GPE Test 1

Typically, the most important determinant of private investment in an economy is A) the inflow of foreign investment. B) the size of the capital account surplus. C) the size of the current account deficit. D) the amount of domestic savings.

D) the amount of domestic savings.

Critics of debt relief make all of the following arguments EXCEPT A) it would be wasted money since the conditions that caused the debt would be likely to persist. B) debt relief can quickly fuel a new round of borrowing that simply restores debt to prior levels. C) debt relief will encourage other nations to borrow excessively with the hope that their debts may be forgiven in the future. D) the cost of debt relief to the most severely indebted countries is too large for the high income countries to afford.

D) the cost of debt relief to the most severely indebted countries is too large for the high income countries to afford.

If a currency has a fixed exchange rate, A) other currencies cannot be exchanged for the pegged currency. B) a country's trade balance will remain constant. C) it is not subject to the forces of supply and demand. D) the country's central bank must respond to market pressures to maintain the peg.

D) the country's central bank must respond to market pressures to maintain the peg.

True or false? If the trade balance is negative, the current account balance will be negative.

false

True or false? Looking at the financial account data, it is possible to determine the total amount of official reserves available to a nation.

false

True or false? Purchases of stocks and bonds are recorded in the capital account.

false

true or false? A sudden stop will be easier to navigate if the country borrows internationally in foreign currencies and lend locally in its domestic currency.

false

true or false? All financial account transactions are linked to current account transactions, since the current and financial accounts are mirror images of each other.

false

true or false? An increase in government budget deficits will necessarily be associated with a worsening of the current account balance.

false

true or false? Borrowing money from other countries is rarely a good idea.

false

true or false? Direct foreign investment items have more liquidity than foreign portfolio investment items.

false

true or false? For countries such as the United States and the United Kingdom, it is important to have trade surpluses in order to service their external debts.

false

true or false? For the United States, U.S. direct foreign investment abroad is more significant than foreign investment in U.S. securities and currency.

false

true or false? Global capital flows have completely broken the link between domestic savings and domestic investment.

false

true or false? Technology transfer comes only from nations importing new capital goods in the current account.

false

true or false? Technology transfer is not valuable to high-income countries.

false

true or false? The free movement of financial capital is desirable for all countries

false

true or false? Total debt is more important in figuring out the ability of a country to service its debt than are debt to GDP and debt to export ratios.

false

true or false? In most of the financial crises of the last decade, there were large and sudden financial outflows as both home and foreign investors tried to avoid the expected crises.

true

true or false? It is important to compare debt levels of low- and middle-income countries to exports because countries must earn foreign exchange in order to service their debts.

true

true or false? The United States international investment position is negative.

true

true or false? There are debt relief programs currently available for highly indebted poor countries.

true

true or false? Ultimate solutions to the problems of unsustainable debt must take into account the incentives for lenders to make loans.

true

Which of the following is true? A) If an exchange rate is allowed to vary across a fixed basket of currencies, it is called a hard peg. B) If an exchange rate is not allowed to vary against the target currency, it is called a soft peg. C) If an exchange is only allowed to fluctuate within a set band, it is considered to be a flexible exchange rate system. D) A soft peg is when a currency's exchange rate is only allowed to fluctuate within a set band.

D) A soft peg is when a currency's exchange rate is only allowed to fluctuate within a set band.

Based on Table 9.2, the current account balance is A) -2 percent of GNP. B) +2 percent of GNP. C) +4 percent of GNP. D) -4 percent of GNP.

B) +2 percent of GNP.

Suppose that the U.S. Open ticket costs $100 and the British Open ticket costs £50 and the exchange rate is $1.43. How much does the British Open ticket cost for an American attending the British Open? A) $71.50 B) $143.00 C) $34.96 D) $69.93

A) $71.50

Which round of GATT first addressed subsidies?

Answer: The Tokyo Round

Votes at the IMF are A) proportional to a country's population. B) proportional to the size of a country's economy. C) evenly distributed among all members. D) assigned randomly.

B) proportional to the size of a country's economy.

If there is a trade deficit, which of the following is true? A) The current account balance could be positive, negative, or zero. B) There will be a current account deficit. C) There will be a current account surplus. D) There will be a financial account surplus.

A) The current account balance could be positive, negative, or zero.

The nominal interest rate in the U.S. is 5% and the nominal interest rate in Canada is 3%. The spot value of the U.S. dollar is 1 ($/Canadian dollar) and the forward rate is 1.2 ($/Canadian dollar). Which of the following is NOT true? A) The dollar is likely to appreciate in spot markets. B) The interest parity condition does not hold. C) The dollar is trading at a forward discount. D) Money will flow into Canada.

A) The dollar is likely to appreciate in spot markets.

Which of the following is true? A) A common market is more deeply integrated than a customs union. B) The European Union is a shallower and broader form of integration than the USMCA (formerly NAFTA). C) The USMCA (formerly NAFTA) is an example of a customs union. D) Customs unions require the creation of a common currency.

A) A common market is more deeply integrated than a customs union.

Which of the following is FALSE? A) A common market is more deeply integrated than an economic union. B) The USMCA (formerly NAFTA) is an example of a free trade area. C) The European Union is a deeper form of integration than the USMCA (formerly NAFTA). D) Common markets allow for labor mobility between participating nations.

A) A common market is more deeply integrated than an economic union.

China's alternative to the IMF is called A) AIIB. B) ASEAN. C) MERCOSUR. D) TIIP.

A) AIIB.

Which of the following defines a flexible exchange rate? A) An exchange rate determined by the market B) An exchange rate that fluctuates within a set band C) An exchange rate that is not allowed to vary D) An exchange rate that is backed by gold

A) An exchange rate determined by the market

Which of the following is an example of a financial derivative? A) An option to purchase stock in the future B) A share of stock in Microsoft C) A U.S. government bond D) Monetary gold

A) An option to purchase stock in the future

In the short run, exchange rates are most directly affected by which of the following? A) Flows of financial capital B) Purchasing power parity C) Trade barriers D) Imports and exports

A) Flows of financial capital

External debt is not usually a problem for high-income countries for which of the following reasons? A) High-income countries take out loans denominated in their own currency. B) High-income countries do not need to borrow. C) High-income countries are too large to default on loans. D) High-income countries use loans to build infrastructure and create economic growth.

A) High-income countries take out loans denominated in their own currency.

Which of the following is a problem that arises when trying to classify regional trade agreements? A) Many agreements combine elements from different categories. B) The definition of free trade area includes that of a customs union. C) Some agreements include cultural issues while others do not. D) The most favored nation clause includes all of them.

A) Many agreements combine elements from different categories.

Suppose that there are only two countries, the U.S. and Japan. If real interest rates rise in Japan, which of the following is NOT true? A) More Japanese yen will be supplied in exchange for dollars. B) More U.S. dollars will be supplied in exchange for yen. C) The volume of yen traded will increase. D) Japanese borrowers will be worse off.

A) More Japanese yen will be supplied in exchange for dollars.

Which of the following is true? A) Most currency trades in London do not involve the British pound. B) The busiest currency center in the world is Hong Kong. C) Currencies may only be traded by central banks. D) Currency trade data is primarily maintained by the bank of the WTO.

A) Most currency trades in London do not involve the British pound.

Which of the following is NOT a feature of a common market? A) Substantial coordination of macroeconomic policies among the members B) Free trade in goods and services between the members C) Common external barriers to trade D) Factor mobility

A) Substantial coordination of macroeconomic policies among the members

Which of the following did NOT contribute to the collapse of Thailand's currency in 1997? A) The adoption of a flexible exchange rate B) A prolonged higher rate of inflation in Thailand than the U.S. C) Intense competition from China and Japan D) The baht was pegged to the U.S. dollar.

A) The adoption of a flexible exchange rate

How is dollarization different from a monetary union? A) The nations of dollarization do not share a central bank and monetary policy. B) The nations of dollarization do not share a common form of government. C) The nations of dollarization do not share a common border. D) The nations of dollarization are not major trade partners.

A) The nations of dollarization do not share a central bank and monetary policy.

Which of the following is an example of foreign direct investment? A) Toyota builds an automobile plant in Ohio. B) The Bank of Japan buys dollars. C) A citizen of Japan buys stock in Microsoft. D) A citizen of Japan buys a U.S. government bond.

