Question 1

Given that _____ is relatively scarce in Latin America, the outflows of capital from the region have been historically ______.
A) labor, large
B) labor, small
C) capital, large
D) capital, small
E) commodities, small

Accepted Answer

The sentence is talking about the scarcity of capital in Latin America, so option C - "capital, large" is the correct answer. The word "outflows" suggests that capital is leaving the region, which would be a large amount historically due to the scarcity of capital. The other options are not relevant to the sentence or the economic situation of Latin America.

Question 2

Which of the following is not part of the current account?
A) FDI
B) exports
C) remittances
D) ODA
E) none of the above

Accepted Answer

E

Question 3

Which of the following would be related to a surplus in the current account balance?
A) low commodity prices
B) large payments on debt
C) low tourism revenues
D) high commodity prices
E) low remittances

Accepted Answer

High commodity prices would lead to an increase in exports, which would result in a surplus in the current account balance.

Question 4

It is common for Latin American countries to have a _____ for their balances of trade, and a _____ for their current account balance.
A) surplus, surplus
B) surplus , deficit
C) deficit, deficit
D) deficit. surplus
E) surplus, surplus.

Accepted Answer

Latin American countries often export commodities but import a wide range of manufactured goods and services, leading to a trade surplus (exports exceed imports) but a current account deficit when considering net income (such as interest and dividends) and direct transfers from abroad (such as foreign aid), which are often negative.

Question 5

A record of the difference between the holding of foreign assets by domestic residents and domestic assets by foreign residents is known as:
A) financial account
B) current account
C) Bretton Woods system
D) official reserve assets
E) real exchange rate

Accepted Answer

The financial account in the balance of payments records transactions that involve the purchase or sale of assets. Essentially, it reflects the difference between a country's domestic assets purchased by foreigners and the foreign assets purchased by domestic residents.

Question 6

What is not included in the current account?
A) transactions involving goods
B) investment income
C) FDI
D) transactions involving services
E) unilateral transfers

Accepted Answer

Foreign Direct Investment (FDI) is not included in the current account. The current account includes the balance of trade, net income from abroad (including investment income), and net transfer payments. FDI refers to the ownership or control of a company in one country by a company in another country, and is recorded in the capital account.

Question 7

The difference between the income from and the payments to the rest of the world constitute the balance on what?
A) investment income
B) FDI
C) the current account
D) the financial account
E) unilateral transfers

Accepted Answer

The answer of The difference between the income from and...

Question 8

The tendency of investors to withdraw portfolio capital from an entire region in response to perceived economic difficulties in a single country or subset of countries is known as:
A) crawling peg
B) exchange rate regime
C) intervention
D) contagion
E) Bretton Woods system

Accepted Answer

The described phenomenon is known as contagion, where investors fear that economic problems in one country may spread to neighboring countries or the entire region, leading to a widespread withdrawal of portfolio capital. The other options are not relevant to this scenario - crawling peg refers to a type of exchange rate regime, intervention involves a government or central bank's actions in the foreign exchange markets, and the Bretton Woods system was an international monetary agreement in place from 1944 to 1971.

Question 9

What are remittances?
A) the transfers of money from foreign workers to their home country
B) grants given for development aid
C) the profits made from FDI
D) interest rate paid to the IMF
E) a crawling peg exchange system

Accepted Answer

Remittances refer to the transfers of money from foreign workers to their home country, typically to family members who reside there. It is a significant source of income for many developing countries and is often used for household expenses and investment in education and small businesses.

Question 10

Which of the following would be the most volatile component of the current account in Latin America?
A) imports of goods
B) imports of services
C) income on foreign assets
D) unilateral transfers
E) exports of goods

Accepted Answer

Unilateral transfers are the most volatile component of the current account in Latin America as they are often influenced by factors such as remittances and foreign aid, which can fluctuate significantly over time. Imports of goods and services, as well as exports of goods, tend to be more stable, while income on foreign assets may also fluctuate but to a lesser extent compared to unilateral transfers.

Question 11

Which of these is a type of unilateral transfer?
A) FDI
B) dividends from investments
C) IMF or World Bank loan
D) remittances
E) profits from investments

Accepted Answer

Remittances are a type of unilateral transfer because they are transfers of money by individuals working abroad back to their home country without the expectation of receiving anything in return. The other options listed are not considered unilateral transfers because they involve some form of return or investment. FDI, dividends, and profits involve a return on investment, while IMF or World Bank loans involve repayment with interest.

Question 12

Which nation uses the U.S. dollar as its currency?
A) Mexico
B) Guatemala
C) Brazil
D) Chile
E) Ecuador

Accepted Answer

Ecuador uses the U.S. dollar as its official currency.

Question 13

Higher commodity prices show up in:
A) the merchandise trade balance.
B) the balance on goods and services.
C) the current account balance.
D) all of the above
E) none of the above

Accepted Answer

Higher commodity prices can affect the merchandise trade balance by changing the value of exports and imports, the balance on goods and services by altering the cost and revenue associated with these items, and the current account balance, which includes the trade balance along with other factors like income from abroad and current transfers.

