Question 1

The world as a whole has a current account deficit because
A) some countries export less than they import.
B) There are statistical discrepancies.
C) The United States and China have current account deficit.
D) Income from assets held abroad is misreported.

Accepted Answer

D

Question 2

The difference between the current account balance and net exports is
A) the capital account.
B) net unilateral transfers plus net factor payments from abroad.
C) adjustments in net foreign assets.
D) income receipts from foreign assets.

Accepted Answer

The difference between the current account balance and net exports is accounted for by net unilateral transfers (such as remittances) plus net factor payments from abroad (such as income from investments minus payments to foreign investors). These components, along with net exports, make up the current account balance.

Question 3

Which of the following would be part of the nation's capital account?
A) a nightclub show seen by a Canadian in Mexico City
B) a dividend from a British equity owned by a Canadian
C) a payment to the Philippine government for the use of military bases in their country
D) one hundred shares of British Petroleum stock purchased by a Canadian

Accepted Answer

D

Question 4

Canada's balance of payment accounts
A) are a record of all Canadian international transactions.
B) are part of the national income accounting.
C) show a flow of funds into Canada as credit and the flow of funds out of Canada as debit.
D) all of the above.

Accepted Answer

Canada's balance of payment accounts are a comprehensive record of all of Canada's international transactions, including goods, services, investments, and financial flows. It is an important component of the national income accounting because it helps to measure the economy's overall level of activity. The balance of payment accounts shows the flow of funds into Canada as credit and the flow of funds out of Canada as debit, giving a clear picture of the country's international financial position. Therefore, all of the statements are correct making option D correct.

Question 5

If a French company sells 1000 gallons of Perrier to a Canadian company at 25 francs per gallon and uses the money to buy stock in a Spanish cork company, how does this affect the French balance of payments accounts?
A) debit: capital account; credit: merchandise trade
B) debit: merchandise trade; credit: capital account
C) debit: net investment income from abroad; credit: capital account
D) debit: merchandise trade; credit: net investment income from abroad

Accepted Answer

The answer of If a French company sells 1000 gallons...

Question 6

Which of the following would be part of the nation's current account?
A) an old house purchased by a Canadian in Croatia
B) the purchase of a Canadian Treasury bond by a foreigner
C) the interest a Canadian earns on a British bond
D) a factory built by the Japanese in Canada

Accepted Answer

The current account includes transactions between a country and the rest of the world for goods, services, income, and transfers. Option C, the interest earned on a British bond by a Canadian, is considered income and would be included in the current account. Options A, B, and D would not be included in the current account as they are either capital account transactions (A and B) or investments (D).

Question 7

If all international factor payment flows are investment income, then net investment income from abroad equals
A) net exports.
B) the current account balance.
C) the trade balance.
D) net factor payments from abroad.

Accepted Answer

The answer of If all international factor payment flows are...

Question 8

The official settlements balance equals
A) the sum of the current account and the capital account.
B) the current account minus net unilateral transfers.
C) net investment income from abroad.
D) the net increase in a country's official reserve assets.

Accepted Answer

The official settlements balance is the overall change in a country's official reserve assets resulting from transactions in the current and capital accounts. Therefore, the correct option is D - the net increase in a country's official reserve assets.

Question 9

If France has a trade deficit, then
A) imports into France exceed exports from France.
B) exports from France exceed imports into France.
C) imports into Canada from France exceed exports from Canada into France.
D) imports into France from Canada exceed exports from France into Canada.

Accepted Answer

A trade deficit happens when a country imports more goods and services than it exports. Therefore, choice A is the correct answer. Choices B, C and D are all incorrect because they imply that France is exporting more goods and services than it is importing, which is the opposite of a trade deficit.

Question 10

Which of the following statements is true?
A) The world as a whole has a current account surplus.
B) The world as a whole has a current account balance.
C) The world as a whole has a balance of payment surplus.
D) The world as a whole has a current account deficit.

Accepted Answer

A current account deficit means that a country is importing more goods and services than they are exporting, and therefore they are paying more to other countries than they are receiving. If the entire world is experiencing a current account deficit, it means that there is an imbalance in global trade where overall, countries are importing more than they export. This is the current situation, as the IMF has reported that the world is experiencing a current account deficit equivalent to approximately 3% of global GDP.

Question 11

The current account balance consists of
A) the trade balance plus the services balance.
B) net exports of goods and services, minus net unilateral transfers.
C) net exports of goods and services, plus investment income from abroad, plus net unilateral transfers.
D) net exports of goods and services, plus investment income from abroad, plus net unilateral transfers, minus the capital account balance.

Accepted Answer

The current account balance is the sum of net exports of goods and services (which includes trade balance and services balance), investment income from abroad, and net unilateral transfers (which are one-way transfers of assets, such as aid or remittances). It does not include the capital account balance, which is a separate measure of cross-border investment flows. Therefore, answer C is the correct choice.

Question 12

If the Bank of Canada buys $3 billion worth of Japanese yen, $4 billion of German marks, and $2 billion of French francs, and sells $5 billion of British pounds, how does this affect the official settlements balance?
A) falls by $4 billion
B) rises by $4 billion
C) rises by $9 billion
D) falls by $5 billion

Accepted Answer

The answer of If the Bank of Canada buys $3...

