Deck 33: International Finance

Question 1

A country's balance of payments account is a summary of:

A) the government budget balance, deficit, or surplus.
B) the country's participation in foreign exchange markets.
C) the country's financial transactions with the rest of the world.
D) government and private-sector saving and borrowing in loanable funds markets.

Answer 1

C

Question 2

A country's financial transactions with the rest of the world are tracked and summarized in its:

A) exchange rate.
B) purchasing power parity records.
C) arbitrage account.
D) balance of payments account.

Answer 2

D

Question 3

The section of a country's balance of payments that measures the flow of money for exports, imports, international investment income, and transfer payments is known as the _____ account.

A) capital
B) current
C) arbitrage
D) international transactions

Answer 3

B

Question 4

A country's current account tracks the flows of funds for:

A) savings, loans, and investments.
B) exports, imports, capital investments, and loans.
C) currency exchanges and government loans.
D) exports, imports, international investment income, and transfer payments.

Question 5

Which of the following would NOT appear in a country's current account?

A) imports
B) international investment income
C) capital investment abroad
D) foreign aid

Question 6

Which of the following would appear in a country's current account?

A) international investment income
B) savings in domestic banks by foreign savers
C) purchases of domestic bonds by foreign buyers
D) prices paid for foreign stock

Question 7

The current account balance measures _____ from trade, transfers, and investment income.

A) international money inflows plus outflows
B) international money inflows minus outflows
C) changes in foreign exchange rates
D) international loan balances

Question 8

The current account is the sum of:

A) the trade balance, foreign aid, and foreign investment in capital.
B) net exports, investment income, and domestic government transfer payments.
C) the trade balance, net investment income, and net transfers.
D) net savings, net investment, and net trade.

Question 9

If Econia increases its exports, which of the following will happen to its current account balance?

A) The inflow of funds will raise the balance.
B) The outflow of goods will lower the balance.
C) The outflow of funds will lower the balance.
D) The inflow of goods will raise the balance.

Question 10

If Econia increases its imports, which of the following will happen to its current account balance?

A) The inflow of funds will raise the balance.
B) The outflow of goods will lower the balance.
C) The outflow of funds will lower the balance.
D) The inflow of goods will raise the balance.

Question 11

If Econia decreases its imports, which of the following will happen to its current account balance?

A) The smaller inflow of funds will lower the balance.
B) The smaller outflow of goods will lower the balance.
C) The smaller outflow of funds will raise the balance.
D) The smaller inflow of goods will raise the balance.

Question 12

If Econia decreases its exports, which of the following will happen to its current account balance?

A) The smaller inflow of funds will lower the balance.
B) The smaller outflow of goods will lower the balance.
C) The smaller outflow of funds will raise the balance.
D) The smaller inflow of goods will raise the balance.

Question 13

When one national government provides aid to another country's government, the value of the aid shows up in what part of the balance of payments accounts of the nations?

A) current account
B) capital account
C) official reserve account
D) currency account

Question 14

Macroland has a trade deficit. What impact does this have on Macroland's balance of payments accounts?

A) The inflow of funds will be a positive influence in the capital account.
B) The inflow of funds will be a negative influence in the capital account.
C) The outflow of funds will be a positive influence in the current account.
D) The outflow of funds will be a negative influence in the current account.

Question 15

Maria is a Philippine citizen who works in Singapore, and every month she sends part of her paycheck home to family members who live in the Philippines. How does this monthly flow of funds from Singapore to the Philippines show up in Singapore's balance of payments accounts?

A) It is a positive amount in the capital account.
B) It is a negative amount in the capital account.
C) It is a positive amount in the current account.
D) It is a negative amount in the current account.

Question 16

A major hurricane damages the infrastructure in Econia. In response, Macroland sends $5 million in aid to Econia. How does this show up in Macroland's balance of payments accounts?

A) It is a positive amount in Macroland's capital account.
B) It is a negative amount in Macroland's capital account.
C) It is a positive amount in Macroland's current account.
D) It is a negative amount in Macroland's current account.

Question 17

A major hurricane damages the infrastructure in Econia. In response, Macroland sends $5 million in aid to Econia. How does this show up in Econia's balance of payments accounts?

A) It is a positive amount in Econia's capital account.
B) It is a negative amount in Econia's capital account.
C) It is a positive amount in Econia's current account.
D) It is a negative amount in Econia's current account.

Question 18

When a citizen of one country buys shares of stock on a stock exchange in a different country, the flow of funds to cover the purchase shows up in what part of the balance of payments accounts of the nations?

A) current account
B) capital account
C) arbitrage account
D) currency account

Question 19

A country's balance of payments is the sum of the _____, and the balance:

A) current account and the capital account; can be positive, negative, or zero.
B) trade balance and the capital balance; can be positive or negative.
C) current account and the capital account; will equal zero.
D) trade balance and the capital balance; will equal zero.

Question 20

The section of the balance of payments that tracks the money flows for changes in the international ownership of capital investments is known as the _____ account.

A) investment
B) capital
C) current
D) exchange

Question 21

A country's net foreign investment is the:

A) sum of its net foreign portfolio investment plus net foreign direct investment.
B) sum of its capital account plus capital inflows.
C) difference between its foreign portfolio investment inflow and its foreign direct investment outflow.
D) difference between its international inflow and its international outflow.

Question 22

The two primary types of foreign assets are:

A) international financial investment and international capital investment.
B) international savings and international physical capital.
C) foreign financial investment and foreign transfer investment.
D) foreign direct investment and foreign portfolio investment.

Question 23

Flows of funds for _____ show up in a country's capital account.

A) an investor who is receiving income from a foreign investment
B) a business that is building a factory in another country
C) a government that is providing foreign aid to build infrastructure in another country
D) someone who is sending income to people in another country

Question 24

A Japanese company builds a factory in Mexico. How do the Japanese funds that are spent on this factory show up in Japan's and Mexico's balance of payments?

A) as an inflow in Mexico's capital account and an outflow in Japan's capital account
B) as an outflow in Mexico's capital account and an inflow in Japan's capital account
C) as an inflow in Mexico's current account and an outflow in Japan's current account
D) as an outflow in Mexico's current account and an inflow in Japan's current account

Question 25

With accurate measurements, if the current account has a deficit of $27 billion, then the capital account will have:

A) a deficit of $27 billion.
B) a deficit of less than $27 billion.
C) a surplus of $27 billion.
D) a surplus of more than $27 billion.

Question 26

The sum of the balance of payments in a country:

A) can be a deficit, a surplus, or zero.
B) can be a deficit or a surplus.
C) will equal zero.
D) will be a deficit.

Question 27

Which of the following is NOT a type of country where the world's current account surpluses are concentrated?

A) east Asian
B) developing
C) major oil producing
D) northern European

Question 28

The two main ways to analyze the causes of trade deficits are the:

A) import and export approach and the government aid approach.
B) capital investment approach and the trade balance approach.
C) deficit approach and the surplus approach.
D) trade approach and the saving and investment approach.

Question 29

Many economists believe that current account deficits are fundamentally an issue based in:

A) a shortfall of domestic saving, which leads to an inflow of foreign saving.
B) tax revenue, which affects disposable income.
C) price levels, which lead to purchase decisions.
D) a surplus of investment funds, which leads to excess saving.

Question 30

Foreign saving is basically equal to:

A) foreign income minus foreign taxes and foreign consumption.
B) domestic saving minus foreign income.
C) the negative of the trade balance.
D) foreign borrowing plus foreign investment.

Question 31

Countries with a current account surplus will have _____ foreign saving.

A) positive
B) negative
C) evenly balanced
D) zero

Question 32

Countries with negative foreign saving typically:

A) have a net inflow of savings from abroad that finances domestic investments.
B) have a net inflow of savings from abroad that offsets domestic savings.
C) are financing investment projects in countries with current account deficits.
D) are financing investment projects in countries with current account surpluses.

Question 33

Countries with higher savings rates tend to have:

A) a current account deficit.
B) a current account surplus.
C) an evenly balanced current account.
D) an unpredictable current account balance.

Question 34

Which of the following is NOT a source of savings that fund investments in a country?

A) private savings
B) government savings
C) foreign savings
D) capital savings

Question 35

Countries that have a current account deficit will have _____ foreign saving.

A) an inflow of
B) an outflow of
C) no
D) a deficit of

Question 36

Countries with a current account surplus will have _____ foreign saving.

A) an inflow of
B) an outflow of
C) no
D) a deficit of

Question 37

Countries with higher savings rates tend to have:

A) an inflow of foreign savings.
B) a trade surplus.
C) large current account surpluses.
D) large current account deficits.

Question 38

What happened to the Greek current account and capital account during the financial crisis of 2008 to 2009?

A) The capital account deficit dropped, and the current account surplus increased.
B) The capital account deficit dropped, and the current account surplus dropped.
C) The capital account surplus dropped, and the current account deficit increased.
D) The capital account surplus dropped, and the current account deficit dropped.

Question 39

Do current account deficits lead to higher unemployment rates?

A) yes, because manufacturing falls
B) yes, because investment falls
C) yes, because total spending falls
D) no, because there is no obvious connection

Question 40

Current account deficits that are associated with _____ can create problems for an economy.

A) excessive indebtedness
B) high unemployment
C) excessive capital account deficits
D) weaker currency value

Question 41

Which of the following is NOT a reason that the U.S. trade deficits are not likely to lead to a crisis like Greece?

A) U.S. earnings on foreign investments exceeds foreign earnings on U.S. investments.
B) The United States borrows in a currency that it controls.
C) The U.S. current account deficit is small compared to the U.S. capital account surplus.
D) The U.S. current account deficit is a smaller share of the U.S. GDP than the Greek deficit was of the Greek GDP.

Question 42

When a country has "exorbitant privilege," it has the ability to:

A) lend at higher interest rates because there is a low risk that it will default on the loans.
B) maintain constant exchange rates while incurring changes in the current account.
C) borrow at lower interest rates than other countries because assets in its currency are sought.
D) maintain a current account surplus at the same time as a capital account surplus.

Question 43

In economics, a debtor nation:

A) has a national debt.
B) owes more to foreigners than it has invested in other countries.
C) is in default on its borrowing.
D) maintains budget deficits each year.

Question 44

If the exchange rate cost of U.S. $1 is 70 Indian rupees, then the dollar cost of one rupee is:

A) $.14.
B) $.70.
C) $.07.
D) $.01.

Question 45

If the exchange rate cost of U.S. $1 is 17 Mexican pesos, then the dollar cost of one peso is:

A) $.59.
B) $.06.
C) $.17.
D) $1.17.

Question 46

Marlon's Manufacturing Company owns a factory in Mexico that is valued at 620,000,000 Mexican pesos. If the exchange rate is 17 pesos = U.S. $1, what is the U.S. dollar value of the factory?

A) $105,400,000
B) $10,540,000,000
C) $36,470,588
D) $364,705,880

Question 47

Corinne is from France, and she makes a shopping trip to Switzerland. She wants to buy a pair of shoes that is on sale for 220 Swiss francs. If the exchange rate is 1.16 Swiss francs = 1 euro, how much would the shoes cost Corinne in euros?

A) 289.66 euros
B) 352.00 euros
C) 255.20 euros
D) 189.66 euros

Question 48

A piece of equipment has a price of 480,000 Thai baht. If the exchange rate with the U.S. dollar is 33.3 baht = U.S. $1, how much would the piece of equipment cost in U.S. dollars?

A) $14,414
B) $368,160
C) $15,984,000
D) $159,840

Question 49

When people engage in arbitrage, they are trying to:

A) add value to an asset by changing its basic features.
B) profit from buying an asset, waiting for it to appreciate, and then selling it.
C) reverse a price decline by manipulating the demand for a product.
D) profit from different buying and selling prices for similar assets in the same time period.

Question 50

Concurrently buying and selling similar assets in order to profit from price differences with little risk of loss is a practice known as:

A) bargaining.
B) arbitrage.
C) price manipulation.
D) profiteering.

Question 51

(Table 1: Exchange Rates) Table 1, Exchange Rates, provides three exchange rates for currencies of three countries. Use these rates to determine what would happen if someone attempted arbitrage with $100. $\begin{array}{|c|}\hline\text { Table 1: Exchange Rates } \\\hline 1 \text { euro }=110 \text { yen } \quad \mid \$ 1=94 \text { yen } \quad \mid \$ 1=.86 \text { euro }\\\hline\end{array}$

A) There would be a gain of $68.
B) There would be a loss of $68.
C) There would be a gain of $10.
D) There would be less than $1 of gain or loss.

Question 52

(Table 2: Exchange Rates for Three Countries) Table 2, Exchange Rates for Three Countries, provides three exchange rates for currencies of three countries. Use these rates to determine what would happen if someone attempted arbitrage with $100. $\begin{array}{|c|}\hline\text { Table 2: Exchunge Rates for Three Countries } \\\hline 1 \text { euro }=105 \text { yen } \quad \mid \$ 1=98 \text { yen } \quad \mid \$1=9 \text { euro }\\\hline\end{array}$

A) There would be a gain of $4.70.
B) There would be a loss of $3.57.
C) There would be a gain of $7.10.
D) There would be less than $1 of gain or loss.

Question 53

The economic theory that identical products should sell for the same price in different markets is known as the:

A) merging market law.
B) neutral price theory.
C) arbitrage offset theory.
D) law of one price.

Question 54

A product sells for $100 in the United States and for 11,000 yen in Japan. Assume that the exchange rate is $1 = 95 yen. What will happen if the law of one price holds true?

A) The U.S. price will continue to be $100, and the Japanese price will continue to be 11,000 yen.
B) The yen price will fall and the dollar price will rise until the exchange rate-adjusted prices are equal.
C) The yen price will rise and the dollar price will fall until the exchange rate-adjusted prices are equal.
D) Both prices will fall to $95.