A) Toyota builds an automobile plant in Ohio.

According to the text, which of the following factors may make the theory of purchasing power parity unrealistic? A) Trading countries may stop exchanging goods once prices between them equalize. B) Shipping, insurance, and transaction costs may reduce the impact of purchasing power parity. C) Prices may not equalize if goods arbitrage is reduced by trade barriers. D) The effects of purchasing power parity may not show up until many years have passed.

A) Trading countries may stop exchanging goods once prices between them equalize.

Which of the following transactions would be recorded in the financial account? A) U.S. investors purchase bonds from Germany. B) A person living in the United States sends money home to her family in Cuba. C) The Fed increases its holdings of yen. D) The U.S. transfers a military base to another country.

A) U.S. investors purchase bonds from Germany.

When most shocks to the economy are external, it is generally better to have A) a flexible rate system. B) a hard peg. C) a soft peg. D) a crawling peg.

A) a flexible rate system.

Negative current account balances are usually associated with A) a shrinking of the international investment position. B) an improvement of the international investment position. C) a decrease in external debt. D) an increase in external debt.

A) a shrinking of the international investment position.

Capital inflows in the form of direct investment can provide ________; this is a ________ of capital inflows. A) access to political power; cost B) access to political power; benefit C) increases in external debt; cost D) decreases in external debt; benefit

A) access to political power; cost

Suppose that the nominal exchange rate between the U.S. dollar and the Canadian dollar is 0.75 U.S. dollars per Canadian dollar. If Canada's rate of inflation is 0 percent and the U.S. rate is 10 percent, then the real exchange rate for the U.S. dollar will A) appreciate by about 9 percent. B) appreciate by 10 percent. C) depreciate by about 9 percent. D) depreciate by 10 percent.

A) appreciate by about 9 percent.

A country that runs out of official reserve assets A) cannot settle international debts. B) is bankrupt. C) will have a current account deficit. D) will have a current account surplus.

A) cannot settle international debts.

Soft pegs that are periodically adjusted are called A) crawling pegs. B) hard pegs. C) snakes. D) managed floats.

A) crawling pegs.

The World Bank was A) created as a result of the Bretton Woods conference and was originally focused on the reconstruction of Europe after World War II. B) created during the Uruguay Round of the GATT and was focused on providing development assistance. C) created as a result of the Bretton Woods conference for the purpose of interceding when a nation experiences a foreign exchange crisis. D) created by the United Nations to provide assistance to developing nations.

A) created as a result of the Bretton Woods conference and was originally focused on the reconstruction of Europe after World War II.

If the residents of a country receive income from their foreign investments, it is counted as a A) credit in the current account. B) debit in the current account. C) credit in the capital account. D) debit in the capital account.

A) credit in the current account.

Suppose the dollar is subject to a floating exchange rate system and that R is the number of dollars per unit of foreign exchange. If R increases, then the dollar A) depreciates. B) appreciates. C) is devalued. D) is revalued.

A) depreciates.

Debt service A) is rarely an issue for high-income countries. B) always makes a country worse off for having borrowed. C) is a problem when the amount of debt is small relative to the size of the economy. D) tends to benefit low- and middle-income countries at the expense of high-income countries.

A) is rarely an issue for high-income countries.

For most countries, the difference between GNP and GDP A) is very small. B) is extremely large. C) is rarely calculated. D) can result in the misallocation of resources.

A) is very small.

National savings is important for all of the following reasons EXCEPT A) it can be used to consume additional foreign goods. B) it can be used to fund private investment. C) it can be used to fund government investment. D) it can be used to fund foreign investment.

A) it can be used to consume additional foreign goods.

WTO talks in the late 1990s A) led to openings in both financial services and telecommunications. B) led to openings in farm subsidies and agriculture. C) led to the creation of the GATT. D) reached an impasse and future talks are unlikely.

A) led to openings in both financial services and telecommunications.

A single currency area requires A) mobile labor and synchronized business cycles. B) immobile labor and synchronized business cycles. C) immobile labor and mobile capital. D) mobile labor and unsynchronized business cycles.

A) mobile labor and synchronized business cycles.

Portfolio investments, relative to FDI, are A) more liquid. B) very illiquid. C) stable cash flows. D) longer term.

A) more liquid.

A forward exchange market contract A) obligates the owner to make a trade at a specified exchange rate a fixed number of days in the future. B) obligates the owner to purchase a foreign good a fixed number of days in the future. C) increases the risks of doing business with a foreign country. D) is most commonly used by interest rate arbitrageurs.

A) obligates the owner to make a trade at a specified exchange rate a fixed number of days in the future.

The primary mission of the World Bank today is to A) provide capital to underdeveloped countries. B) provide capital to firms around the world. C) provide financial assistance for the reconstruction of war-damaged nations. D) help countries manage their exchange rates.

A) provide capital to underdeveloped countries.

Payments made to foreign countries that are not in exchange for goods or services are known as A) remittances. B) stock transfers. C) exports. D) investments.

A) remittances.

The U.S. current account deficit improved slightly from 2007 to 2010 because A) spending on imports fell due to an overall fall in consumption. B) state, local, and federal government budget deficits increased. C) worldwide economic growth spurred U.S. exports. D) capital controls restricted capital inflow.

A) spending on imports fell due to an overall fall in consumption.

One positive interpretation of a current account deficit is A) that it enables higher levels of investment. B) it is usually inexpensive to finance. C) it always increases a nation's standard of living. D) it is perceived as a sign of political strength.

A) that it enables higher levels of investment.

The international organization that serves as a forum for trade discussions and the development of trade rules is called A) the WTO. B) the World Bank. C) the IMF. D) the United Nations.

A) the WTO.

Under a fixed exchange standard, if the domestic demand for foreign exchange increases, A) the central monetary authority must meet the demand out of its reserves to maintain the peg. B) the central monetary authority must increase the supply of domestic money to maintain the peg. C) the country will be forced to abandon the peg. D) inflation will increase.

A) the central monetary authority must meet the demand out of its reserves to maintain the peg.

All else equal, if Canada raises its interest rates, A) the dollar depreciates. B) the U.S. demand for Canadian dollars decreases. C) the Canadian supply of Canadian dollars increases. D) the Canadian dollar will depreciate.

A) the dollar depreciates.

The real exchange rate is defined as A) the market exchange rate adjusted for price differences. B) the purchasing power parity exchange rate. C) the exchange rate that causes interest parity to hold. D) the exchange rate that exists in major currency centers.

A) the market exchange rate adjusted for price differences.

Based on Table 9.1, if the information in the table is typical of current and financial account values over a long period, then it would be reasonable to infer that A) the net international investment position is negative. B) the net international investment position is positive. C) national savings are less than domestic investment. D) government accounts are in deficit.

A) the net international investment position is negative.

If Mexicans increasingly lose confidence in their domestic financial markets and move their assets to other countries, A) the peso will depreciate. B) the peso will appreciate. C) the peso is selling at a premium. D) there will be no impact on the peso exchange rate.

A) the peso will depreciate.

Covered interest arbitrage involves both A) the purchase of a foreign asset and a forward contract in the market for foreign exchange. B) the purchase of a domestic asset and a spot contract in the market for foreign exchange. C) the sale of a foreign asset and the purchase of a forward contract in the market for foreign exchange. D) the sale of domestic stocks and the purchase of foreign bonds.

A) the purchase of a foreign asset and a forward contract in the market for foreign exchange.

Holding nominal exchange rates constant, if inflation in Europe exceeds inflation in the United States, A) the real exchange rate ($/€) will rise, and the euro will buy more in the U.S. B) the real exchange rate ($/€) will rise, and the euro will buy less in the U.S. C) the real exchange rate ($/€) will fall, and the euro will buy more in the U.S. D) the real exchange rate ($/€) will fall, and the euro will buy less in the U.S.

A) the real exchange rate ($/€) will rise, and the euro will buy more in the U.S.

The international investment position is defined as A) the total of all domestic assets owned by foreigners minus the total of all foreign assets owned by residents of the home country. B) the total of all domestic assets owned by foreigners plus the total of all foreign assets owned by residents of the home country. C) the total of all foreign assets owned by residents of the home country minus the total of all domestic assets owned by foreigners. D) the total of all foreign assets owned by residents of the home country times the total of all domestic assets owned by foreigners.