Question 14

What international institution was created at the Bretton Woods conference?
A) the United Nations
B) UNCTAD
C) the International Court of Justice
D) the International Monetary Fund
E) the International Olympic Committee

Accepted Answer

The International Monetary Fund (IMF) was created at the Bretton Woods conference in 1944 with the goal of promoting international economic cooperation and facilitating international trade.

Question 15

The exchange rate observed in the market is known as what?
A) real exchange rate
B) financial account
C) current account
D) absolute purchasing power parity
E) nominal exchange rate

Accepted Answer

The nominal exchange rate is the exchange rate observed in the market and is the rate at which one currency can be exchanged for another currency without adjusting for inflation or other factors.

Question 16

If there is a black market in foreign exchange, then what is likely to be the case?
A) There is no intervention in the foreign exchange market.
B) There are no exchange controls.
C) There is a free market in foreign exchange market.
D) all of the above
E) none of the above

Accepted Answer

A black market in foreign exchange typically arises when there are restrictions or controls on currency exchange, contradicting options A, B, and C, which suggest an absence of intervention, controls, or a free market scenario.

Question 17

Attempting to influence the exchange rate by buying or selling foreign exchange is known as _____ in the foreign exchange market.
A) sterilization
B) stabilization
C) intervention
D) monetarization
E) amelioration

Accepted Answer

Attempting to influence the exchange rate by buying or selling foreign exchange is known as intervention. Sterilization refers to the process of offsetting the impact of a foreign exchange intervention on the domestic money supply, stabilization and amelioration are not directly related to the foreign exchange market, and monetarization refers to the process of converting an asset into a form of currency.

Question 18

Exchange controls plus high inflation tends to produce:
A) sterilization.
B) intervention.
C) an undervalued exchange rate.
D) a black market in foreign exchange.
E) none of the above

Accepted Answer

Exchange controls and high inflation create a situation where obtaining foreign exchange legally becomes difficult and expensive due to strict government regulations and a devalued currency. As a result, a black market for foreign exchange typically develops, where people can buy and sell currency at higher rates than the official exchange rate.

Question 19

If Bolivia decides to fix their exchange rate but does not have enough foreign exchange (dollars) to intervene in the foreign exchange market, then they might institute a system of:
A) exchange controls.
B) white markets.
C) nominal markets.
D) an MTN.
E) all of the above

Accepted Answer

If Bolivia wants to fix their exchange rate but does not have enough foreign exchange reserves to intervene in the foreign exchange market, they might choose to institute a system of exchange controls. This would involve restricting or limiting the amount of foreign currency that can be bought or sold within the country, as well as imposing penalties for those who violate these restrictions. This would help them to maintain the fixed exchange rate without having to rely on intervention in the currency markets. The other options (B, C, D, and E) are not relevant in this context.

Question 20

Buying and selling of foreign exchange to influence the exchange rate is referred to as:
A) capital controls
B) a managed float.
C) exchange controls.
D) sterilization.
E) intervention.

Accepted Answer

The buying and selling of foreign exchange to influence the exchange rate is commonly referred to as intervention. This is often done by central banks or other governmental entities to stabilize or manipulate their currency's value. Choice A refers to restrictions on the flow of capital, while Choice B refers to a floating exchange rate system that is subject to market forces. Choice C refers to restrictions on the conversion of domestic currency to foreign currency. Choice D refers to a monetary policy tool used to offset the effects of foreign exchange intervention on the money supply.

Quiz 8: Exchange-Rate Policy

Given that _ is relatively scarce in Latin America, the outflows of capital from the region have been historically __.

Which of the following is not part of the current account?

Which of the following would be related to a surplus in the current account balance?

It is common for Latin American countries to have a _ for their balances of trade, and a _ for their current account balance.

A record of the difference between the holding of foreign assets by domestic residents and domestic assets by foreign residents is known as:

What is not included in the current account?

The difference between the income from and the payments to the rest of the world constitute the balance on what?

The tendency of investors to withdraw portfolio capital from an entire region in response to perceived economic difficulties in a single country or subset of countries is known as:

What are remittances?

Which of the following would be the most volatile component of the current account in Latin America?

Which of these is a type of unilateral transfer?

Which nation uses the U.S. dollar as its currency?

Higher commodity prices show up in:

What international institution was created at the Bretton Woods conference?

The exchange rate observed in the market is known as what?

If there is a black market in foreign exchange, then what is likely to be the case?

Attempting to influence the exchange rate by buying or selling foreign exchange is known as _____ in the foreign exchange market.

Exchange controls plus high inflation tends to produce:

If Bolivia decides to fix their exchange rate but does not have enough foreign exchange (dollars) to intervene in the foreign exchange market, then they might institute a system of:

Buying and selling of foreign exchange to influence the exchange rate is referred to as: