International Finance Chapter 3

14 The capital account includes a) the export and import of goods and services. b) all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses. c) all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs). d) none of the above

B

17 Invisible trade refers to a) services that avoid tax payments. b) the underground economy. c) legal, consulting, and engineering services. d) tourist expenditures, only.

C

1 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 a) consumption and investment and government expenditure. b) consumption and government expenditure and net exports. c) consumption and net exports and government expenditure. d) consumption less imports.

A

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

A

13 A country with a current account surplus a) acquires IOUs from foreigners, thereby increasing its net foreign wealth. b) must borrow from foreigners or draw down on its previously accumulated foreign wealth. c) will experience a reduction in the country's net foreign wealth. d) both b) and c)

A

2 If the United States imports more than it exports, then this means that a) the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus. b) the demand for dollars is likely to exceed the supply in the foreign exchange market, ceteris paribus. c) the U.S. dollar would be under pressure to appreciate against other currencies. d) both b) and c) are correct

A

20 The "J-curve effect" shows a) the initial deterioration and the eventual improvement of a country's trade balance following a currency depreciation. b) the initial improvement and the eventual depreciation of a country's trade balance following a currency depreciation. c) the trade balance's lack of responsiveness to the exchanges rate changes. d) none of the above

A

23 When a country's currency depreciates against the currencies of major trading partners, a) the country's exports tend to rise and imports fall. b) the country's exports tend to fall and imports rise. c) the country's exports tend to rise and imports rise. d) the country's exports tend to fall and imports fall.

A

24 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)

A

25 In the short run a currency depreciation can make a trade balance worse if a) there is no domestic producer of an import. b) there is no domestic buyer for an import. c) there is no export market for a country's output.

A

28 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

A

31 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

A

33 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.

A

37 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

A

45 The "one word that haunts the dollar" is a) (Central bank) diversification. b) Reunification (Korean). c) Euro. d) (Current account) deficit.

A

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

A

50 BCA stands for a) the balance on the current account. b) the balance on the capital account. c) the balance on the official reserves. d) net imports.

A

53 The economic theory of mercantilism holds that a) a continuing trade surplus should be a government's major policy goal. b) the main source of wealth of a country is its productive capacity. c) free trade is the result of countries exploiting their comparative advantage. d) none of the above

A

55 Over half of all dollar bills in circulation are held outside American's borders. a) True b) False

A

56 The capital account is divided into three subcategories: direct investment, portfolio investment, and other investment. Direct investment involves a) acquisitions of controlling interests in foreign businesses. b) investments in foreign stocks and bonds that do not involve acquisitions of control. c) bank deposits, currency investment, trade credit, and the like. d) all of the above

A

7 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.

A

19 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.

B

21 The J-curve effect received wide attention when a) the British trade balance worsened after a strengthening of the pound in 1967. b) the British trade balance worsened after a devaluation of the pound in 1967. c) the British trade balance improved after a devaluation of the pound in 1967. d) none of the above

B

22 A currency depreciation will begin to improve the trade balance immediately a) if the demand for imports and exports are inelastic. b) if the demand for imports and exports are elastic. c) if imports decrease and exports decrease. d) none of the above

B

26 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

B

32 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)

B

34 Government controlled investment funds, known as sovereign wealth funds, a) are playing a less-important role in international finance following the end of the fixed exchange rate era. b) are mostly domiciled in Asian and Middle Eastern countries. c) are usually are responsible for converting trade surpluses and oil revenues into foreign exchange reserves. d) none of the above

B

38 The United States is considered a) a net creditor nation. b) a net debtor nation

B

39 The central bank of the United States is a) the New York Fed. b) the Federal Reserve System. c) the EXIM bank. d) none of the above—the U.S. does not have a central bank.

B

42 Currently, international reserve assets are comprised of a) gold, platinum, foreign exchanges, and special drawing rights (SDRs). b) gold, foreign exchanges, special drawing rights (SDRs), and reserve positions in the International Monetary Fund (IMF). c) gold, diamonds, foreign exchanges, and special drawing rights (SDRs). d) reserve positions in the International Monetary Fund (IMF), only.

B

44 The most important international reserve asset, comprising 94 percent of the total reserve assets held by IMF member countries is a) gold. b) foreign exchange. c) special Drawing Rights (SDRs). d) reserve positions in the International Monetary Fund (IMF).

B

46 The vast majority of the foreign-exchange reserves held by central banks are denominated in a) local currencies. b) U.S. dollars. c) Yen. d) Euro.

B

48 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 a) BCA + BKA + BRA = 0 b) BCA = -BKA c) BCA + BKA = -BRA d) BRA = -BCA

B

49 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 a) equal in magnitude to the country's national debt. b) zero. c) equal in magnitude to the Trade Deficit or Surplus. d) none of the above

B

51 BKA stands for a) the balance on the current account. b) the balance on the capital account. c) the balance on the official reserves. d) net imports.