A) the total of all domestic assets owned by foreigners minus the total of all foreign assets owned by residents of the home country.

One problem with high current account deficits is A) there is a higher potential for foreign capital flight. B) the foreign inflows can offset declining savings rates. C) they always indicate that domestic saving is too low. D) they are correlated with declining living standards.

A) there is a higher potential for foreign capital flight.

The traditional view of fixed rate systems was that A) they improved inflation but were worse for growth. B) they improved stability but were worse for inflation. C) they improved inflation but worsened stability. D) they improved growth but worsened inflation.

A) they improved inflation but were worse for growth.

Which type of exchange rate system minimizes external shocks to an economy?

Answer: A flexible exchange rate system

Describe the potential benefits and the potential costs to global trade of the tremendous growth in regional trade agreements.

Answer: A regional trade agreement creates preferential treatment for nations that are participants, which violates the idea of MFN status in multilateral agreements, where nations agree to treat all participants the same. The WTO recognizes that regional agreements destroy some opportunities for trade by making non-members face higher barriers than members of the regional agreement. But it believes that they create more trade than they divert, and the regional agreements allow nations to try out arrangements that may later be adopted more broadly.

Describe how a sudden stop leads to a financial crisis.

Answer: A sudden shift from positive to negative flows from one year to the next in the foreign owned reserve assets in the nation and loans to domestic firms may cause the financial account to become negative. This means there are no inflows to finance a current account deficit, so it must move from a negative balance to a positive balance, usually by a sudden reduction in imports and an eventual increase in exports. This shift in trade relations may cause a deep recession.

Trade policies in which industries have been the most contentious in the Doha Round?

Answer: Agriculture and services

The government budget deficit and the trade deficit are often called the "twin deficits." Explain why this name applies, and why it is not always accurate.

Answer: All other things equal, an increase in government spending that is not funded by an increase in taxes will result in an increase in the trade (or current account) deficit. However, it is not necessarily the case that in times of rising budget deficits, the trade (or current account balance) will always worsen. For example, during an economic recession, most countries experience government budget deficits. State, local, and federal governments all saw dramatic increases in their deficits from 2007 to 2010 as unemployment rose and tax collections fell. Nevertheless, the U.S. current account balance improved slightly due to the fall in consumption and the decline in spending on imports.

Describe the technology transfer benefit of capital flows into low-income countries.

Answer: Benefits include new technologies, new management techniques, and new ideas. Developing countries often lack access to these without outside help. If it comes as direct investment, it has the further benefit of not coming from debt and requiring interest payments from scarce national resources.

Carefully explain the pros and cons of borrowing from other countries.

Answer: Borrowing from other countries can be less costly and there may be more funds available than in the domestic market. All other things equal, if the loans are used to finance economic activities that encourage growth, this can be a desirable things to do, since increased economic growth can more than cover the costs of debt service. However, if the loans are not used wisely, the cost of debt service can use a large amount of already-scarce government resources. These loans also require currency of other nations to repay (which usually means that there must be sufficient exports or other international payments to obtain the currency), and if the value of the nation's currency falls, the cost of debt service can increase significantly over time.

The rights of nations to be free from unwanted foreign interference in their affairs is referred to as A) transparency. B) sovereignty. C) independence. D) globalization.

B) sovereignty.

What is debt service and how does it impact borrowing from other nations?

Answer: Debt service refers to the interest payments made on debt. Debt service is unrelated to the source of the loans and is instead determined by the financial strength of the debtor nation. Paying a foreign lender is no different than paying a domestic lender.

The International Bank for Reconstruction and Development (IBRD) part of the World Bank is set up to lend to whom and for what types of projects?

Answer: Developing nations' governments for specific development projects or major government economic policy adjustments

Explain the difference between primary and secondary income.

Answer: Earned income paid abroad and received from abroad is called primary income. This includes income on investments and compensation of employees. Secondary income is payments made abroad or received from abroad, such as payments made that are not in exchange for a good or service, like foreign aid, gifts, or the remittances (the transfer of wages earned in one country to residents of another country) of immigrants temporarily residing in another country.

Why might a group of countries wish to have a common currency? Explain four reasons.

Answer: First, a single currency eliminates the need to convert each other's money and thereby reduces transaction costs. Second, a single currency eliminates price fluctuations caused by changes in the exchange rate. The elimination of misleading price signals that result from exchange rate fluctuations is also a potential gain in efficiency. Third, the elimination of exchange rates through the adoption of a single currency can help increase political trust between countries seeking to increase their integration. Fourth, in some developing countries the adoption of a common currency may give their exchange rate system greater credibility.

Use the U.S. current account balance and international investment position to explain the relationship between the current account balance and the international investment position.

Answer: For many years, the U.S. international investment position was positive. The large current account deficits of the 1980s, 1990s, and 2000s have eroded the United States' investment position from a positive $288.6 billion in 1983 to zero in 1989, and negative since then. Each year a country experiences a current account deficit, foreigners acquire more assets inside its boundaries than its residents acquire abroad, and the international investment position shrinks further. Thus a current account deficit in a given year does not imply that the international investment position is negative, but sustained current account deficits must eventually lead to a negative international investment position.

How did the Financial Crisis of 2007-2009 change how some economists think about allowing the free flow of financial assets?

Answer: For over two decades, from the 1980s until the Financial Crisis of 2007-2009, many economists argued that it was better to allow financial capital to move freely across international borders. However, since that time the extreme volatility in some financial markets and the severe damage it has caused to many countries revived interest in regulations to limit the damage caused by unexpectedly large financial outflows.

What is the difference between the U.S. current account deficits of the 1980s and the 1990s?

Answer: In the 1980s, the government budget balance (T-G) turned into a large negative, and foreign financing filled the gap. In the 1990s, the federal budget moved to a positive balance, but investment expanded and private savings fell, overwhelming the changes in the government budget position.

How is the IMF funded?

Answer: It collects fees called quotas from its members.

How do recent current account deficits compare to GDP and to past ratios?

Answer: It is over 6 percent of GDP, much larger than it has been in the past, and the percentage has grown sharply over the last few years.

What is MFN status? How does the WTO reconcile the principle of equal treatment with the preferential treatment created by regional trade agreements?

Answer: MFN status is basically that you will treat all nations participating in the agreement the same. A regional trade agreement creates preferential treatment for nations that are participants. (For example, because of the USMCA (formerly NAFTA), Mexico and Canada get more preferential terms with the United States than other WTO members would.) The WTO recognizes that regional agreements destroy some opportunities for trade (by making nonmembers face higher barriers than members), but believes they create more trade between participants than they destroy. The regional agreements also allow nations to try out new arrangements that may later be adopted more broadly.

If nominal exchange rates do not change, an increase in the U.S. price level relative to the foreign price level represents a real appreciation of the dollar. However, if nominal exchange rates can change, is an increase in U.S. inflation relative to foreign inflation likely to cause appreciation of the dollar in the short run?

Answer: No. An increase in U.S. inflation relative to foreign inflation is likely to reduce the demand for dollars relative to other currencies. This will cause the nominal exchange rate to increase, a depreciation of the dollar relative to other currencies, and thus the effect on the real exchange rate is unclear.

What is odious debt, and how is the Democratic Republic of the Congo (DRC) an example of this?

Answer: Odious debt is legally defined as debt incurred without the consent of the people and that is not used for their benefit. During Joseph Mobutu's reign (1967 to 1997) in the DRC, real GDP, measured in the equivalent of U.S. dollars at 2000 prices, fell from $317 per person to $110 per person, while the regime amassed billions of dollars in foreign aid and loans. Mobutu's personal fortune was estimated to have reached $4 to $6 billion. In 2004, per capita income was at $88 and international debts were around $12 billion. Given the continued decline in incomes and the large number of unfinished projects financed by various governments and multilateral agencies, there is little evidence that the borrowed money was successfully used for development purposes. Furthermore, lenders knew the situation when they made their loans, but they went ahead since they wanted to secure access to the DRC's mineral deposits of cobalt and other strategic metals. In 2003, the DRC was admitted to the HIPC program and qualified for up to 80 percent debt forgiveness, and by 2010, more than half of its debt had been forgiven.

