Deck 3: The Classical Model of International Trade

Question 1

Use the following information to answer questions
Table 3.1:
$\begin{array}{|l|l|}\hline \text { Exports of goods and services } & 1000 \\\hline \text { Imports of goods and services } & 800 \\\hline \text { Net change in domestic-owned assets abroad } & 500 \\\hline \text { Net change in foreign-owned assets at home } & 400 \\\hline \text { Unilateral transfers received } & 100 \\\hline \text { Unilateral transfers paid } & 200 \\\hline \text { Investment income paid to foreigners } & 300 \\\hline \text { Investment income received from foreigners } & 400 \\\hline\end{array}$

-Refer to Table 3.1. The balance on the capital account is:

A) + 900
B) +100
C) 0
D) - 100

Answer 1

+100

Question 2

Which of the following categories generally has a deficit for the U.S.?

A) Investment income
B) Unilateral transfers
C) Services
D) Balance of payments

Answer 2

Unilateral transfers

Question 3

Which of the following is considered as a capital inflow to the U.S.?

A) A sale of U.S. financial assets to a foreign buyer.
B) A loan from U.S. bank to a foreign borrower.
C) A purchase of foreign financial assets by a U.S. buyer.
D) A U.S. company deposits $1 million in a bank account in Switzerland.

Answer 3

A sale of U.S. financial assets to a foreign buyer.

Question 4

The ________ measures changes in financial assets held by foreign monetary agencies and official reserve asset transactions.

A) Monetary exchange board
B) Unilateral account balance.
C) Official settlements balance.
D) Currency balance sheet.

Question 5

If imports exceed exports, then:

A) private saving exceeds public saving.
B) private saving plus public saving exceed domestic investment.
C) private saving plus public saving minus domestic investment is negative.
D) domestic investment is negative.

Question 6

Michael Phelps, the U.S. Olympic swimmer, spends $2,000 on traveling costs around England after the London Olympic game. This is counted as:

A) Debit to services.
B) Credit to services.
C) Debit to unilateral transfer.
D) Credit to unilateral transfer.

Question 7

The balance on current account includes all of the following items EXCEPT:

A) merchandise exports minus merchandise imports
B) exports of services minus imports of services
C) income receipts minus income payments on investments
D) changes in U.S. assets owned abroad and foreign assets owned in the U.S.

Question 8

Which of the following is considered a capital outflow?

A) A sale of U.S. financial assets to a foreign buyer.
B) A loan from a U.S. bank to a foreign borrower.
C) A purchase of foreign financial assets by a U.S. buyer.
D) A donation of $100,000 worth of wheat to Nicaragua

Question 9

A U.S. gift of wheat to a Nicaragua causes a:

A) Debit in the U.S. merchandise account
B) Debit in the U.S. unilateral transfers
C) Debit in the U.S. private capital account
D) Credit in the U.S. private capital account

Question 10

The net value of flows of goods, services, investment income, and unilateral transfers is called the:

A) Capital account balance
B) Current account balance
C) Merchandise account balance.
D) Official settlements balance.

Question 11

Which of the following is considered a capital inflow?

A) A sale of U.S. financial assets to a foreign buyer.
B) A loan from a U.S. bank to a foreign borrower.
C) A purchase of foreign financial assets by a U.S. buyer.
D) A U.S. citizen's repayment of a loan from a foreign bank.

Question 12

A U.S. resident increasing her holdings of a foreign financial asset causes a:

A) Credit in the U.S. current account
B) Debit in the U.S. current account
C) Credit in the U.S. capital account
D) Debit in the U.S. capital account

Question 13

A foreign resident increasing her holdings of a U.S. financial asset causes a:

A) Credit in the U.S. merchandise account
B) Debit in the U.S. current account
C) Credit in the U.S. private capital account
D) Debit in the U.S. private capital account

Question 14

In the twin deficits hypothesis, to reduce a current account deficit, a country has to:

A) increase domestic investment
B) reduce private saving
C) reduce government budget deficit
D) All of the above are correct

Question 15

Unilateral payments include pensions, private transfers and ________.

A) Demand deposits
B) Foreign aid
C) Tradable goods
D) Tradable services

Question 16

Use the following information to answer questions
Table 3.1:
$\begin{array}{|l|l|}\hline \text { Exports of goods and services } & 1000 \\\hline \text { Imports of goods and services } & 800 \\\hline \text { Net change in domestic-owned assets abroad } & 500 \\\hline \text { Net change in foreign-owned assets at home } & 400 \\\hline \text { Unilateral transfers received } & 100 \\\hline \text { Unilateral transfers paid } & 200 \\\hline \text { Investment income paid to foreigners } & 300 \\\hline \text { Investment income received from foreigners } & 400 \\\hline\end{array}$

-Refer to Table 3.1. The balance on the current account is:

A) + 100
B) + 200
C) - 100
D) 0

Question 17

The difference between the balance on current account and the balance on capital account is:

A) the balance of payment
B) statistical discrepancy
C) the balance of trade
D) official settlements balance

Question 18

If the residents of a country receive money from their relatives living abroad, it will be counted as:

A) credit in the current account
B) debit in the current account
C) credit in the capital account
D) debit in the capital account

Question 19

Let Y be domestic income, C be consumption, I be investment, G be government spending and T be taxes. The private saving pluses public saving equal to:

A) Y - C - T - G
B) Y - I
C) Y - C - T
D) Y - C - G

Question 20

Let Y be domestic income, C be consumption, I be investment, G be government spending and T be taxes. The private saving is:

A) Y - C - T - G
B) Y - C - I
C) Y - C - T
D) Y - C - G

Question 21

A U.S. resident receives $1,000 in interest from French bonds he owns causes a:

A) Credit to service
B) Debit to service
C) Credit to investment income
D) Debit to investment income

Question 22

In September, 2005, exports of goods from the U.S. decreased $3.3 billion to $73.4 billion, and imports of goods increased $3.8 billion to $144.5 billion. This increased the deficit in:

A) The balance of payments
B) The financial account.
C) The current account.
D) Unilateral transfers.

