Question 1

A country's balance of payments is:

Accepted Answer

A country's balance of payments is a comprehensive record of all economic transactions between the residents of the country and the rest of the world, including trade in goods and services, financial transactions, and investments.

Question 2

In the balance of payments a net capital outflow from a country is:

Accepted Answer

Net capital outflow is essentially the mirror image of the current account surplus. When a country has a surplus in its current account, it means that its national savings exceed its domestic investment, leading to a net outflow of capital to foreign markets.

Question 3

The part of the balance of payments account that records all short-term flows of payments is called the:

Accepted Answer

The current account records all short-term flows of payments, including trade in goods and services, primary income, and secondary income transactions between residents and non-residents.

Question 4

The part of the balance of payments account that records the amount of foreign currency the government buys or sells is the:

Accepted Answer

The official reserves account is the part of the balance of payments that records transactions involving the purchase or sale of foreign currency by the government. It is used to stabilize the value of the home country's currency.

Question 5

If a Canadian company buys steel from Russia, then that purchase will be recorded in the:

Accepted Answer

This purchase is recorded in the Canadian current account because it involves the import of goods, affecting the trade balance, which is a component of the current account.

Question 6

If a French billionaire buys stock in the Bank of Montreal, then that purchase will be recorded in the:

Accepted Answer

When a foreign investor, such as a French billionaire, buys stock in a Canadian company like the Bank of Montreal, the transaction is recorded in the Canadian capital account. This account tracks the flow of investment into and out of the country, including investments in stocks, bonds, and real estate.

Question 7

If the balance on current account and the balance on capital account do not sum to zero:

Accepted Answer

The balance of payments consists of the current account, the capital account, and the financial account, which includes official reserves. If the sum of the current and capital accounts does not equal zero, the discrepancy is offset by changes in official reserves. This adjustment ensures that the overall balance of payments remains balanced, as per the accounting principle that all transactions must net to zero.

Question 8

A balance of payments deficit will always occur if:

Accepted Answer

A balance of payments deficit occurs when the sum of the current account and the capital account (excluding official reserve transactions) is negative. This means the country is spending more on foreign trade than it is earning, and is borrowing capital from foreign sources to make up the deficit. Options A, B, and C do not necessarily result in a balance of payments deficit.

Question 9

During the last decade, Canada ran large balance of trade surpluses. These trade surpluses imply:

Accepted Answer

A trade surplus indicates that a country exports more than it imports, but it doesn't directly determine the overall balance of payments status. The balance of payments includes not just the trade balance but also financial flows and other transactions. Thus, a trade surplus could coexist with a balance of payments surplus, deficit, or equilibrium, depending on the net effect of all transactions.

Question 10

Capital account deals with all of the following except one, which one:

Accepted Answer

The capital account in balance of payments accounting primarily deals with flows of investment and financial capital across borders (A, B, D). It does not deal with payments for buying foreign goods; that is recorded in the current account.

Question 11

Use the following terms and determine which of the following choices is wrong? Balance of current account (CA)
Balance in capital account (KA)
Change in official international reserves (?OR)

Accepted Answer

The balance of payments must always balance, meaning CA + KA - ?OR = 0. Therefore, if CA is +5 and KA is -3, ?OR must be -2 to balance the equation, making the balance of payments zero, not positive or negative.

Question 12

Suppose, the nominal exchange rate (er) of US dollar is $1.20, price (GDP deflator) in USA is 115 and the price (GDP deflator) in Canada in 112. The real exchange rate of US dollar is:

Accepted Answer

The real exchange rate is calculated as (Nominal Exchange Rate * Price of Domestic Goods) / Price of Foreign Goods. Here, it is (1.20 * 115) / 112 = 1.23214, which rounds to 1.23.

Question 13

Suppose, the purchasing power parity holds and real exchange rate remains constant. If the inflation rate in USA is 10% and Canada's inflation rate is 4%, then the nominal exchange rate of US dollar will:

Accepted Answer

According to the relative purchasing power parity, the nominal exchange rate change is approximately equal to the difference in inflation rates between the two countries. Here, the US inflation rate is 10% and Canada's is 4%, so the nominal exchange rate of the US dollar will decrease by approximately 6% (10% - 4%).

Question 14

Which of the following statements is false?

Accepted Answer

The answer of Which of the following statements is false?
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Question 15

A Chinese purchase of a Canadian-made Bombardier aircraft is recorded in the Canadian balance of payments as:

Accepted Answer

When a Chinese entity purchases a Canadian-made Bombardier aircraft, it is considered an export of goods from Canada to China. This transaction increases Canada's exports, which is recorded as a positive entry in the current account of Canada's balance of payments. The current account tracks the trade balance, including exports and imports of goods and services, along with earnings on overseas investments minus payments made to foreign investors.

Question 16

An increase in Canadian real GDP will:

Accepted Answer

An increase in Canadian real GDP typically leads to higher domestic consumption, including imports, which can reduce the current account balance as imports rise relative to exports.

Question 17

An increase in US real GDP will:

Accepted Answer

An increase in US real GDP typically leads to increased imports as consumers and businesses have more income to spend, which can reduce the US current account balance due to a higher import bill. Conversely, Canada, being a close trading partner, is likely to experience an increase in exports to the US, improving its current account balance.

Question 18

Lower transport costs that result in lower prices for Chinese manufactures in the Canadian economy:

Accepted Answer

Lower transport costs make Chinese manufactured goods cheaper in Canada, leading to an increase in Canadian imports of these goods. This, in turn, would likely reduce the Canadian current account balance as more money flows out of Canada to pay for these imports.

Question 19

The price of imported goods and services compared to domestic goods and services is:

Accepted Answer

The real exchange rate compares the price of domestic goods and services to the price of foreign goods and services, taking into account the exchange rate and inflation differences between the two countries.

Question 20

If the domestic currency depreciates, raising the nominal exchange rate but leaving other things unchanged, the real exchange rate will:

Accepted Answer

When the domestic currency depreciates, it means that more units of the domestic currency are needed to purchase a unit of foreign currency, effectively raising the nominal exchange rate. The real exchange rate, which adjusts the nominal exchange rate by the relative prices of domestic and foreign goods, will increase if the domestic currency depreciates and other factors remain constant. This is because the domestic goods become cheaper relative to foreign goods, making the real exchange rate—the price of domestic goods in terms of foreign goods—higher.

Quiz 12: An AD As Model of the Inflation Rate and Real GDP