If inflation in the rest of the world is lower than inflation in Brazil, Brazil's currency (the real) would A) tend to appreciate. B) tend to depreciate. C) tend to remain unchanged. D) only impact exporters, not importers.

B) tend to depreciate.

It is unclear whether the free flow of capital is beneficial to all countries. Explain the benefits and costs of allowing capital to move freely.

Answer: On the one hand, foreign capital inflows are beneficial because they enable countries to increase their investments in factories, ports, and other physical assets that help raise living standards and incomes. On the other hand, the sudden outward flight of foreign financial capital can generate a debt crisis and throw a country into deep depression. Extreme volatility in some financial markets and the severe damage it has caused to many countries has revived interest in regulations to limit the damage caused by unexpectedly large financial outflows.

Explain why current account deficits may or may not be harmful to a country.

Answer: On the positive side, a current account deficit enables more investment than would be possible otherwise, and since higher investment is correlated with higher living standards, the current account deficit might be interpreted as beneficial. In addition, the capital inflows associated with current account deficits are an implicit vote of confidence by foreigners. On the negative side, capital inflows that occur with a current account deficit increase the stock of foreign-owned assets inside the home country, raising the possibility that a change in investor expectations about the economy's future can lead to a sudden surge in capital outflows. In the worst case scenario, capital flight is followed by a depletion of international reserves and a financial crisis.

Briefly describe the factors that contributed to the U.S. current account deficits of the 1990s.

Answer: Rapid U.S. economic growth raised income and import demand; economic growth was low or negative for U.S. trading partners, depressing export demand.

What are official reserve assets, and why are they important to countries?

Answer: Reserve assets are mainly the currencies of the largest and most stable economies in the world: U.S. dollars, European Union (EU) euros, British pounds, the Japanese yen, and recently the Chinese yuan, as well as monetary gold and SDRs. All forms of international debts can be settled with reserve assets. When a country runs low on reserve assets, it signals that potentially serious problems are arising. In particular, the country may not be able to pay international debts, and it may harm import businesses if the central bank cannot provide a key currency required for payment of import goods.

Which multilateral institution serves as the lender of last resort?

Answer: The IMF

Describe the primary functions of the World Bank, the IMF, and the WTO. When was each of these organizations formed?

Answer: The IMF and the World Bank were outlined at the Bretton Woods Conference and began operations at the end of World War II. Both function as banks for national governments, with the IMF playing the role of lender of last resort and the World Bank focusing its loans on economic development. A nation facing a payments crisis can contact the IMF for a loan, but it may have to change its domestic policies as part of the price of the loan package. The World Bank initially focused its lending on rebuilding war-torn areas, but then broadened its focus to development. Only developing countries can borrow from the World Bank. The World Trade Organization was not formed until 1994. An international organization to establish rules related to world trade, business practices, and international investment was proposed at the end of World War II, but was not created. A series of trade negotiations that focused primarily on lowering tariffs were launched. A number of rounds of GATT were completed and ultimately the round known as the Uruguay Round led to the formation of the WTO. The WTO focuses on the multilateral resolution of trade disputes and on continued negotiations to further reduce barriers to trade.

Describe the political power cost of large capital flows into low-income countries.

Answer: The Odious Debt situation pointed out that among the lowest income countries, corruption and lack of freedom have been a problem in the debt crisis. Similar problems could result from non-debt capital inflows (although tax payers may not be left with the same kinds of IOUs with interest). Large inflows of capital give access to power that may be exploited on the side of those doing the investing (their gain as opposed to the host nation's) or by those with political power in the nation receiving it (the interests of the people in power as opposed to the nation's interests). Large bribes for favorable legal treatment, for example, may be in the interests of the policy makers and the firms, but not the people.

Which round of GATT led to the formation of the WTO?

Answer: The Uruguay Round

What result of the Uruguay Round was the most significant for global trade?

Answer: The creation of the WTO

What does a current account deficit do that is positive for a nation?

Answer: The deficit enables more investment in the economy and investment increases living standards. Capital inflows, in general, indicate foreign confidence in the domestic economy.

Explain Mundell's four conditions for adopting a single currency.

Answer: The first condition is that the business cycle must be synchronized and national economies must enter recessions and expansions at more or less the same time, which makes similar monetary policies desirable. The second condition is a high degree of labor and capital mobility between the member countries. This allows workers and capital to leave countries or regions where work is scarce and to join the supply of labor and capital in booming regions. The third condition is that there are regional policies capable of addressing the imbalances that may develop. Depressed areas may remain depressed if people cannot move or choose not to move because the psychological or other costs are too high or resources outside the region are not available. The fourth condition is that the nations involved must be seeking a level of integration that goes beyond simple free trade.

How is dollarization different from a monetary union?

Answer: The nations do not share a central bank and monetary policy.

A rise in the nominal exchange rate ($/€) represents a depreciation of the dollar relative to the euro, but a rise in the real exchange rate ($/€) represent an appreciation of the dollar. Explain why this is true.

Answer: The nominal exchange rate represents the number of dollars required to buy one euro. An increase in that number means that more dollars are required to purchase a euro. The dollar price of the euro has risen, and the dollar has depreciated because one dollar now buys fewer euros. However, holding nominal rates constant, the reverse is true about real exchange rates. The real exchange rate is the nominal rate times the ratio of the foreign price level to the domestic price level. For the real rate to increase, the foreign price level must rise more slowly than the domestic price level. All other things equal, that means that a dollar can buy more goods in Europe than it could in the U.S. The dollar has thus appreciated in real terms, because it can purchase more goods abroad than before.

Your text considers both the low savings and high savings nations and concludes what about the relationship between government budgets and the current account?

Answer: The relationship isn't fixed. One does not cause the other in any necessary form.

Describe the criticisms about decision making at the IMF and the World Bank. Which types of policies are thought to reflect bias? What types of costs are not considered? What is the fundamental question critics raise about the operations of the international governmental economic institutions?

Answer: Voting structures at the IMF and World Bank give developed nations, and the U.S. especially, control over decision making, making it hard to delineate whose interests are being served. For example, policies favoring free capital flows and privatization of publicly owned industries are thought to reflect the biases of industrialized countries rather than overwhelming economic consensus. Implementation and adjustment costs may be much greater in developing countries because they have higher overall levels of unemployment, less diversification in their economies, and fewer resources to develop new infrastructure or to do other spending necessary to take advantage of new opportunities. Fundamentally, critics ask whether they are fostering development and economic security or generating greater economic inequality and compounding risks to vulnerable groups.

What are the disadvantages of adopting a single currency? Explain.

Answer:In addition to its political symbolism, the adoption of a common currency also means that the country no longer has its own money supply as a tool for managing its economic growth. A second potential cost to adopting a single currency is that countries give up their ability to alter their exchange rates. Exchange rate adjustments are sometimes the least costly way to restore competitiveness after a round of price increases

Based on Table 9.1, the balance on the current account is A) +100. B) +200. C) -100. D) -200.

B +200

Which of the following institutions is the most important participant in foreign currency markets? A) A retail customer B) A commercial bank C) A foreign exchange broker D) A central bank

B) A commercial bank

Which of the following is NOT required of a country with a gold standard? A) A country must be willing and able to exchange gold for their home currency. B) A country must coordinate the value of their currency with respect to gold with other countries. C) A country must keep their domestic money supply fixed in constant proportion to their supply of gold. D) A country must fix the value of their currency to a quantity of gold.

B) A country must coordinate the value of their currency with respect to gold with other countries.

Which of the following is an example of external debt for the United States? A) A purchase of Apple stock by a person in Canada B) A loan made in yen to a company in the United States C) A loan made by Citibank to the government of Mexico D) A purchase of U.S. Treasury bills by the Bank of Japan

B) A loan made in yen to a company in the United States

Which of the following transactions would be recorded in the current account? A) U.S. investors purchase bonds from Germany. B) A person living in the United States sends money home to her family in Cuba. C) The Fed increases its holdings of yen. D) The U.S. transfers a military base to another country.

B) A person living in the United States sends money home to her family in Cuba.

