International Finance CH 3
Statistical discrepancy formula
(Balance on current account + Balance on capital account + Balance on financial account + official reserve account)/-1
Information about which of the following can potentially be learned from a country's balance of payments accounts? Multiple select question. The supply and demand for the country's currency The country's international competitiveness The country's status as a net creditor or debtor The country's openness to trade
- The country's openness to trade - The country's international competitiveness - The supply and demand for the country's currency
True or false: Capital transfers involve change of ownership or acquisition or disposal of an asset.
True
The most dominant currency in the World's Foreign Exchange Reserves is:
U.S. dollar.
Under the fixed exchange rate regime, the combined balance on the current and capital accounts will be ______ to the change in the official reserves.
equal in size but opposite in sign
With double-entry bookkeeping, each transaction gives rise to two bookkeeping entries of _____ magnitude but _____ sign.
equal; opposite
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.
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 and discourage capital outflows.
When Honda, a Japanese auto maker, built a factory in Ohio,
it was engaged in foreign direct investment.
The current account balance is exports ______ imports ______ unilateral transfers.
minus; plus
The capital account includes capital transfers and acquisitions and disposals of nonproduced and _____ assets between U.S. residents and foreigners.
nonfinancial
The balance of payments records
not only international trade, (exports and imports) but also cross-border investments.
The ______ includes transactions undertaken by the authorities to finance the overall balance and intervene in foreign exchange markets.
official reserve account
The balance of payments is defined as a flow concept because it is measured ______ time.
over a period of
A country's balance-of-payments gap that must be accommodated by official reserve transactions is known as the ________ balance or the official settlement balance.
overall
A credit entry in a country's balance of payments has a ______ sign and gives rise to an increase in the ______ a country's currency.
positive; demand for
When a country must make a net payment to foreigners because of a balance-of-payments deficit, the central bank of the country
should either run down its official reserve assets (e.g., gold, foreign exchanges, and SDRs) or borrow anew from foreign central banks.
The special category called _____ _____ is used because the sum of the credits and debits actually recorded in the balance of payments differs from zero.
statistical discrepancy
A country's net foreign wealth is increased by a current account ______, which implies that the country used up ______ output than it produced.
surplus; less
Transactions in currency, bank deposits and so forth
tend to be sensitive to both changes in relative interest rates and the anticipated change in exchange rate.
When a country's currency depreciates against the currencies of major trading partners,
the country's exports tend to rise and imports fall.
Suppose a country is currently experiencing a trade deficit. In the long run, this could be self-correcting if
the deficit exists because of the import demand for capital goods
In the short run a currency depreciation can make a trade balance worse if
there is no export market for a country's output.
Invisible trade: refers to
trades in legal, consulting, and engineering services.
The financial account is divided into three subcategories: direct investment, portfolio investment, and other investment. Other investment involves
transactions in currency, bank deposits, trade credits, and so forth bank deposits, currency investment, trade credit, and the like.
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.
Which of the following is significant because it indicates a country's international payment gap that must be accommodated with a government's official reserve transactions?
The official settlement balance
When a currency depreciation causes the trade balance first to deteriorate then improve, it is referred to as the ______.
J-curve effect
In the early 21st century, which country was the world's largest creditor nation?
Japan
Continued U.S. trade deficits coupled with foreigners' desire to diversify their currency holdings away could affect the value of U.S. dollar (e.g., through the currency diversification decisions of Asian central banks). could lend steam to the emergence of the euro as a credible reserve currency. all of the options could further diminish the position of the dollar as the dominant reserve currency.from U.S. dollars
All of the options
Currently, international reserve assets are comprised of
Gold. Foreign exchange. Special drawing rights (SDRs). Reserve positions in the International Monetary Fund (IMF).
When the balance-of-payments accounts are recorded correctly, the combined balance of the current account, the capital account, the financial account, and the reserves account must be zero and are illustrated by the equation:
BCA + BKA + BFA + BRA = 0
The statistical discrepancy entry in the balance of payments statement is necessary in part because some of the information used in compiling the statement is ______. Multiple select question. not time synchronized inaccurately or falsely reported based on different recording methods embargoed by the government
a. not time synchronized b. inaccurately or falsely reported c. based on different recording methods
The financial account is divided into three subcategories: direct investment, portfolio investment, and other investment. Direct investment involves
acquisitions of controlling interests in foreign businesses.
The capital account includes
all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses capital transfers and acquisitions and disposals of nonproduced, nonfinancial assets between U.S. residents and foreigners.
The official reserve account includes
all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs).
Government controlled investment funds, known as sovereign wealth funds,
are mostly domiciled in Asian and Middle Eastern countries.
The statistical record of a country's international transactions over a certain period of time presented in the form of double-entry bookkeeping is defined as the ______.
balance of payments
In the long run, ______ tend to be responsive to a depreciation, exerting ______ influences on the trade balance.
both exports and imports; positive
If a country is experiencing trade deficits year after year, the country's domestic industries may lack international
competitiveness
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.
