QUIZ 2

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A balance of trade deficit indicates an excess of imports over exports.

TRUE

Assume that some U.S. firms will purchase supplies from either China or from U.S. firms. If the Chinese yuan appreciates against the dollar, it should reduce the U.S. balance of trade deficit with China.

TRUE

Outsourcing allows some MNCs to reduce costs but shifts jobs to other countries.

TRUE

Portfolio investments represent transactions involving long-term financial assets (such as stocks and bonds) between countries that do not affect the transfer of control.

TRUE

Regarding the U.S. balance of payments, capital account items are relatively minor compared to the financial account items.

TRUE

The J curve effect is the initial worsening of the U.S. trade balance due to a weakening dollar because of established trade relationships that are not easily changed; as the dollar weakens, the dollar value of imports initially rises before the U.S. trade balance is improved.

TRUE

The World Bank frequently enters into cofinancing agreements. Under these agreements, financing is provided by the World Bank and/or official aid agencies, export credit agencies, or commercial banks.

TRUE

The balance of payments is a measurement of all transactions between domestic and foreign residents over a specified period of time.

TRUE

The sale of patent rights by a U.S. firm to a Russian firm reflects a credit to the U.S. balance of payments account.

TRUE

Which of the following is not a goal of the International Monetary Fund (IMF)?

To enhance a country's long-term economic growth via the extension of structural adjustment loans

__ represent aid, grants, and gifts from one country to another.

Transfer payments

Which of the following would likely have the least direct influence on a country's current account?

a tax on income earned from foreign stocks.

The North American Free Trade Agreement (NAFTA) increased restrictions on:

a. trade between Canada and Mexico. b. trade between Canada and the U.S. c. direct foreign investment in Mexico by U.S. firms. ANSWER: NONE OF THESE

Which of the following will probably not result in an increase in a country's current account balance (assuming everything else constant)?

An appreciation of the country's currency

Also known as the "central banks' central bank," the ____ attempts to facilitate cooperation among countries with regard to international transactions and provides assistance to countries experiencing a financial crisis.

Bank for International Settlements (BIS)

Which of the following countries purchases the largest amount of exports by U.S. firms?

Canada

___ purchases more U.S. exports than the other countries listed here.

Canada

A U.S. purchase of patent rights from a firm in Mexico reflects a credit to the U.S. balance of payments account.

FALSE

A balance of trade surplus indicates an excess of imports over exports.

FALSE

A balance of trade surplus indicates an excess of merchandise imports over merchandise exports.

FALSE

A tariff is a maximum limit on imports.

FALSE

A weakening of the U.S. dollar with respect to the British pound would likely reduce U.S. exports to the U.K. and increase U.S. imports from the U.K.

FALSE

An American tourist visiting Germany and spending money there (for lodging, food, etc.) will reduce the U.S. current account deficit and reduce Germany's current account balance.

FALSE

Direct foreign investment by U.S.-based MNCs occurs primarily in the Bahamas and Brazil.

FALSE

Exporting of products by one country to other countries at prices below cost is called elasticity.

FALSE

The Central American Trade Agreement (CAFTA) is intended to raise tariffs and regulations between the U.S., the Dominican Republic, and Central American countries.

FALSE

The World Bank extends loans only to developed nations, while the International Development Association (IDA) extends loans only to developing nations.

FALSE

The capital account reflects changes in country ownership of long-term (but not short-term) assets.

FALSE

The current account represents the investment in fixed assets in foreign countries that can be used to conduct business operations.

FALSE

The primary component of the capital account is the balance of trade.

FALSE

U.S. government officials would likely prefer that China devalue the yuan against the dollar.

FALSE

__ is (are) income received by investors on foreign investments in financial assets (securities).

Factor income

Like the International Monetary Fund (IMF), the ____ is composed of a collection of nations as members. However, unlike the IMF, it uses the private rather than the government sector to achieve its objectives.

International Financial Corporation (IFC)

Which of the following is mentioned in the text as a possible means by which the government may attempt to improve its balance of trade position (increase its exports or reduce its imports)?

It could attempt to reduce its home currency's value

The primary component of the current account is the:

balance of trade

A high home inflation rate relative to other countries would ____ the home country's current account balance, other things equal. A high growth in the home income level relative to other countries would ____ the home country's current account balance, other things equal.

decrease; decrease

According to the "J curve effect," a weakening of the U.S. dollar relative to its trading partners' currencies would result in an initial ____ in the current account balance, followed by a subsequent ____ in the current account balance.

decrease; increase

Recently, the U.S. experienced an annual balance of trade representing a ____

deficit

A country's net outflow of funds ____ affect its interest rates, and ____ affect its economic conditions.

does; does

The International Financial Corporation was established to:

enhance economic development of the private sector through investment in stock of corporations.

The World Bank was established to:

enhance economic development through non-subsidized loans (at market interest rates).

Dumping" is used in the text to represent the:

exporting of goods at prices below cost.

A weak home currency may not be a perfect solution to correct a balance of trade deficit because:

foreign companies may reduce the prices of their products to stay competitive.

If a country's government imposes a tariff on imported goods, that country's current account balance will likely ____ (assuming no retaliation by other governments).

increase

Over the last several years, international trade has generally:

increased for most major countries.

The direct foreign investment positions by U.S. firms have generally ____ over time. Restrictions by governments on direct foreign investment have generally ___ over time.

increased; decreased

In recent years, the U.S. has had a relatively (compared to other countries) ____ balance of trade ____ with China.

large; deficit

Without the international capital flows, there would be ____ funding available in the U.S. across all risk levels, and the cost of funding would be ____ regardless of the firm's risk level.

less; higher

Japan's annual interest rate has been relatively ____ compared to other countries for several years, because the supply of funds in its credit market has been very ____.

low; large

According to the text, international trade (exports plus imports combined) as a percentage of GDP is:

lower in the U.S. than in European countries.

As a result of the European Union, restrictions on exports between ____ were reduced or eliminated.

member countries

The World Bank's Multilateral Investment Guarantee Agency (MIGA):

offers various forms of political risk insurance.

If the home currency begins to appreciate against other currencies, this should ____ the current account balance, other things equal (assume that substitutes are readily available in the countries, and that the prices charged by firms remain the same).

reduce

The demand for U.S. exports tends to increase when:

the currencies of foreign countries strengthen against the dollar.

The "J curve" effect describes:

the short-run tendency for a country's balance of trade to deteriorate even while its currency is depreciating.


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