Until the Uruguay Round of trade negotiations, which of the following sectors were NOT included in the rules for international trade? A) Steel and agriculture B) Agriculture and apparel C) Steel and textiles D) Automobiles and agriculture

B) Agriculture and apparel

Which of the following defines a soft peg? A) An exchange rate determined by the market B) An exchange rate that fluctuates within a set band C) An exchange rate that is not allowed to vary D) An exchange rate that is backed by gold

B) An exchange rate that fluctuates within a set band

Which of the following is FALSE? A) National sovereignty limits outsiders' ability to change the trade laws and practices of individual nation states. B) Because of international recognition of national sovereignty, individual nations are unaffected by global trade and capital flows. C) Foreign investors may not have a legal right to impose policies on a nation state, but the nation state may still experience consequences of poor policies. D) Because trade policies are laws of individual nations, it is difficult for other nations and international organizations to force changes on unwilling nation states.

B) Because of international recognition of national sovereignty, individual nations are unaffected by global trade and capital flows.

Which of these activities is included in the GDP? A) Cooking at home B) Bicycle manufacturing C) All household production D) Gardening

B) Bicycle manufacturing

When the United States gives MFN status to China, it means that A) China is treated better than other U.S. trading partners. B) China is treated the same as other U.S. trading partners. C) China is treated worse than other U.S. trading partners. D) China is legally bound to reciprocate.

B) China is treated the same as other U.S. trading partners.

Which of the following is NOT true about this national income equation: A) For the current account, CA, to improve, we may have to invest less than otherwise would be the case. B) For the current account, CA, to improve, we may have to save less to maintain the same amount of investment that includes foreign saving. C) For the current account, CA, to improve, the government may have to run budget surplus. D) A reduction in the trade deficit with one country will simply show up as an increase in a trade deficit with another country.

B) For the current account, CA, to improve, we may have to save less to maintain the same amount of investment that includes foreign saving.

Which of the following is NOT true about the national income identity given by the equation: S + (T - G) = I + CA? A) If CA is positive, national saving finances the purchase of our goods by foreign users. B) If CA is negative, our investment is less than our national savings. C) A negative CA may imply that foreigners have confidence in the U.S. economy. D) If CA is negative and large, a country risks foreigners owning a large piece of its assets.

B) If CA is negative, our investment is less than our national savings.

Which of the following is true? A) If the European Central Bank sells euros and buys pounds, the U.S. dollar will appreciate. B) If the Japanese central bank sells yen and buys U.S. dollars, the U.S. dollar will appreciate. C) If the Federal Reserve Bank of the U.S. buys Mexican pesos and sells dollars, the U.S. dollar will appreciate. D) If the Chinese government imposes restrictions on the flow of capital from China to the U.S., the U.S. dollar will appreciate.

B) If the Japanese central bank sells yen and buys U.S. dollars, the U.S. dollar will appreciate.

Which of the following in true? A) International economic crises are relatively rare events. B) International economic crises can be made worse by free riding. C) Public goods are not usually a component of international economic crises. D) International economic institutions cannot reduce the severity of international economic crises.

B) International economic crises can be made worse by free riding.

Which of the following is a FALSE statement concerning purchasing power parity? A) Purchasing power parity states that dollars will tend to exchange for pounds at a rate that maintains a constant purchasing power of a given quantity of a currency. B) It is rare to see deviations from the purchasing power parity value of currencies. C) Over the long run, purchasing power parity exerts influence over exchange rates. D) An overvalued dollar buys more in Britain than it does in the United States.

B) It is rare to see deviations from the purchasing power parity value of currencies.

Which of the following would NOT be a benefit of regional trade agreements? A) It is easier for a few countries to reach a trade agreement than the many countries of the WTO. B) RTAs reduce the incentives to work towards global agreements. C) RTAs can experiment with new agreements covering new sectors or services. D) The impact of trade protection changes from an RTA will be less dramatic and possibly create less concern among domestic firms.

B) RTAs reduce the incentives to work towards global agreements.

Which of the following is an example of a change in reserve assets? A) Toyota builds an automobile plant in Ohio. B) The Bank of Japan buys dollars. C) A citizen of Japan buys stock in Microsoft. D) A citizen of Japan buys a U.S. government bond.

B) The Bank of Japan buys dollars.

A free trade agreement plus a common set of tariffs toward non-members is called A) a common market. B) a customs union. C) a free trade area. D) an economic union.

B) a customs union.

When most shocks originate in the monetary sector, it is generally better to have A) a flexible rate system. B) a fixed rate system. C) a gold standard. D) a managed float.

B) a fixed rate system.

A weak U.S. dollar leads to A) a higher volume of U.S. imports. B) a lower volume of U.S. imports. C) a leftward shift in the demand for U.S. dollars. D) a rightward shift in the supply of U.S. dollars.

B) a lower volume of U.S. imports.

When an economy is closely tied to another, larger economy, floating exchange rates A) are viewed by many as desirable. B) are viewed by many as undesirable. C) are usually impossible to implement. D) tend to be considered more stable.

B) are viewed by many as undesirable.

Suppose that the nominal exchange rate between the U.S. dollar and the Mexican peso is 0.10 dollars per peso. If Mexico's inflation is 10 percent and the United States' inflation is 0 percent, from the U.S. point of view, the real exchange rate A) appreciates to 0.11 dollars per peso. B) depreciates to 0.11 dollars per peso. C) appreciates to 0.09 dollars per peso. D) depreciates to 0.09 dollars per peso.

B) depreciates to 0.11 dollars per peso.

The international investment position of the United States is negative. This means that A) the U.S. current account balance is positive. B) foreigners own more U.S. assets than domestic residents own foreign assets. C) foreigners own fewer U.S. assets than domestic residents own foreign assets. D) the U.S. current account balance is negative.

B) foreigners own more U.S. assets than domestic residents own foreign assets.

The majority of countries in the world A) use a modified gold standard. B) have some type of fixed exchange rate system. C) have some type of flexible exchange rate system. D) rely on the Bank of International Settlements to determine their exchange rate system.

B) have some type of fixed exchange rate system.

One of the strongest motivations for holding the Bretton Woods Conference was to design new international institutions that would A) contain communism. B) help countries avoid the mistakes of the 1920s and 1930s. C) provide a collective defense security for Western Europe and North America. D) ensure that world prices were not rising too rapidly.

B) help countries avoid the mistakes of the 1920s and 1930s.

The world's combined foreign exchange market A) is second only to the oil market in size as measured by value traded. B) is the largest market in the world as measured by value traded. C) is small compared to the largest economies in the world as measured by value. D) is headquartered in Switzerland.

B) is the largest market in the world as measured by value traded.

The spot rate A) is the rate at which foreign currencies will be exchanged a specified number of days in the future. B) is the rate at which foreign currencies will be exchanged in the present. C) is the rate at which a government sets the exchange rate. D) is the preferred rate at which one central bank exchanges currency with another central bank.

B) is the rate at which foreign currencies will be exchanged in the present.

Under a gold standard, countries should A) keep the supply of their domestic money constant. B) keep the supply of their domestic money fixed in proportion to their gold holdings. C) keep the supply of foreign exchange less than their domestic money supply. D) restrict the demand for foreign goods.

B) keep the supply of their domestic money fixed in proportion to their gold holdings.

A reason why fixed exchange rate systems might lower growth is that A) inflation may be higher. B) monetary policy cannot be used. C) they are more risky. D) they deter international trade.

B) monetary policy cannot be used.

If a country runs a current account surplus and national private savings equals domestic investment, then the combined governmental accounts A) must be balanced. B) must be positive. C) must be negative. D) could be either negative or positive, depending on the net international investment position.

B) must be positive.

If a good or service does not get used up as it is consumed, then it is said to be A) nonexcludable. B) nonrival. C) nondiscrimination. D) nonconsumable.

B) nonrival.

If the dollar/pound exchange rate is $2/£, a Big Mac costs $5 in New York City and costs £4 in London, the pound is ________, and U.S. tourists will be ________. A) overvalued; better off in London B) overvalued; better off in New York C) undervalued; better off in London D) undervalued; better off in New York

B) overvalued; better off in New York

A country's foreign exchange reserves refers to A) the currency of the nation itself. B) the country's holdings of gold and internationally accepted currencies. C) the total amount of a country's currency held by other nations. D) the country's Special Drawing Rights (SDRs) at the IMF.

