 gold accounted for

less than one percent of total reserve assets held by IMF memeber countries

in the long run, both exports and imports tend to be

responsive to changes in exchange rates

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

-44billion bka+bca+bra=0

nternational reserve assets include "foreign exchanges". These are

foreign currency held by a bank

A depreciation will begin to improve the trade balance immediately if imports and exports are inelastic to the exchange rate changes and consumers exhibit brand loyalty and price inelasticity. imports and exports are inelastic to the exchange rate changes. consumers exhibit brand loyalty and price inelasticity. imports and exports are responsive to the exchange rate changes.

imports and exports are responsive to exchange rate changes

If a country is grappling with a major balance-of-payment difficulty, it may not be able to expand imports from the outside world. Instead, the country may be tempted to impose measures to restrict imports. none of the options impose measures to discourage capital outflows. impose measures to restrict imports and discourage capital outflows. Correct

impose measures to restrict imports and discourage capital outflows

the balance of payments records

international trade and cross border investments

since security returns tend to have low correlations among countries investors can reduce risk more effectively if they diversify their portfolio holdings internationally rather than purely domestically. none of the options investors who diversify internationally will likely underperform investors who keep all their investments in one country. i nvestors who have a domestically diversified portfolio, with exposures across industry types will not gain much from diversifying abroad.

investors can reduce risk more effectively if they diversify their portfolio holdings internationally rather than purely domestically.

more important than the absolute size of a country's balance of payment disequilibrium

is nature and cause of disequilibrium

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

local currency

current account is divided into four finer categories

merchandise trade, services, factor income and unilateral transfers

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, Nestlé would have been engaged in portfolio investment. it would depend if they bought the shares from an American or a Canadian. none of the options Nestlé would have been engaged in a cross-border acquisition.

nestle would have been engaged in portfolio investment

Assume that the balance-of-payments accounts for a country are recorded correctly. Balance on the current account = BCA = $130 billion Balance on the capital account = BKA = −$86 billion Balance on the reserves account = BRA =? The balance on the reserves account (BRA), under the pure flexible exchange regime is

none of the options

Which of the following is most indicative of the pressure that a country's currency faces for depreciation or appreciation?

official settlement balance

If Japan exports more than it imports,

one can infer that the yen would be likely to appreciate against other currencies

Suppose the InBev Corporation (a non-U.S. MNC) buys the Anheuser-Busch Corporation, paying the U.S. shareholders cash. Payment by InBev will be recorded as a credit. Payment by InBev will be recorded as a debit. The deposit of the funds by the buyer will be credit. The deposit of the funds by the sellers will be recorded as a debit.

payment by InBev recorded as a credit

Regarding the statistical discrepancy in the balance-of-payments accounts,

there is some evidence that financial transactions may be mainly responsible for the discrepancy, and 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.

If the central banks of the world chose to diversify their foreign-exchange reserves away from the dollar and into the euro,

this will have the result of a weakening in the value of the dollar

over half of all dollar bills in circulation are held outside American's borders

true

The world's largest debtor nation and creditor nation, respectively, are

us and japan

the vast majority of the foreign exchange reserves held by central banks are denominated in

us dollars

When a country's currency depreciates

exports rise and imports fall

J-curve effect

following a currency depreciation, a country's balance of trade may get worse before it gets better

international reserve assets are comprimised of

gold, foreign exchanges, special drawing rights (SDRs), and reserve positions in the International Monetary Fund (IMF). Correct

A country that gives foreign aid to another country can be viewed as

importing goodwill from the later

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

investments in foreign stocks and bonds that do not involve acquistions of control

central bank of united states is

Federal Reserve System

A country with a current account surplus

acquires IOUs from foreigners, thereby increasing its net foreign wealth

The capital account is divided into three subcategories: direct investment, portfolio investment, and other investment. Direct investment involves

acquisitions of controlling interests in foreign businesses

continued US trade deficits coupled with foreigners' desire to diversify their currency holdings away from US Dollars could further diminish the position of the dollar as the dominant reserve currency. could affect the value of U.S. dollar (e.g., through the currency diversification decisions of Asian central banks). all of the options could lend steam to the emergence of the euro as a credible reserve currency.

all options

statistical discrepancy in balance of payments accounts arise because some transactions (illegal transactions) occur "off the books." arise since recordings of payments and receipts are done at different times, in different places, possibly using different methods. all of the options represents omitted and misreported transactions.

