Deck 23: International Financial Transactions and Balance of Payments

Question 1

The international financial markets perform the same basic function as do the domestic financial markets, bringing international lenders of funds into contact with borrowers.

Answer 1

True

Question 2

The balance of payments accounts reflect stocks rather than flows.

Answer 2

False

Question 3

The balance of payments accounts make use of single-entry bookkeeping principles and must always "balance" in a statistical sense.

Answer 3

False

Question 4

International transactions which bring about inflows of foreign currency into the home country would be recorded in the balance of payments accounts as credits (+).

Question 5

International transactions resulting in an outflow of foreign currency from the home country would be recorded in the balance of payments accounts as debits (-).

Question 6

Any economic transaction which involves domestic residents only and is carried out in the home currency could not appear in the home country's balance of payments accounts.

Question 7

Credit items in the balance of payments accounts are uses of funds, adding to a nation's external buying power.

Question 8

Debit items in the balance-of payments accounts are sources of funds, reducing a nation's external buying power.

Question 9

There are approximately 50 different monetary units around the world.

Question 10

One of the features of the historical gold standard was that nations agreed to exchange paper money or gold coins for gold bullion in unlimited amounts at fixed, predetermined prices.

Question 11

Operation of a gold standard is dependent upon having free trade among nations.

Question 12

One of the disadvantages of the gold standard is to limit the domestic policy options open to economic policymakers within each country.

Question 13

The Bretton Woods System was dismantled in the early 1970s when the U.S. dollar was devalued by the Nixon Administration and the gold convertibility of the dollar was suspended.

Question 14

Gold is still considered to be an international monetary medium, according to your text.

Question 15

Nations that attempt to keep their currency's exchange value within a fixed range around the value of some other currency or basket of currencies are known as floaters.

Question 16

The majority of pegging nations are major industrialized Western countries, while developing countries tend to be floaters as far as their exchange rate policy is concerned.

Question 17

Most developed nations use a "managed float" policy to determine the value of their currencies in international markets, which means that central banks or other government monetary authorities will intervene frequently to keep their currency values in a relatively fixed ratio to the value of major convertible currencies (especially the dollar).

Question 18

The five member nations represented in the valuation of SDRs include Germany, France, Japan, the United Kingdom and the United States.

Question 19

If Americans are importing more goods from abroad than they are able to sell to their overseas customers, there will be an excess supply of U.S. dollars in foreign hands.

Question 20

A rise in the value of Japanese yen, assuming all currency values are unchanged, will reduce the official value assigned to an SDR.

Question 21

The majority of American balance of payments deficits in recent years have been financed through changes in official reserve assets.

Question 22

When a domestic corporation brings the earnings of its foreign affiliates back into the domestic economy this is called direct investment.

Question 23

The International Monetary Fund (IMF) laid down rules for settling balance-of-payments deficits between nations.

Question 24

The modified exchange standard was adopted by member nations at the historic Yalta Conference at the end of World War II.

Question 25

The five nations whose currencies and trade are used to establish the value of SDRs are Canada, the United States, Italy, Spain and the United Kingdom.

Question 26

The sale of U.S. tractors to a French agricultural cooperative is an export of merchandise and a debit entry in the U.S. balance of payments.

Question 27

Blanchard Chocolatier imports Swiss chocolate into the U.S. This is reflected as a debit entry in the U.S. balance of payments.

Question 28

General Dynamics sends a dividend check to an investor in the United Kingdom. This is a debit entry in the U.S. balance of payments.

Question 29

The purchase of tulip bulbs from a Dutch grower by a nursery in the U.S. is an import of merchandise.

Question 30

Compared to earlier years, U.S. investors found investment abroad more attractive than domestic investment during the 1990s.

Question 31

The market for trading foreign currencies is largely an over-the-counter market rather than one in which organized exchanges predominate with set trading hours.

Question 32

The market for immediate delivery of a foreign currency is known as the spot market; the term "immediate delivery" normally means "within one or two business days."

Question 33

In the forward currency markets, delivery of currencies normally occurs one, three or six months following an agreement to trade between buyer and seller.

Question 34

For each pair of currencies, such as dollars and pounds, foreign-currency brokers and dealers post two different exchange rates.

Question 35

Most foreign currency futures contracts are made with the ultimate intention of actually delivering the currencies mentioned in the contracts.