B) the country's holdings of gold and internationally accepted currencies.

The Smithsonian Agreement of 1971 was hailed by President Nixon as a fundamental reorganization of the international monetary system. In fact, what it accomplished was A) an appreciation of the dollar. B) the devaluation of the dollar. C) an increase of the gold content of the dollar. D) the elimination of gold backing for the dollar.

B) the devaluation of the dollar.

The current account balance of the United States began to deteriorate in A) the early 1970s. B) the early 1980s. C) the late 1980s. D) the early 1990s.

B) the early 1980s.

A current account deficit implies that A) the financial account is negative. B) the financial account is in surplus. C) exports of goods and services exceed imports of goods and services. D) secondary income is positive.

B) the financial account is in surplus.

Most favored nation (MFN) status means that a country treats another country A) better than its other trading partners. B) the same as its other trading partners. C) worse than its other trading partners. D) any way it chooses since it is the "most favored nation."

B) the same as its other trading partners.

With a partial trade agreement, A) goods and services are allowed to cross boundaries without tariffs. B) two or more countries agree to liberalize trade in a selected group of categories. C) two or more countries set common tariffs toward non-members. D) two or more countries allow the free mobility of inputs such as labor and capital.

B) two or more countries agree to liberalize trade in a selected group of categories.

2) Based on Table 9.1, the balance on the financial account is A) +100. B) +200. C) -100. D) -200.

C -100

3) Based on Table 9.1, the statistical discrepancy is A) +100. B) 0. C) -100. D) -200.

C -100

Based on Table 9.3, if values in the table are amended to reflect a net increase in U.S. foreign direct investment of 100, then the new balance for the capital account balance becomes A) -75. B) -25. C) +25. D) +75.

C) +25.

Based on Table 9.2, total savings, private plus public, is equal to A) 3 percent of GNP. B) 18 percent of GNP. C) 16 percent of GNP. D) 20 percent of GNP.

C) 16 percent of GNP.

Which of the following is an example of portfolio investment? A) Toyota builds an automobile plant in Ohio. B) The Bank of Japan buys dollars. C) A citizen of Japan buys stock in Microsoft. D) A citizen of Japan buys an option to purchase Microsoft stock in the future.

C) A citizen of Japan buys stock in Microsoft.

Why might a developing country prefer a fixed exchange rate? A) It allows them to form trade relationships with more countries. B) Many developing countries do not have a foreign exchange market which would allow for a flexible exchange rate. C) A fixed exchange rate can increase a country's credibility. D) A fixed exchange rate prevents speculative attacks.

C) A fixed exchange rate can increase a country's credibility.

Which of the following is true? A) A rise in the real exchange rate represents an increase in the purchasing power of the home currency. B) A tourist going to Europe would be happy if the real exchange rate ($/€) increased. C) A rise in the nominal exchange rate ($/€) represents a depreciation of the dollar relative to the euro, but a rise in the real exchange rate ($/€) represents an appreciation of the dollar. D) A rise in the real exchange rate will lead to a smaller trade deficit.

C) A rise in the nominal exchange rate ($/€) represents a depreciation of the dollar relative to the euro, but a rise in the real exchange rate ($/€) represents an appreciation of the dollar.

Which of the following defines a hard peg? A) An exchange rate determined by the market B) An exchange rate that fluctuates within a set band C) An exchange rate that is not allowed to vary D) An exchange rate that is backed by gold

C) An exchange rate that is not allowed to vary

Which of the following is an example of direct foreign investment? A) A U.S. citizen buys stock in a Mexican company. B) The Bank of China buys U.S. Treasury bonds. C) Apple builds a plant in Ireland. D) A company in England buys inputs to production from a German company.

C) Apple builds a plant in Ireland.

Which of the following is FALSE? A) Current account deficits must be financed through inflows of capital. B) Loans from abroad add to a country's stock of external debt and generate debt service. C) Borrowed funds are always used in a manner that contributes to the expansion of the country's productive capability. D) Debt service can become an unsustainable burden that holds back development.

C) Borrowed funds are always used in a manner that contributes to the expansion of the country's productive capability.

Which of the following is FALSE about the Highly Indebted Poor Countries initiative? A) Most of the countries included are in sub-Saharan Africa. B) Countries qualify for debt relief partly based on their level of poverty. C) Countries do not have to have established a past track record of economic reform in order to qualify as long as they make future commitments. D) External debt levels must be high relative to exports in order to qualify.

C) Countries do not have to have established a past track record of economic reform in order to qualify as long as they make future commitments.

Which of the following is true? A) Imports tend to fall whenever a nation's currency appreciates because foreign products become more expensive to domestic consumers. B) A country that experiences higher real interest rates than other countries would expect its currency to depreciate. C) If U.S. consumers increase their demand for foreign products and foreign travel, the U.S. dollar would tend to depreciate as more dollars are supplied to foreign exchange markets. D) An influx of tourists and advertising business for the Olympics would tend to lead to a decrease in the host nation's currency value, boosting ticket sales.

C) If U.S. consumers increase their demand for foreign products and foreign travel, the U.S. dollar would tend to depreciate as more dollars are supplied to foreign exchange markets.

Which of the following criticisms is NOT directed at the IMF? A) It lacks openness in its decision-making process. B) It serves the interests of wealthier countries. C) It creates a free-riding problem. D) It violates national sovereignty.

C) It creates a free-riding problem.

Which of the following is NOT true about the Doha round of the GATT? A) It was especially focused on issues of importance to developing countries. B) It is the first GATT trade round to fail or reach an impasse. C) It has ended discussion between WTO members on issues like greater market access and lower trade barriers. D) It involves the largest ever number of participants.

C) It has ended discussion between WTO members on issues like greater market access and lower trade barriers.

Which of the following is a FALSE statement about the International Monetary Fund (IMF)? A) The IMF was created after the Bretton Woods Conference to help to maintain the international fixed exchange rate system that was introduced. B) The IMF lends to national governments, initially to maintain the fixed exchange rate system, and today to deal with debt or currency crises. C) Multinational corporations can get IMF loans if they agree to invest in economies that are internationally perceived as risky and otherwise unlikely to receive direct foreign investment. D) One of the criticisms of the IMF and other international governmental organizations that deal with the global economy is that their decision making may be biased toward policies that favor industrialized nations.

C) Multinational corporations can get IMF loans if they agree to invest in economies that are internationally perceived as risky and otherwise unlikely to receive direct foreign investment.

Which of the following is true? A) A country experiencing a debt or currency crisis would contact the World Trade Organization. B) The World Trade Organization was formed at the Bretton Woods conference. C) The General Agreement on Tariffs and Trade created the World Trade Organization in the negotiations and treaty known as the Uruguay Round. D) The World Trade Organization has no power to resolve trade disputes and to enforce their resolution.

C) The General Agreement on Tariffs and Trade created the World Trade Organization in the negotiations and treaty known as the Uruguay Round.

Which of the following transactions would be recorded as a CREDIT in the current account? A) A U.S. citizen purchases goods from Ireland. B) A U.S. company pays dividends on its stock. Some of the dividends go to foreign owners of the stock. C) The U.S. sells wheat to Mexico. D) A person living in the United States sends money home to her family in Cuba.

C) The U.S. sells wheat to Mexico.

Which of the following is FALSE? A) In 2002, the United States imported more goods and services from foreign suppliers than it exported to foreign purchasers. B) Services are almost one-third of total exports and are a growing part of U.S. and world trade. C) The U.S. trade balance in services is in deficit. D) With the exception of the Gulf War period in 1991, the U.S. current account has been in deficit since the 1980s.

C) The U.S. trade balance in services is in deficit.

Which of the following transactions would be recorded in the capital account? A) U.S. investors purchase bonds from Germany. B) The Fed increases its holdings of yen. C) The U.S. transfers a military base to another country. D) A U.S. firm sells a machine to a business in another country.

C) The U.S. transfers a military base to another country.

Which of the following would NOT be a cause for an increased American demand for the Mexican peso? A) The United States having lower interest rates than Mexico B) Increased American demand for Mexican goods C) The expectation by speculators that the value of the peso is edging down D) Economic growth in the United States

C) The expectation by speculators that the value of the peso is edging down

Which of the following is NOT a criticism of international institutions such as the IMF, the World Bank, or the WTO? A) They violate national sovereignty by imposing unwanted domestic policies. B) They fail to understand the effects of their policies on the vulnerable. C) Their decision-making is biased in favor of underdeveloped nations. D) They ignore potentially large adjustment costs for developing nations of implementing their policies.

