Question 1

What is a country's balance of (merchandise) trade and why is it so widely reported in the financial and popular press?

Accepted Answer

The answer of What is a country's balance of (merchandise)...

Question 2

What is the Official Reserves Account (ORA) and why is it more important for countries under a fixed exchange rate regime than for ones under a floating exchange rate regime?

Accepted Answer

The answer of What is the Official Reserves Account (ORA)...

Question 3

Which of the following does NOT represent a possible mechanism by which capital can be moved from country to country?

Accepted Answer

All of the above are mechanisms for moving capital from country to country.

Question 4

Assume that a country is experiencing a balance of trade deficit and then suffers a rapid depreciation of its currency. J-curve theory suggests that the trade balance will adjust in three distinct periods in the following order

Accepted Answer

The J-curve theory suggests that after a currency depreciation, the trade balance initially worsens during the currency contract period, then stabilizes during the pass-through period, and finally improves during the quantity adjustment period.

Question 5

The time from 1971 to today has predominately used a regime of variable exchange rates. It has also seen a decrease in capital mobility.

Accepted Answer

The statement is incorrect. The time from 1971 to today has predominantly used a regime of floating exchange rates, where the exchange rates are determined by the market forces of supply and demand. Additionally, there has been an increase in capital mobility, with countries lifting restrictions on the movement of capital across borders.

Question 6

Your authors identify five primary mechanisms by which capital may be moved from one country to another. Identify and briefly explain/define three of those methods.

Accepted Answer

The answer of Your authors identify five primary mechanisms by...

Question 7

The immediate impact on the balance of trade (BOT) for a country in deficit when there is an immediate devaluation of its currency is likely to be an even larger BOT deficit than prior to devaluation.

Accepted Answer

When a country's currency is devalued, its exports become cheaper and imports become more expensive. This means that the demand for exports may increase, leading to an increase in export revenue. However, the increased cost of imports could cancel out the gains from exports, leading to a larger overall BOT deficit. Therefore, a devaluation of the currency is unlikely to immediately improve the BOT for a country in deficit.

Question 8

________ has increasingly focused on cost reduction through imports from less costly (lower wage) foreign locations.

Accepted Answer

Supply chain management involves arranging the movement of goods and services from suppliers to consumers. In recent years, many companies have focused on reducing costs through importing from countries with lower wages, which is a key component of supply chain management. Exchange rate management, inflation rate management, and interest rate management may all be important factors in business operations, but they are not directly related to cost reduction through imports from lower-wage countries.

Question 9

A positive current account balance (surplus) contributes directly to increasing the measure of GDP.

Accepted Answer

A positive current account balance means that a country is exporting more goods and services than it is importing. This leads to an increase in the country's GDP as the value of exports is included in the GDP calculation. Therefore, a surplus in the current account has a positive impact on the GDP measure.

Question 10

Identify and explain the three stages of the J-curve adjustment path of the trade balance adjustment process.

Accepted Answer

The answer of Identify and explain the three stages of...

Question 11

Which of the following is the best definition of money laundering?

Accepted Answer

Money laundering involves the cross-border purchase of assets that are then managed in a way that hides the movement of money and its ownership. This can include purchasing high-value items such as real estate, artwork, or luxury goods, and then taking steps to make it difficult to trace the funds used to make these purchases.

Question 12

It is possible that the J-curve path for BOT adjustments may be elongated or even inapplicable if exports are NOT predominately priced in the domestic currency and/or imports are NOT predominately priced in the foreign currency.

Accepted Answer

The J-curve effect relies on a depreciation in the domestic currency leading to an increase in export competitiveness and a decrease in import demand. If exports are not priced in the domestic currency or imports are not priced in the foreign currency, the expected changes in export and import demand may not occur, resulting in an elongated or even absent J-curve path.

Question 13

The J-curve adjustment path for trade balance adjustments assumes that export products are predominantly priced in the ________ currency and that import products are predominantly priced in the ________ currency.

Accepted Answer

The answer of The J-curve adjustment path for trade balance...

Question 14

The J-curve adjustment path for trade balance adjustments assumes that ________ products are predominantly priced in the domestic currency and that ________ products are predominantly priced in the foreign currency

Accepted Answer

The J-curve adjustment path assumes that export products are predominantly priced in the foreign currency, while import products are predominantly priced in the domestic currency. This is because a decline in the exchange rate makes export products cheaper in foreign markets, thus increasing demand and improving the trade balance in the long run. However, it takes time for this adjustment to occur, hence the J-shaped curve. On the other hand, a decline in the exchange rate makes import products more expensive, which may reduce demand only in the short run, hence the initial decline in the trade balance.

Question 15

The era between 1880 and 1914, when the gold standard was in use, was characterized by increasing capital mobility.

Accepted Answer

The gold standard enabled the free flow of capital across borders, allowing for increased capital mobility during the era between 1880 and 1914.

Question 16

In a static (accounting) sense, a nation's GDP can be represented by the following equation: where C = consumption spending, I = investment spending, G = government spending, X = exports of goods and services, and M = imports of goods and services.

Accepted Answer

GDP is calculated as the sum of all final goods and services produced within a country's borders in a given period. Consumption spending (C), investment spending (I), government spending (G), exports (X), and imports (M) are all components that make up a nation's GDP. Since exports of goods and services (X) add to GDP and imports of goods and services (M) detract from GDP, the correct formulation is GDP = C + I + G + X - M.

Question 17

Construct, in a static (accounting) form the equation for a nations GDP as presented by the authors. Identify each term (e.g., r = interest rate). How does a positive BOP account balance affect a country's GDP?

Accepted Answer

The answer of Construct, in a static (accounting) form the...

Quiz 3: The Balance of Payments