Question 1

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.

Accepted Answer

Selective currency pricing is a strategy where a firm chooses to invoice customers in a currency that is either more stable or considered easier to hedge against, in order to minimize the risks associated with currency fluctuations.

Question 2

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.

Accepted Answer

A dual currency bond is a debt security where the coupon payments are made in one currency and the principal repayment is made in another currency; the currencies and amounts are determined at the issuance of the bond, not based on the lender's preference at the time of payment.

Question 3

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

Accepted Answer

In a back-to-back loan agreement, two companies in different countries borrow each other's currency for a set period of time, effectively swapping loans in their respective currencies to hedge against currency risk.

Question 4

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.

Accepted Answer

Currency sterilization involves a central bank conducting operations to offset the effects of foreign exchange intervention on the domestic money supply, not fixing or freezing the price of the home currency.

Question 5

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

Accepted Answer

In an effective currency sterilization, the central bank neutralizes the impact of its interventions in the forex market on the domestic money supply. When it purchases foreign currency, it typically sells domestic bonds to offset the increase in bank reserves, and vice versa when it sells foreign currency, it buys domestic bonds to prevent a decrease in bank reserves.

Question 6

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

Accepted Answer

The foreign-exchange market is primarily an over-the-counter (OTC) market, where trading occurs directly between two parties, rather than through a centralized exchange.

Question 7

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

Accepted Answer

If the value of the dollar declines, the foreign securities will be worth less in dollar terms, resulting in a loss for the investor.

Question 8

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

Accepted Answer

If the value of the dollar declines, the cost of importing goods into the U.S. would increase because more dollars would be needed to purchase the same amount of foreign currency to buy goods. However, this scenario does not automatically mean the importer will suffer a loss, as the importer could pass these increased costs onto consumers or might have hedged against currency fluctuations. The statement oversimplifies the complex dynamics of international trade and currency exchange rates.

Question 9

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.

Accepted Answer

This process describes a currency swap, where two parties exchange principal and interest in different currencies, allowing the company to manage foreign exchange risk and benefit from more favorable borrowing rates in another currency.

Question 10

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

Accepted Answer

Private insurers continue to offer exchange-risk insurance, adapting their models and premiums to account for the unpredictability of currency values rather than ceasing to offer it altogether.

Question 11

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.

Accepted Answer

The U.S. Balance of Payments current account includes transactions in goods, services, primary income, and secondary income. Significant debt forgiveness would reduce the amount of primary income received from abroad, and reduced service and merchandise revenues would decrease exports. Both effects would contribute to a larger current account deficit by reducing inflows or increasing outflows in the account.

Question 12

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

Accepted Answer

While many economists and policymakers argue that intervention in the foreign exchange markets can be costly and unproductive, there is no unanimous agreement among the U.S. and other major nations on this issue. Some countries actively intervene in the foreign exchange market to manage their currency values for various economic reasons.

Question 13

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

Accepted Answer

The passage states that the U.S. and other major nations will work to keep the dollar strong.

Question 14

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

Accepted Answer

In 2008, the U.S. service balance, which includes earnings from services such as financial, travel, and intellectual property, did indeed record a surplus of almost $150 billion, reflecting the country's strong position in global services trade at that time.

Question 15

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.

Accepted Answer

The answer of With the introduction of the Euro, the...

Question 16

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

Accepted Answer

In 2008, the United States experienced a significant balance of payments deficit, indeed amounting to just over $700 billion, reflecting the country's economic situation and its trade and financial flows with the rest of the world during that period.

Question 17

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

Accepted Answer

The United States is one of the largest sources of foreign aid and philanthropic giving globally, meaning that the gifts and grants it provides to other countries and organizations typically exceed the amount it receives.

Question 18

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.

Accepted Answer

The United States consumes more than it produces, resulting in a trade deficit. To finance this deficit and its consumption, the U.S. borrows from overseas by issuing government and private securities, attracting foreign investment.

Question 19

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:

Accepted Answer

The statement exemplifies the principle of Comparative Advantage, which suggests that nations should specialize in producing goods for which they have the lowest opportunity cost and trade for others, thereby maximizing economic efficiency and resource utilization globally.

Question 20

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:

Accepted Answer

The Balance of Payments Accounts record all economic and financial transactions between residents of one nation and the rest of the world during a specific time period, capturing trade in goods and services, financial transactions, and investments.

Quiz 23: International Financial Transactions and Balance of Payments