Question 13

If Canada donates footballs to Japan, how is the transaction recorded on the Canadian balance of payments accounts?
A) debit: merchandise trade; credit: capital account
B) debit: capital account; credit: merchandise trade
C) debit: net unilateral transfers; credit: merchandise trade
D) debit: merchandise trade; credit: net unilateral transfers

Accepted Answer

The answer of If Canada donates footballs to Japan, how...

Question 14

If a country's merchandise exports exceed its merchandise imports,
A) it has a trade surplus.
B) it has a trade deficit.
C) it has a current account surplus.
D) it has a current account deficit.

Accepted Answer

A trade surplus occurs when a country's merchandise exports exceed its merchandise imports. This means that the country is exporting more than it is importing and thus has a positive balance of trade. A current account surplus may also occur if a country has a surplus in its trade of services, income from investments, and unilateral transfers, in addition to merchandise trade. However, the question specifically mentions merchandise trade, so the correct answer is A - trade surplus.

Question 15

The merchandise trade balance is a country's
A) exports of goods.
B) net exports of goods.
C) exports of goods and services.
D) net exports of goods and services.

Accepted Answer

The merchandise trade balance measures the difference between a country's exports and imports of goods only, so it only includes net exports of goods.

Question 16

If a Canadian firm buys stereos from a Japanese firm and the Japanese firm uses the dollars it gets to buy Canadian Treasury bonds, what items are recorded in the Canadian balance of payments accounts?
A) credit the trade account; credit the capital account
B) credit the trade account; debit the capital account
C) debit the trade account; debit the capital account
D) debit the trade account; credit the capital account

Accepted Answer

The answer of If a Canadian firm buys stereos from...

Question 17

If a Canadian company imports 10 Toyotas from Japan at $15,000 each, and the Japanese company buys airline tickets on a Canadian airline with the money, how does this affect the Canadian balance of payments accounts?
A) debit: merchandise trade; credit: capital account
B) debit: capital account; credit: merchandise trade
C) debit: merchandise trade; credit: services
D) debit: services; credit: merchandise trade

Accepted Answer

The Canadian company's import of Toyotas from Japan counts as a debit in the merchandise trade account, as it involves imports of goods. However, the Japanese company's purchase of airline tickets from a Canadian airline counts as a credit in the services account, as it involves a transaction for a service provided. Therefore, the overall effect is a debit in the merchandise trade account and a credit in the services account, which matches option C.

Question 18

Suppose a wealthy Saudi Arabian prince donates 2000 camels to the San Diego Zoo. The Canadian trade balance ________ and the current account balance ________.
A) falls; rises
B) rises; rises
C) is unchanged; is unchanged
D) falls; is unchanged

Accepted Answer

The donation of camels from the Saudi Arabian prince would not affect the Canadian trade balance or the current account balance as it does not involve any economic activity between Canada and the countries involved (Saudi Arabia and the United States). Therefore, both the Canadian trade balance and the current account balance would remain unchanged.

Question 19

Suppose the current account shows debits of $4.7 billion and credits of $5.3 billion. The current account balance is ________, and the capital account balance is ________.
A) +$0.6 billion; -$0.6 billion
B) +$0.6 billion; +$0.6 billion
C) -$0.6 billion; -$0.6 billion
D) -$0.6 billion; +$0.6 billion

Accepted Answer

Current account balance = credits - debits = $5.3 billion - $4.7 billion = +$0.6 billion (as credits > debits, so the balance is positive)

Capital account balance = credits - debits = 0 (as no information is given in the question about any capital account transactions)

Therefore, the current account balance is +$0.6 billion, and the capital account balance is -$0.6 billion (or simply 0). Choice A is the only option that matches these two balances.

Question 20

A capital account surplus necessarily implies
A) a balance of payments surplus.
B) a current account surplus.
C) a current account deficit.
D) an increase in the nation's official reserve assets.

Accepted Answer

The answer of A capital account surplus necessarily implies
A) a...

Quiz 5: Saving and Investment in the Open Economy

The world as a whole has a current account deficit because

The difference between the current account balance and net exports is

Which of the following would be part of the nation's capital account?

Canada's balance of payment accounts

If a French company sells 1000 gallons of Perrier to a Canadian company at 25 francs per gallon and uses the money to buy stock in a Spanish cork company, how does this affect the French balance of payments accounts?

Which of the following would be part of the nation's current account?

If all international factor payment flows are investment income, then net investment income from abroad equals

The official settlements balance equals

If France has a trade deficit, then

Which of the following statements is true?

The current account balance consists of

If the Bank of Canada buys $3 billion worth of Japanese yen, $4 billion of German marks, and $2 billion of French francs, and sells $5 billion of British pounds, how does this affect the official settlements balance?

If Canada donates footballs to Japan, how is the transaction recorded on the Canadian balance of payments accounts?

If a country's merchandise exports exceed its merchandise imports,

The merchandise trade balance is a country's

If a Canadian firm buys stereos from a Japanese firm and the Japanese firm uses the dollars it gets to buy Canadian Treasury bonds, what items are recorded in the Canadian balance of payments accounts?

If a Canadian company imports 10 Toyotas from Japan at $15,000 each, and the Japanese company buys airline tickets on a Canadian airline with the money, how does this affect the Canadian balance of payments accounts?

Suppose a wealthy Saudi Arabian prince donates 2000 camels to the San Diego Zoo. The Canadian trade balance and the current account balance .

Suppose the current account shows debits of $4.7 billion and credits of $5.3 billion. The current account balance is , and the capital account balance is .

A capital account surplus necessarily implies