C) Their decision-making is biased in favor of underdeveloped nations.

The United States is best described as A) a customs union. B) a free trade area. C) an economic union. D) a common market.

C) an economic union.

Suppose the exchange rates between the United States and Canada are in long-run equilibrium as defined by the idea of purchasing power parity. If the law of one price holds perfectly, then differences between U.S. and Canadian rates of inflation would A) have no effect on nominal exchange rates. B) be completely offset by changes in the real exchange rate. C) be completely offset by changes in the nominal exchange rate. D) lead to a change in the real purchasing power of each country's currency when it is converted to the other country's currency.

C) be completely offset by changes in the nominal exchange rate.

If the nominal exchange rate does not change, but U.S. prices rise, the real exchange rate has ________, and U.S. imports are likely to ________. A) increased; rise B) increased; fall C) decreased; rise D) decreased; fall

C) decreased; rise

Openness in financial markets that allows free flow of financial capital across borders A) creates currency conversion problems. B) always stabilizes a financial system. C) encourages economic growth. D) is always harmful to an economy.

C) encourages economic growth.

Capital controls are most often aimed at slowing or eliminating movements of A) reserve assets. B) foreign direct investment. C) foreign portfolio investment. D) nonreserve government assets.

C) foreign portfolio investment.

One reason markets may fail to provide the optimal quantity of public goods is the problem of A) determining what the public wants. B) nondiscrimination. C) free riders. D) economic integration.

C) free riders.

The use of forward contracts and options to reduce the exchange rate risk on future foreign exchange transactions is A) arbitrage. B) speculation. C) hedging. D) devaluation.

C) hedging.

All other things equal, an increase in government spending that is NOT funded by taxes will A) have an undetermined effect on the current account. B) have no effect on the current account. C) increase the current account deficit. D) decrease the current account deficit.

C) increase the current account deficit.

A change in an exchange rate as a result of a difference between domestic and foreign interest rates is likely due to A) purchasing power parity. B) the business cycle. C) interest rate parity. D) the size of the foreign exchange market.

C) interest rate parity.

Technology transfer A) is not encouraged by low-income countries. B) is not beneficial to high-income countries. C) is a consequence of direct investment. D) is a consequence of all foreign investment.

C) is a consequence of direct investment.

The Bretton Woods exchange rate system was an example of a A) managed float. B) pure gold standard. C) modified gold standard. D) floating exchange rate system.

C) modified gold standard.

Under a pure gold standard, A) exchange rates float most of the time. B) money is worth more than under other systems. C) nations must buy and sell gold to settle international obligations. D) there is no inflationary pressure.

C) nations must buy and sell gold to settle international obligations.

An important function of international institutions during times of crisis is to A) make goods nonrival. B) make goods nonexcludable. C) prevent free riding. D) prevent nondiscrimination.

C) prevent free riding.

The original mission of the World Bank was to A) provide capital to underdeveloped countries. B) provide capital to firms around the world. C) provide financial assistance for the reconstruction of war-damaged nations. D) help countries manage their exchange rates.

C) provide financial assistance for the reconstruction of war-damaged nations.

If Juana contracts to buy U.S. office equipment in U.S. dollars and her domestic currency depreciates against the U.S. dollar between the time the contract is signed and the bill is paid, A) she will wind up paying less for the equipment because she stayed in the spot market. B) the amount she pays for the equipment will be unchanged because she stayed in the spot market. C) she will wind up paying more for the equipment because she stayed in the spot market. D) the price in the contract will be amended higher.

C) she will wind up paying more for the equipment because she stayed in the spot market.

Many of the important international governmental institutions that deal with the global economy have their roots in A) the establishment of the United Nations. B) the League of Nations. C) the Bretton Woods conference at the end of World War II. D) the World Trade Organization.

C) the Bretton Woods conference at the end of World War II.

A country experiencing a debt or currency crisis would contact A) the World Bank. B) the United Nations. C) the International Monetary Fund. D) the WTO.

C) the International Monetary Fund.

If all government budgets are balanced, and S is greater than I, then A) the net international investment position must be positive. B) the financial account must be positive. C) the financial account must be negative. D) the net international investment position must be negative.

C) the financial account must be negative.

In order to protect against foreign exchange risk, firms can use A) the spot market for foreign exchange. B) interest rate arbitrage. C) the forward market for foreign exchange. D) the J-curve.

C) the forward market for foreign exchange.

Whether capital inflows result in access to political power depends on A) whether Democrats or Republicans control the White House. B) the legality of offering bribes in the contributing country. C) the political culture of the host country receiving the inflows. D) the host nation's relative position in terms of the size of the GDP.

C) the political culture of the host country receiving the inflows.

All else equal and given the current system of exchange rates, if the United States enters a period of exceptionally strong growth, A) the pressure on the dollar is to revalue. B) the pressure on the dollar is to devalue. C) the pressure on the dollar is to depreciate. D) the pressure on the dollar is to appreciate.

C) the pressure on the dollar is to depreciate

When the purchasing power of currencies is the same, A) interest parity holds. B) currencies cannot change in value C) the real exchange rate is equal to the nominal exchange rate. D) interest rates are the same.

C) the real exchange rate is equal to the nominal exchange rate.

What matters most to importers and exporters is A) the domestic inflation rate. B) the nominal exchange rate. C) the real exchange rate. D) the real interest rate.

C) the real exchange rate.

If domestic savings is less than domestic investment, then A) reserve assets will increase. B) the government runs a budget deficit. C) there will be negative foreign investment. D) a trade surplus must result.

C) there will be negative foreign investment.

The Tokyo Round of the GATT negotiations was notable because it was the first round A) that included Japan. B) that included textiles and apparel. C) to begin establishing rules on subsidies. D) to begin discussions of exchange rates.

C) to begin establishing rules on subsidies.

The biggest disadvantage of a fixed exchange rate is the A) increased probability of high inflation. B) tradeoff between supporting the exchange rate and adjusting the trade balance. C) tradeoff between supporting the exchange rate and maintaining economic growth. D) tradeoff between supporting the exchange rate and maintaining a balanced budget.

C) tradeoff between supporting the exchange rate and maintaining economic growth.

If the dollar/pound exchange rate is $2/£, a Big Mac costs $5 in New York City and costs £2 in London, the pound is ________, and U.S. tourists will be ________. A) overvalued; better off in London B) overvalued; better off in New York C) undervalued; better off in London D) undervalued; better off in New York

C) undervalued; better off in London

Unsustainable debt may occur for all of the following reasons EXCEPT A) when countries are dependent on one or two key export commodities, and there is a sudden drop in the price of those commodities. B) when natural disasters occur. C) when civil conflicts are resolved and a peace dividend occurs. D) when there are corrupt politicians and practices.

C) when civil conflicts are resolved and a peace dividend occurs.

The WTO permits the creation of a regional trade agreement A) when the RTA includes a most-favored nation clause. B) if all members of the RTA are also members of the WTO. C) when the RTA leads to more trade creation than trade diversion. D) only if the RTA is a partial trade agreement.

C) when the RTA leads to more trade creation than trade diversion.

Based on Table 9.3, the capital account balance is equal to A) +25. B) -25. C) -125. D) +125.

D) +125.

All of the following are true about foreign direct investment (FDI) and portfolio investment EXCEPT A) increases in the flow of portfolio investments increase the likelihood of financial crisis. B) both portfolio investments and FDI are the same in that they both give their holders a claim on the future output of the foreign economy. C) FDI is relatively illiquid compared to portfolio investment. D) FDI changes very little from year to year.

D) FDI changes very little from year to year.

Which of the following is NOT a problem with excessive debt? A) It worsens the central government's budget position by adding large debt service payments to other budget items. B) It reduces the quantity of resources available to invest in economic development. C) If debt service is substantial, schools, health clinics, roads, ports, other infrastructure, and social needs are less likely to be addressed. D) It can reduce the chance of a crisis.

D) It can reduce the chance of a crisis.

