Question 1

Tourism shows up on the&#10;A) merchandise account&#10;B) current account&#10;C) a and c above&#10;C) capital account

Accepted Answer

Tourism is a service export, and as such, it is included in the current account of the balance of payments. The current account includes all transactions related to the sale and purchase of goods, services, and income between a country and the rest of the world. The merchandise account (A) only includes the export and imports of goods, while the capital account (C) includes capital transfers and investments between countries.

Question 2

If a real value of a nation's freely floating currency increases, and the nation's current account is initially zero, its capital account will most likely be
A) adjusted for the rate of inflation

A) in deficit
B) decreased by the amount of increase in the current account
B) in surplus

B

Accepted Answer

If the value of a nation's currency increases, it becomes more expensive for foreign investors to purchase assets denominated in that currency. This makes the nation's assets less attractive to foreign investors and reduces their willingness to invest in that country. As a result, a capital account surplus is unlikely. Additionally, if the current account was initially zero, there would be no offsetting actions that would lead to a deficit in the capital account. Therefore, the most likely outcome is a capital account surplus.

Question 3

The Japanese current account surplus can best be attributed to&#10;A) the high rate of Japanese domestic investment&#10;B) Japanese protectionism&#10;C) the high rate of Japanese savings&#10;D) government budget deficits

Accepted Answer

The high rate of Japanese savings has contributed to the country's current account surplus. This is because a high level of savings leads to increased investment by Japanese firms, which in turn increases exports and thus boosts the current account surplus. Additionally, a high level of savings means that Japan is able to invest in foreign assets, which also contributes to the current account surplus.

Question 4

A nation that is running a savings deficit&#10;A) must spend more than it produces&#10;B) will invest domestically more than it saves&#10;C) must have a net capital outflow&#10;D) a and b only

Accepted Answer

A savings deficit means that the nation is not saving enough to fund its investments, and it must therefore rely on borrowing from other countries or institutions. This involves spending more than it produces (choice A) and investing domestically more than it saves (choice B). As a result, there will be a net capital outflow (choice C), which refers to the difference between the amount of capital leaving a country and the amount entering it.

Question 5

The accounting statement that summarizes all the economic transactions between residents of the home country and residents of all other countries is called the
A) balance of trade

A) capital account balance
B) current account balance
C) balance of payments

Accepted Answer

The balance of payments statement provides a summary of all economic transactions between a country and other countries, including trade in goods and services, financial transactions, and transfers of money. The current account balance and capital account balance are both components of the balance of payments statement. The balance of trade is a subset of the current account balance and only refers to trade in goods.

Question 6

The change in private domestic borrowing or lending required to keep payments in balance without adjusting official reserves is called&#10;A) the net liquidity balance&#10;B) the balance of payments&#10;C) the balance on current account&#10;D) the balance on capital account

Accepted Answer

The change in private domestic borrowing or lending required to keep payments in balance without adjusting official reserves is called the net liquidity balance. The other options refer to broader concepts in the balance of payments, but do not specifically address the change in private domestic borrowing or lending.

Question 7

In a freely floating exchange rate system, if the capital account surplus for the U.S. rises, what will most likely happen to the real value of the dollar?
A) it will decline

A) there is no impact on the dollar
B) it will rise
B) the IMF will step in to adjust rising exchange rates

Accepted Answer

In a freely floating exchange rate system, the balance of payments must be zero, meaning any deficit in the capital account must be offset by a surplus in the current account.

Question 8

In a freely?floating exchange rate system, the sale of Japanese cars to the United States will be offset by which item on the US balance of payments?&#10;A) a credit on the current account&#10;B) a credit on the capital account&#10;C) a debit on the trade account&#10;D) a or b

Accepted Answer

The answer of In a freely?floating exchange rate system, the...

Question 9

Suppose Lufthansa buys 10 Boeing 747s for $150 million in 1991, financed by a five?year loan from the US Export?Import Bank There is a one year grace period on principal and interest payments The net impact of this sale in 1991 is

A) a $150 million reduction in the U.S. trade deficit
B) a $150 million increase in the U.S. capital account surplus
C) positive change in the U.S. balance of payments in 1991
D) a $500 million reduction in the U.S. trade deficit

Accepted Answer

The sale of Boeing 747s to Lufthansa represents an export from the U.S., which would reduce the U.S. trade deficit by $150 million in 1991.

Question 10

If a nation's income exceeds its spending, then&#10;A) savings will be less than domestic investment&#10;B) the nation must run a current?account deficit&#10;C) the balance of payments will have deficits for the next two years&#10;D) the nation must run a capital?account deficit

Accepted Answer

If a nation's income exceeds its spending, it implies that the nation is saving more than it is investing domestically, leading to a surplus in the current account. To balance the balance of payments, there must be a corresponding deficit in the capital account.

Question 11

In a freely floating exchange rate system, if the capital account surplus for the U.S. rises, what will most likely happen to the real value of the dollar?
A) it will decline

A) there is no impact on the dollar
B) it will rise
B) the IMF will step in to adjust rising exchange rates

Accepted Answer

The answer of In a freely floating exchange rate system,...

Question 12

In a freely floating exchange rate system, if the capital account surplus for the U.S. rises, what will most likely happen to the real value of the dollar?
A) it will decline

A) there is no impact on the dollar
B) it will rise
B) the IMF will step in to adjust rising exchange rates

Accepted Answer

The answer of In a freely floating exchange rate system,...

Question 13

The balance on current account includes the net flow of good, services, income and&#10;A) portfolio investments&#10;B) changes in reserve assets&#10;C) direct investment&#10;D) unilateral transfers

Accepted Answer

The answer of The balance on current account includes the...

Question 14

The US savings deficit can be attributed, in part, to
A) rising US taxes on capital accumulation

A) the growing US budget deficit
B) high real interest rates abroad
C) low American investment in plant and equipment

Accepted Answer

The answer of The US savings deficit can be attributed,...

Question 15

As the real value of the dollar rises, the balance on current account is likely to&#10;A) increase&#10;B) decrease&#10;C) stay the same&#10;D) move with the capital account adjustments factor

Accepted Answer

The answer of As the real value of the dollar...

Question 16

A balance of trade deficit results in a current account&#10;A) deficit&#10;A) surplus&#10;B) IMF intervention&#10;D) World Bank loan

Accepted Answer

The answer of A balance of trade deficit results in...

Question 17

In order to reduce its current?account deficit, the United States must do which of the following?&#10;A) reduce the federal budget deficit&#10;B) lower national product relative to national spending&#10;C) reduce savings relative to domestic investment&#10;D) reduce the federal budget surplus

Accepted Answer

The answer of In order to reduce its current?account deficit,...

Question 18

The sale of American computers to the Spanish government shows up as
A) a debit on the current account

A) a debit on the official reserves account
B) a credit on the official reserves account
C) a credit on the trade account

Accepted Answer

The answer of The sale of American computers to the...

Deck 5: The Balance of Payments and International Economic Linkages