Question 36

Currency futures are traded in the majority of cases to reduce the risk associated with fluctuating currency prices.

Question 37

Importer of goods typically use a buying hedge in the currency futures market.

Question 38

Investors committing their funds to foreign securities would normally employ a selling hedge in the currency futures market.

Question 39

A currency option obligates the option buyer to make or take delivery.

Question 40

A straight currency swap facilitates the borrowing of foreign currency without currency risk.

Question 41

Selective currency pricing involves invoicing a customer to whom a firm has sold goods in a more stable currency or in a currency believed easier to effectively hedge.

Question 42

A dual currency bond is a debt security in which the lender insists that the bond be retired in either one of two different currencies depending upon the lender's preference at the time a payment is to be made.

Question 43

In a back-to-back loan agreement two borrowing companies agree to swap their loans which are denominated in two different currencies.

Question 44

Currency sterilization is a process by which a central bank attempts to fix or freeze the price of the home currency where the central bank is located.

Question 45

In an effective currency sterilization operating bank reserves will increase after a currency is purchased and decline after currency is sold.

Question 46

The foreign-exchange market is largely an exchange, rather than an over-the counter market.

Question 47

A U.S. investor purchases foreign securities. The investor will lose money if the value of the dollar subsequently declines.

Question 48

An importer of goods into the U.S. will suffer a loss if the value of the dollar declines.

Question 49

When a company borrows money in a foreign currency and then immediately reverses the transaction by swapping the foreign currency into its home currency with a counterparty it has participated in a currency swap.

Question 50

Private insurers have stopped offering exchange-risk insurance because currency values have become so unpredictable.

Question 51

Significant debt forgiveness and reduced service and merchandise revenues, both effects of the recent global economic crisis, are reflected in the U.S. Balance of Payments current account deficit.

Question 52

The U.S. and other major nations all agree that intervention in the foreign exchange markets is costly and unproductive.

Question 53

For the foreseeable future, the U.S. and other major nations will work to keep the dollar strong.

Question 54

In 2008 the U.S. service balance surplus was almost $150 billion.

Question 55

With the introduction of the Euro, the proportion of U.S. dollars that make up all official currency holdings worldwide has dropped to less than half.

Question 56

The United States balance of payments (BOP) in 2008 was a deficit of just over 700 billion.

Question 57

Gifts and grants flowing out of the U.S. typically exceed gifts and grants flowing into the U.S.

Question 58

The United States consume more than producers were provided it borrows from overseas, such as, by issuing government and private securities, to finance their consumption.

Question 59

A nation should acquire goods and services from those sources, foreign or domestic, which result in the lowest cost of its own resources. This statement exemplifies the principle of:

A) Minimum Resource Cost
B) Diminishing Returns
C) Operating Resource Leverage
D) Comparative Advantage
E) International Specialization
F) None of the above

Question 60

All economic and financial transactions between residents of one nation and the rest of the world during a specific time period are recorded in the:

A) Balance of Payments Accounts
B) Official Reserves Transactions Report
C) IMF Statistical Report
D) World Trade and Commerce Statistics
E) None of the above

Question 61

The U.S. balance of payments accounts are prepared and published quarterly by the:

A) Federal Reserve Board
B) Federal Trade Commission
C) Department of Commerce
D) World Bank
E) None of the above

Question 62

Imports and exports of goods and services and unilateral transfers are recorded in which of the following components of a nation's balance of payments accounts?

A) Capital Account
B) Official Reserves
C) Merchandise Trade Balance
D) Current Account
E) None of the above

Question 63

Short-term and long-term investment abroad would be recorded in the _____ of a nation's balance of payments accounts.

A) Capital account
B) Official reserves
C) Service balance
D) Unilateral transfers
E) Current account
F) None of the above

Question 64

Changes in government holdings of foreign currency, gold and special drawing rights at the International Monetary Fund would be reflected in the _____ on a nation's balance of payments accounts.

A) Current account
B) Capital account
C) Basic balance
D) Official reserve transactions
E) Unilateral transfers

Question 65

All of the following items except one are credit entries in a nation's balance of payments. Which one is not a credit entry?

A) Exports of merchandise
B) Services sold abroad
C) Gifts of money sent abroad
D) Interest and dividends earned from investments overseas
E) Repayments by foreigners of funds borrowed from domestic institutions
F) All of the above are credit entries

Question 66

All of the following items except one are debit entries in a nation's balance of payments. Which one is not a debit entry?