An increase in the U.S. demand for the Mexican peso causes all of the following EXCEPT A) an increase in the U.S. dollar price of a Mexican peso. B) the Mexican peso to appreciate. C) the U.S. dollar to depreciate. D) Mexican goods to be cheaper.

D) Mexican goods to be cheaper.

Which of the following is NOT an official reserve asset for the United States? A) Monetary gold B) British pounds C) SDRs from the IMF D) Mexican pesos

D) Mexican pesos

According to purchasing power parity, which of the following is FALSE about an overvalued dollar compared to the Japanese yen? A) U.S. merchants would be motivated to import more Japanese goods. B) Japanese merchants would tend to export more to the United States. C) Prices in the United States would tend to fall. D) Over the long term, the exchange rate would fall.

D) Over the long term, the exchange rate would fall.

During the 1990s, which of the following did NOT occur? A) Private savings fell. B) Investment rose. C) The United States received capital inflows. D) Private savings was greater than investment for most of the 1990s.

D) Private savings was greater than investment for most of the 1990s.

Which of the following is NOT part of the current account? A) Dividends received on a foreign investment B) Purchase of a plane ticket on a foreign airline C) Shipment of food aid to a poor country D) Purchase of a foreign bond

D) Purchase of a foreign bond

Which of the following is NOT an argument against regional trade agreements? A) Freer trade from RTAs may lead to a loss of domestic manufacturing jobs. B) RTAs may undermine the WTO. C) RTAs may be harmful to the interests of countries excluded from the agreement. D) RTAs are limited to countries who are not members of the WTO.

D) RTAs are limited to countries who are not members of the WTO.

Which of the following is NOT an example of an international public good? A) Capital flows to less-developed countries B) Last-resort lending C) Open markets during a recession D) Regional trade agreements

D) Regional trade agreements

Suppose that Mexico has external debt, and the value of the country's currency, the peso, falls. Which of the following is true? A) The peso value of the loans will decrease as well. B) Mexico will find it easier to pay off its external debt. C) Mexico will declare bankruptcy. D) The cost of debt service will be higher.

D) The cost of debt service will be higher.

Why did China propose an alternative to the IMF ? A) They wanted more influence in voting for the next leader of the WTO. B) They wanted a larger share of the financial benefits of participating in the IMF. C) They wanted to use their surplus trade dollars to become a lender of last resort to other Asian countries. D) They wanted a stronger voice in international institutions but had less than five percent of IMF weighted votes.

D) They wanted a stronger voice in international institutions but had less than five percent of IMF weighted votes.

Which of the following is NOT a true statement about the Bretton Woods system? A) The value of the dollar was fixed in terms of gold. B) Other currencies fixed values in terms of the dollar. C) The U.S. was able to increase its money supply easily. D) Trade deficits were eliminated.

D) Trade deficits were eliminated.

Which of the following is true? A) A gold standard in any form was abandoned shortly after World War II. B) The gold standard was symbolic and did not require countries to actually hold gold reserves. C) Economists usually favor a return to the gold standard. D) Under a gold standard, a country must pay out gold in exchange for its currency on demand.

D) Under a gold standard, a country must pay out gold in exchange for its currency on demand.

Which of the following was NOT a creation of the Bretton Woods Conference? A) World Bank B) IMF C) IBRD D) WTO

D) WTO

Which of the following is NOT one of the determinants of the gains of adopting a single currency? A) A well-synchronized business cycle involving all member countries B) The possibility of factors of production to freely move across borders C) The willingness and ability of member countries to design policies to address regional imbalances that may develop D) Widening the common market by allowing other countries to join

D) Widening the common market by allowing other countries to join

The IMF A) can force nations to take loans and bail out packages and has more power than other international governmental organizations dealing with the global economy. B) can intercede uninvited in any country's banking system through the Bank of International Settlements. C) can offer only advice and has no financial resources. D) can only intercede in a financial crisis at the invitation of the stricken country.

D) can only intercede in a financial crisis at the invitation of the stricken country.

IMF conditionality refers to the A) technical assistance the IMF gives. B) minimum-sized loan the IMF will make. C) maximum-sized loan the IMF will make. D) changes a country must make in order to receive IMF financial assistance.

D) changes a country must make in order to receive IMF financial assistance.

If the current account balance of a country is positive, the country's international investment position A) is positive. B) is zero. C) is negative. D) could be positive, negative, or zero.

D) could be positive, negative, or zero.

If the Costa Rican colón is expected to depreciate in the future, A) it will temporarily appreciate as people move to take advantage based on this expectation. B) exchange rate speculators will purchase more cólones now. C) exchange rate speculators will wait and see what the future exchange rate becomes. D) exchange rate speculators will sell their cólones now.

D) exchange rate speculators will sell their cólones now.

People sometimes worry that American trade with other countries will lead to large U.S. trade deficits and the movement of massive amounts of American capital out of the country. This worry is unfounded because countries cannot A) increase savings at the same time that a trade deficit grows. B) spend more than they earn. C) invest more than they save. D) have both current account and financial account deficits at the same time.

D) have both current account and financial account deficits at the same time.

An American firm that buys foreign exchange because its managers expect the dollar to depreciate is A) increasing the supply of foreign exchange. B) decreasing the demand for foreign exchange. C) speculating. D) hedging.

D) hedging.

One of the most important and most visible roles of the IMF is to A) hold regular negotiations over tariff reductions. B) investigate countries that are charged with being unfair traders. C) provide loans to countries that need capital to develop their economies. D) intercede by invitation when countries cannot pay their international debts.One of the most important and most visible roles of the IMF is to A) hold regular negotiations over tariff reductions. B) investigate countries that are charged with being unfair traders. C) provide loans to countries that need capital to develop their economies. D) intercede by invitation when countries cannot pay their international debts.

D) intercede by invitation when countries cannot pay their international debts.

Having MFN status means A) that foreign goods are treated similarly to the same domestic goods once they enter a nation's market. B) that a country is excluded from any tariffs or trade barriers. C) that a country cannot join a regional trade agreement. D) that a country is getting the same treatment as a most-favored trading partner.

D) that a country is getting the same treatment as a most-favored trading partner.

The most commonly traded currency is A) the EU euro. B) the British pound. C) the Chinese renminbi. D) the U.S. dollar.

D) the U.S. dollar.

If more European and Japanese firms want to build factories and expand their offshore investments in the United States, A) the supply of U.S. dollars on foreign exchange markets will increase as a result of this investment activity. B) the demand for U.S. dollars on foreign exchange markets will decrease as a result of this investment activity. C) the exchange rate will be unaffected by this foreign direct investment. D) the supply of euros and yen on foreign exchange markets will increase as a result of this investment activity.

D) the supply of euros and yen on foreign exchange markets will increase as a result of this investment activity.

Economic research using data from the 1990s has shown that A) floating rate systems are better for economic growth. B) fixed rate systems are better for economic growth. C) gold standards are better for economic growth. D) there is no clear relationship between the exchange rate system and growth.

D) there is no clear relationship between the exchange rate system and growth.

A group of countries might want to share a common currency for all of the following reasons EXCEPT A) to increase political trust between the countries. B) to reduce transaction costs associated with currency conversions. C) to eliminate price fluctuations cause by exchange rate changes. D) to increase the effectiveness of domestic monetary policy.

D) to increase the effectiveness of domestic monetary policy.

The difference between GNP and GDP is A) GNP includes income received from abroad and excludes income paid abroad. B) GNP excludes income received from abroad and includes income paid abroad. C) GNP includes exports and imports. D) GNP excludes exports and imports.

GNP includes income received from abroad and excludes income paid abroad.

true or false? Capital inflows that take the form of direct investment may be particularly beneficial if they bring new technologies, new management techniques, and new ideas to the host country.

true

true or falsE? An example of odious debt would be debts on the part of a nation that were incurred by a dictator for the well-being of his family.

true

true or false? A sudden stop refers to a rapid slowing of capital inflows.

true

true or false? Between 1972 and 1999, the majority of loans to HIPC countries went to regimes considered "not free," and between 1985 and 1995, to places that were considered "corrupt" by international organizations.

true

true or false? Borrowing from other countries always leads to economic growth.

true

true or false? Capital inflows are desirable because they increase investment in a country.

true