all options

statistical discrepancy, which by defintion represents errors and omissions probably has some elements that are honest mistakes, it can't all be money laundering and drugs. cannot be calculated directly. is calculated by taking into account the balance-of-payments identity. all of the options

all options

the capital account includes

all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses

government controlled investment funds, known as sovereign wealth funds

are mostly domiciled in asian and middle eastern countries

The capital account is divided into three subcategories: direct investment, portfolio investment, and other investment. "Other" investment involves

bank deposits, currency investment, trade credit and the like

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

bca+bka=0

if interest rate rises in US while other variables remain constant

capital inflows into the US will increase

the one word that haunts the dollar is

central bank diversification

In 2012, the United States had a current account deficit. The current account deficit implies that the United States

consumed more output than it produced

A country's international transactions can be grouped into the following three main types:

current account, capital account, and official reserve

when honda, a japanese auto maker built a factory in ohio

engaged in an FDI

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

every credit in the account is balanced by a matching debit and every debit in the account is balanced by a matching credit.

a country experiencing a significant balance of payments surplus would be likely to refrain from imposing foreign exchange restrictions. expand exports, offering international marketing opportunities for domestic enterprises. expand imports, offering marketing opportunities for foreign enterprises. expand imports, offering marketing opportunities for foreign enterprises, and refrain from imposing foreign exchange restrictions.

expand imports, offering marketing opportunities for foreign enterprises, and refrain from imposing foreign exchange restrictions.

factor income

income (interest and dividend payments) received by investors on foreign investments in financial assets (securities)

Credit entries in the U.S. balance of payments

result from foreign sales of U.S. goods and services, goodwill, financial claims, and real assets, and give rise to the demand for dollars.

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

should either run down its official reserve assets (e.g., gold, foreign exchanges, and SDRs) or borrow anew from foreign central banks.

f the United States imports more than it exports, then

supply of dollars will exceed demand and pressure to depreciate because the value is so high so other people don't want to buy these goods

Assume that the balance-of-payments accounts for a country are recorded correctly. Balance on the current account = BCA = $130 billion Balance on the capital account = BKA = −$86 billion Balance on the reserves account = BRA =? In a pure flexible exchange rate regime, a country's central banks will not need to maintain official reserves. Under this regime BKA=-BRA BCA=-BRA=0 BSA=BCA -BCA=BKA

-bca=bka

generally speaking, any transaction that results in a receipt from foreigners

will be recorded as a credit, with a positive sign, in the U.S. balance of payments.

Generally speaking, any transaction that results in a payment to foreigners

will be recorded as a debit with a negative sign in the US balance of payments

The difference between Foreign Direct Investment and Portfolio Investment is that 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. all of the options 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. Foreign Direct Investment is about buying land and building factories, whereas portfolio investment is about buying stocks and bonds.

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.

Invisible trade

Trade in services

in the latter half of the 1980's, with a strong yen, japanese firms faced difficulty exporting. all of the options financed a sharp increase in Japanese FDI in the United States. could better afford to acquire U.S. assets that had become less expensive in terms of yen.

all options

Suppose the McDonalds Corporation imports Canadian beef, paying for it by transferring the funds to a New York bank account kept by the Canadian beef producer. The deposit of the funds by the buyer will be credit. Payment by McDonalds will be recorded as a debit. Payment by McDonalds will be recorded as a credit. deposit of funds by the seller will be recorded as a debit

payment by mcdonalds will be recorded as a debit

with regard to capital account

purchase=debits sells=credit measures difference between us sales of assets to foreigners and us purchases of foreign assets

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

tend to be sensitive to both changes in relative interest rates and the anticipated change in exchange rate

Under the pure flexible exchange rate regime,

the balance on the current and capital accounts will be equal in side but opposite in sign

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

the combined balance on the current and capital accounts will be equal in size, but opposite in sign, to the change in the official reserves.

the current account includes none of options all purchases and sales of assets such as stocks, bonds, bank accounts, real estate and businesses export and import of goods and services all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs).

the export and import of goods and services

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

the general relaxation of capital controls and regulation in many countries

The balance of payments identity is given by BCA + BKA + BRA = 0. Rearrange the identity to solve for the statistical discrepancy.

the statistical discrepancy=BCA+BKA+BRA

in the short run, a currency depreciation can make a trade balance worse if

there is no domestic producer of an import

FDI occurs when a firm: 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. when an investor acquires a measure of control of a foreign business. when an investor acquires a measure of control of a foreign business and 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. with sales and purchases of foreign stocks and bonds that do not involve a transfer of control.

when an investor acquires a measure of control of a foreign business and 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.

When the balance-of-payments accounts are recorded correctly, the combined balance of the current account, the capital account, and the reserves account must be

zero