Question 23

The U.S. subsidiary of a South Korean company pays dividends to its parent company in South Korea causes a:

A) Credit in the U.S. investment income
B) Debit in the U.S. investment income
C) Credit in U.S. services
D) Debit in U.S. services

Question 24

A foreign resident buys shares of in a U.S. company stock in the New York Stock Exchange.

A) Credit in U.S. services
B) Credit to the U.S. unilateral transfers
C) Credit in the U.S. private capital account
D) Debit in U.S. services

Question 25

The double-entry bookkeeping for the balance of payments tracks tariffs and currency exchanges.

Question 26

A U.S. citizen takes a cruise on a Norwegian cruise line to Canada causes a:

A) Credit in U.S. services
B) Credit to the U.S. unilateral transfers
C) Credit in the U.S. private capital account
D) Debit in the U.S. private capital account

Question 27

A U.S. gift of wheat to a Nicaragua causes a:

A) Credit in the U.S. merchandise account
B) Credit in the U.S. unilateral transfers
C) Credit in the U.S. private capital account
D) Debit in the U.S. private capital account

Question 28

A Japanese store buys Apple iPods shipped from the U.S. causes a:

A) Credit in the U.S. merchandise account
B) Debit in the U.S. merchandise account
C) Credit to U.S. investment income
D) Debit to U.S. investment income

Question 29

The United States, Germany, and China are examples of net creditor nations, where the country owes more to the rest of the world than it is owed.

Question 30

Capital account transactions include: I. Foreign purchases of U.S. stocks
II) Goods imports
III) Official financial transactions
IV) Changes in U.S. bank claims on foreign banks

A) I only
B) II only
C) I and IV
D) I, III, and IV

Question 31

A trade surplus occurs when the current account is greater than the capital account.

Question 32

Which of the following is an example of an outflow in the U.S. capital account?

A) A foreign resident purchases a U.S. made car from a foreign dealer.
B) A U.S. firm gives 90 days for a $1,000,000 note to be paid off by a French importer of U.S. goods.
C) A U.S. firm pays salaries to employees based in Paris.
D) A foreign firm receives a payment for exports from a U.S. firm.

Question 33

A Belgian company pays $100,000 to a consulting company in Chicago for a consulting report. This causes a:

A) Credit in the U.S. investment income
B) Debit in the U.S. investment income
C) Credit in U.S. services
D) Debit in U.S. services

Question 34

A U.S. car company builds a factory in Mexico causes a:

A) Debit in U.S. services
B) Debit in the U.S. unilateral transfers
C) Debit in the U.S. private capital account
D) Credit in U.S. private capital account

Question 35

Remittances by foreigners in the U.S., pension paid and aid offered by the U.S. to its citizens living abroad are examples of:

A) Reserve asset transfers
B) Investment income
C) Export of services
D) Unilateral transfers

Question 36

Which of the following is an argument made to explain the large U.S. trade deficit in the 1980's?

A) Deflation in the U.S. dollar
B) Inflation in the U.S.
C) Government budget deficit
D) Government budget surplus

Question 37

The current account balance measures all of the following except:

A) Foreign cash payments
B) Goods imports and goods exports
C) Net receipts of investment income
D) Unilateral transfers

Question 38

Bank claims and liabilities, security purchases, direct investments are examples of items found in the capital account.

Question 39

What is a country called if its accumulated capital account balances results in it owing more than it is owed?

A) Complete debtor
B) Complete creditor
C) Net debtor
D) Net creditor

Question 40

The German government donates $100,000 worth of vaccine to Tanzania. This action is recorded as a $100,000 debit to the German unilateral transfers.

Question 41

Unlike the trade balance of exports and imports, the balance of payments equilibrium has a zero balance at all times.

Question 42

Because foreigners hold a greater claim to U.S. assets than U.S. residents to foreign assets, U.S. is a ________.

A) Net creditor
B) Trade creditor
C) Trade debtor
D) Net debtor

Question 43

Current account deficits are offset by capital account ________.

A) Assets
B) Revenues
C) Surpluses
D) Imports

Question 44

A decrease in the U.S.-owned deposit in foreign banks is an) ________ to the U.S. capital.

A) Credit to the private capital account
B) Debit to the private capital account
C) Credit to the official capital account
D) Debit to the official capital account

Question 45

For unfair trade to be a reasonable explanation for the U.S. trade deficit then it is reasonable that

A) Foreign countries must have simultaneously increased trade protection in 1982.
B) U.S. manufacturing must have experienced a sharp decline in the years preceding 1982.
C) Foreign interest rates must have decreased the value of the U.S. dollar in 1982.
D) Foreign countries must have simultaneously reduced trade protection in 1982.

Question 46

Investment income, unilateral payments, and the value of trade of merchandise and services define the current account.

Question 47

Which of the following is not a method to restore a balance of payments equilibrium in a surplus country?

A) Government mandated quotas
B) Accumulate international reserves
C) Allow the use of flexible exchange rates
D) Price controls

Question 48

The Algerian government receives $1,000,000 worth of seed from the U.S. government as a gift. This action is recorded as a $1,000,000 debit to the U.S. merchandise account.

Question 49

The current account shows international transactions that involve currently produced goods and services.

Question 50

In the balance of payments debits are recorded as negative entries and credits are recorded as positive entries.

Question 51

What kind of currency exchange system will prevent the balance of payments from being automatically balanced?

A) Monetary unions
B) Fixed exchange rate
C) Floating
D) Managed floating