B

52 If the central banks of the world chose to diversify their foreign-exchange reserves away from the dollar and into the euro, a) this would have the result of a strengthening of the value of the dollar. b) this have the result of a weakening in the value of the dollar. c) this would not have much impact, as the information would be lost in the day-to-day volatility of exchange rates.

B

57 The capital account is divided into three subcategories: direct investment, portfolio investment, and other investment. Portfolio investment involves a) acquisitions of controlling interests in foreign businesses. b) investments in foreign stocks and bonds that do not involve acquisitions of control. c) bank deposits, currency investment, trade credit, and the like. d) all of the above

B

60 If a country must make a net payment to foreigners because of a balance-of-payments deficit, the country should a) either increase its official reserve assets or borrow anew from foreigners. b) either run down its official reserve assets or borrow anew from foreigners. c) either run down its official reserve assets or lend more foreigners. d) none of the above

B

61 Under the pure flexible exchange rate regime a) 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. b) the balance on the current and capital accounts will be equal in size, but opposite in sign. c) a current account surplus or deficit must be matched by an official reserves deficit or surplus. d) a capital account surplus or deficit must be matched by an official reserves deficit or surplus.

B

8 If Japan exports more than it imports, then 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

B

15 The official reserve account includes a) the export and import of goods and services. b) all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses. c) all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs). d) none of the above

C

16 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

C

18 In 2007 the United States had a current account deficit. The current account deficit implies that the United States a) had a surplus on legal consulting and engineering services. b) produced more output than it consumed. c) consumed more output than it produced. d) none of the above

C

30 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

C

4 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 a) impose measures to restrict imports. b) impose measures to discourage capital outflows. c) Both a) and b) d) None of the above

C

43 International reserve assets include "foreign exchanges". These are a) Special Drawing Rights (SDRs) at the IMF. b) reserve positions in the International Monetary Fund (IMF). c) foreign currency held by a country's central bank. d) none of the above

C

5 If the United States imports more than it exports, then a) the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris paribus. b) one can infer that the U.S. dollar would be under pressure to depreciate against other currencies. c) a) and b) d) None of the above

C

54 The U.S. Trade Deficit a) is a capital account surplus. b) is a current account deficit. c) is both a capital account surplus and a current account deficit. d) none of the above

C

58 The capital account is divided into three subcategories: direct investment, portfolio investment, and other investment. "Other" investment involves a) acquisitions of controlling interests in foreign businesses. b) investments in foreign stocks and bonds that do not involve acquisitions of control. c) bank deposits, currency investment, trade credit, and the like. d) all of the above

C

59 Over the last several years the U.S. has run persistent a) balance-of-payments deficits. b) balance-of-payments surpluses. c) current Account deficits. d) capital Account deficits.

C

9 The balance of payments records a) only international trade, (exports and imports). b) only cross-border investments (FDI and portfolio investment). c) not only international trade, (exports and imports) but also cross-border investments. d) none of the above

C

11 A country experiencing a significant balance-of-payments surplus would be likely to a) expand imports, offering marketing opportunities for foreign enterprises. b) refrain from imposing foreign exchange restrictions. c) expand exports, offering international marketing opportunities for domestic enterprises. d) Both a) and b)

D

27 With regard to the capital account a) the capital account balance measures the difference between U.S. sales of assets to foreigners and U.S. purchases of foreign assets. b) U.S. sales (or exports) of assets are recorded as credits, as they result in capital inflow. c) U.S. purchases (imports) of foreign assets are recorded as debits, as they lead to capital outflow. d) all of the above

D

29 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

D

3 Balance of payments a) is defined as the statistical record of a country's international transactions over a certain period of time presented in the form of a double-entry bookkeeping. b) provides detailed information concerning the demand and supply of a country's currency. c) can be used to evaluate the performance of a country in international economic competition. d) all of the above

D

35 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) both a) and b)

D

36 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.

D

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

D

41 Continued U.S. trade deficits coupled with foreigners' desire to diversify their currency holdings away from U.S. dollars a) could further diminish the position of the dollar as the dominant reserve currency. b) could affect the value of U.S. dollar (e.g. through the currency diversification decisions of Asian central banks). c) could lend steam to the emergence of the euro as a credible reserve currency. d) all of the above

D

6 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.

D

10 Credit entries in the U.S. balance of payments a) result from foreign sales of U.S. goods and services, goodwill, financial claims, and real assets. b) result from U.S. purchases of foreign goods and services, goodwill, financial claims, and real assets. c) give rise to the demand for dollars. d) give rise to the supply of dollars. e) both a) and c)

E