A) Imports of merchandise
B) Foreign purchases of securities issued by domestic firms and units of government
C) Services provided to domestic citizens by foreign countries
D) Gifts of money sent abroad
E) Capital investments abroad by domestic citizens
F) None of the above are debit entries

Question 67

An international monetary system in which virtually all international transactions take place in convertible currencies with gold bullion little used for this purpose, but each currency is freely convertible into gold at a fixed rate (and into other currencies) is known as the:

A) Gold standard
B) Gold exchange standard
C) Modified exchange standard
D) Managed floating currency standard
E) None of the above

Question 68

The international monetary system in which foreign currency prices are linked to the U.S. dollar and gold, the dollar is tied to gold at a fixed price and central banks are obligated to intervene in the currency markets to keep their home currency's exchange rate with the dollar within a narrowly defined band is called the:

A) Gold standard
B) Gold exchange standard
C) Modified exchange standard
D) Managed floating currency standard
E) None of the above

Question 69

The international monetary system in which each nation is allowed to choose its own exchange rate policy and may intervene in the foreign exchange markets to protect its own national currency and correct short-term disorderly conditions, provided the welfare of other countries is taken into account, is called the:

A) Gold standard
B) Gold exchange standard
C) Modified exchange standard
D) Managed floating currency standard
E) None of the above

Question 70

An official monetary reserve unit designed to settle international claims arising from transactions between the IMF, member governments, central banks and international agencies is known as:

A) SDR
B) Currency Basket
C) EMS Account Unit
D) Central Bank Currency Swap
E) Currency Denominated Deposit
F) None of the above

Question 71

The major transactions captured in a nation's balance of payments accounts include all the following except:

A) Exports of goods and services
B) Expenditures by foreign tourists in the domestic economy
C) Income from overseas investments
D) Government loans abroad
E) Surplus or deficit in the federal government's official budget

Question 72

Services included in a nation's balance of payments accounts include all of the following items except:

A) Hotel accommodations for foreigners
B) Medical care given by domestic hospitals to foreign citizens
C) Receipts of income from direct investments made overseas
D) Shipping of ocean freight for foreign firms and individuals
E) All of the above items are included in the services account in a nation's balance of payments

Question 73

American gift giving and charitable contributions overseas are recorded in which balance of payments accounts?

A) Capital account
B) Direct investments account
C) Services account
D) Merchandise trade account
E) None of the above

Question 74

If a business headquartered inside the United States establishes affiliated companies in Europe and Japan, but gathers the net income from these affiliated companies and returns it to the United States, this is known as:

A) Capital flight
B) Repatriation of funds
C) Capital transfer
D) Capital investment exchange
E) None of the above

Question 75

The agency which establishes rules for settling international balance-of-payments accounts between nations is known as the:

A) World Bank
B) International Agency for Reconstruction and Development
C) International Monetary Fund
D) International Clearinghouse and Payments Association
E) None of the above

Question 76

The five IMF nations whose currency values and exports are used as the basis for valuing SDRs are:

A) U.S., France, Germany, Japan and the United Kingdom
B) U.S., Italy, France, Switzerland and Japan
C) United Kingdom, U.S., Holland, Germany and Italy
D) U.S., Japan, China, Germany and the United Kingdom
E) None of the above are completely correct

Question 77

The sale of IBM computers in France will be recorded as a:

A) Credit item on the current account
B) Debit item on the current account
C) Credit item on the capital account
D) Debit item on the capital account
E) Credit item on the official reserves account

Question 78

Lloyd's of London provides insurance to a U.S. corporation. This will be recorded as a:

A) Credit item on the current account
B) Debit item on the current account
C) Credit item on the capital account
D) Debit item on the capital account
E) Credit item on the official reserves account

Question 79

The purchase of real estate in the U.S. by a Group of Japanese investors will be recorded as a:

A) Credit item on the current account
B) Debit item on the current account
C) Credit item on the capital account
D) Debit item on the capital account
E) Credit item on the official reserves account

Question 80

A decline in inflation in the U.S. relative to other countries should make American products:

A) More competitive
B) Less competitive
C) More expensive abroad
D) Harder to sell abroad
E) Relative inflation rates have no impact on the demand for products across countries