The current account balance, which is the difference between a country's exports and imports, is a component of the country's GNP. Other components of GNP include
consumption and investment and government expenditure.
If the central banks of the world chose to diversify their foreign exchange reserves away from the dollar and into the euro,
could further diminish the position of the U.S. dollar as the dominant reserve currency
In a country's balance of payments statement, a transaction that results in a receipt from foreigners will be recorded as a(n)
credit
The financial account may be divided into three categories—
direct investment, portfolio investment, and other investment.
In a(n) _______ floating exchange rate system, central banks discreetly buy and sell foreign exchanges with the result that the overall balance is indeterminate.
dirty
For the purpose of preserving the ______-________ ________ rule, when goods, services, or assets are provided without a corresponding return of something of economic value, the corresponding entry is made as transfer.
double-entry bookkeeping
Suppose that a country with a pure flexible exchange rate has a current account deficit and a capital account surplus equal in magnitude but opposite in sign. Which of the following may be true? Appealing investment opportunities in the country may have caused the country to run the current account deficit. High interest rates may have caused the current account deficit. The central bank must intervene for the balance of payments identity to hold. Domestic industries' lack of international competitiveness is causing the country to run the current account deficit.
-Domestic industries' lack of international competitiveness is causing the country to run the current account deficit. -appealing investment opportunities in the country may have caused the country to run the current account deficit. -high interest rates may have caused current account deficit
The notation is Y = GNP = national income C = consumption I = private investment G = government spending X = exports M = imports T = taxes There is an intimate relationship between a country's BCA and how the country finances its domestic investment and pays for government expenditures. This relationship is given by BCA ≡ X − M ≡ (S − I) + (T − G). Given this, in order for a country to reduce a BCA deficit, which of the following must occur? For a given level of S and (T − G), I must fall. All of the options would work to reduce a BCA deficit. For a given level of I and (T − G), S must be increased. For a given level of S and I, the government budget deficit (T − G) must be reduced.
All of the options would work to reduce a BCA deficit.
Under the fixed exchange rate regime, the combined balance on the current accounts will be equal in size, but opposite in sign and are illustrated by the equation:
BCA + BKA + BFA = −BRA
Under the pure flexible exchange rate regime, a current account surplus or deficit (assuming the capital account is negligible) must be matched by a financial account deficit or surplus, and vice versa. this is illustrated by the equation:
BCA + BKA = −BFA
balance on current account
Exports - imports + primary + secondary income
Originally applied to countries that accumulated precious metals, the theory that a continuing trade surplus should be a policy goal is known as
Mercantilism
Which of the following are categories in the current account? Multiple select question. Services Merchandise trade Factor income Unilateral transfers Foreign direct investment
Merchandise trade, services, factor income, and unilateral transfers
Match the current account category with the appropriate transaction. Instructions
Merchandise trade= The export of computers Services= Tourist expenditures Factor income= Dividends paid by a company to foreigners Unilateral transfers= Foreign aid
Which of the following is correct?
The causality between current account deficit and financial account surplus flows both ways.
Which of the following accounts for the export and import of goods and services?
The current account
Which of the following are classifications for a country's international transactions? Multiple select question. The financial account The capital account The official reserve account The unofficial reserve account The trade deficit account The current account
The current account The capital account The financial account The official reserve account
The overall balance includes which of the following? Multiple select question. The capital account The statistical discrepancy The official reserve account The current account
The current account The statistical discrepancy The capital account
The vast majority of the foreign exchange reserves held by central banks are denominated in
U.S. dollars.
The notation is Y = GNP = national income C = consumption I = private investment G = government spending X = exports M = imports T = taxes The current account balance is given by
X − M
International reserve assets include "foreign exchanges". These are
foreign currencies held by a country's central bank.
A currency depreciation will begin to improve the trade balance immediately
if the demand for imports and exports are elastic.
Which of the following statements are true regarding the 2017 Tax Cuts and Jobs Act?
illustrated a net decrease of direct investment in 2018 due to the repatriation of accumulated prior earnings of foreign affiliates by their US parent companies generally eliminated taxes on repatriated earnings
Since security returns tend to have low correlations among countries,
investors who have a domestically diversified portfolio, with exposures across industry types will not gain much from diversifying abroad.
Gold, foreign currency, special drawing rights (SDRs), and reserve positions in the International Monetary Fund (IMF) are official ______ assets.
reserve
In the long run, both exports and imports tend to be
responsive to changes in exchange rates.
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.
The current account includes
the export and import of goods and services.
The "J-curve effect" shows
the initial deterioration and the eventual improvement of a country's trade balance following a currency depreciation.
Regarding the statistical discrepancy in the balance-of-payments accounts,
the sum of the balance on the financial account and the statistical discrepancy is very close to the balance of the current account in magnitude. there is some evidence that financial transactions may be mainly responsible for the discrepancy.
Foreign direct investment (FDI) occurs
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.
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 U.S. balance of payments.
Because of double-entry bookkeeping, the sum of all of the items (or entries) in a country's balance of payments must equal ______.
zero