Question 55

A product sells for $50 in the United States and for 1,700 baht in Thailand. If the exchange rate is $1 = 33 Thai baht, what would be expected to happen according to the law of one price?

A) The U.S. price will continue to be $50, and the Thai price will continue to be 1,700 baht.
B) The baht price will fall and the dollar price will rise until the exchange rate-adjusted prices are equal.
C) The baht price will rise and the dollar price will fall until the exchange rate-adjusted prices are equal.
D) Both prices will fall to $48.

Question 56

A product sells for $60 in the United States and for 1,980 baht in Thailand. If the exchange rate is $1 = 33 Thai baht, what would be expected to happen according to the law of one price?

A) The U.S. price will continue to be $60, and the Thai price will continue to be 1,980 baht.
B) The baht price will fall and the dollar price will rise until the exchange rate-adjusted prices are equal.
C) The baht price will rise and the dollar price will fall until the exchange rate-adjusted prices are equal.
D) Both prices will fall to $55.

Question 57

Assume that the exchange rate between the Mexican peso and the U.S. dollar is $1 = 18 pesos. Which of the following situations is consistent with the law of one price?

A) A product has a price of $20 in the United States and 360 pesos in Mexico.
B) A product has a price of $360 in the United States and 360 pesos in Mexico.
C) A product has a price of $360 in the United States and 20 pesos in Mexico.
D) A product has a price of $20 in the United States and 111 pesos in Mexico.

Question 58

Which one of the following is NOT a reason that the law of one price may not hold for a product?

A) differing taxes, tariffs, or nontariff trade barriers across countries
B) differing currencies in different countries
C) differing transportation costs to deliver the good to different markets
D) differing consumer preferences across markets

Question 59

In which of the following situations will the law of one price hold true?

A) The product is a service that cannot be transported.
B) The products are not perfect substitutes.
C) Transportation costs are unequal.
D) Exchange rates are flexible and responsive.

Question 60

If the law of one price is working, then:

A) the exchange rate will adjust to be one to one across currencies.
B) neutral pricing will exist.
C) purchasing power parity will exist.
D) gains from arbitrage will continue to be available.

Question 61

When purchasing power parity exists:

A) it takes the same amount of one country's currency to buy a given group of goods across different countries when the currency is exchanged into local currencies.
B) a given group of goods will have the same local currency price in every country in which the goods are sold.
C) the price of one good is the same in every country.
D) the currency exchange rate is one unit of currency per one unit of currency regardless of local prices across countries.

Question 62

Which of the following statements describes the difference between the law of one price and purchasing power parity (PPP)?

A) The law of one price requires prices to be identical across countries, and PPP requires exchange rates to be identical across countries.
B) The law of one price means that all products move toward equal prices, and PPP means that prices are fair but not necessarily equal across markets.
C) The two terms are different names for the same concept.
D) The law of one price applies to an individual product, and PPP applies to a market basket of products.

Question 63

The Big Mac index is used to illustrate purchasing power parity (PPP). Which one of the following is NOT an argument as to why this single product is appropriate for making PPP claims?

A) The product is standardized across countries.
B) The product is composed of several other goods.
C) The product's price is affected by local real estate and labor costs.
D) The product's price is always set in U.S. dollars.

Question 64

One of the most important factors that is used to determine exchange rates in the long run is:

A) relative prices.
B) currency names.
C) absolute prices.
D) neutral values.

Question 65

An important factor that is used to determine the exchange rate between the currencies of two countries is the:

A) currency name that is used in each of the two countries.
B) difference in the overall price levels of the countries.
C) geography of the two countries.
D) the type of products that are sold in the countries.

Question 66

The theory that exchange rates will gradually adjust to offset differences in inflation rates between two countries is known as:

A) purchasing power parity.
B) the law of one exchange rate.
C) the marginal rate adjustment theory.
D) dynamic purchasing power parity.

Question 67

Dynamic purchasing power parity theory claims that exchange rates adjust _____ to offset differences in _____ between two countries.

A) gradually; inflation rates
B) quickly; absolute price levels
C) gradually; product mixes
D) quickly; labor rates

Question 68

Countries with relatively high inflation have currencies that are _____ domestic purchasing power and ______ in terms of international exchange rate.

A) gaining; gaining value
B) gaining; losing value
C) losing; losing value
D) losing; gaining value

Question 69

If Econia has a higher inflation rate than Macroland, then the currency of Econia will tend to _____ in relation to Macroland's currency.

A) depreciate gradually
B) appreciate gradually
C) depreciate quickly
D) appreciate quickly

Question 70

If Econia has a lower inflation rate than Macroland, then the currency of Econia will tend to _____ in relation to Macroland's currency.

A) depreciate gradually
B) appreciate gradually
C) depreciate quickly
D) appreciate quickly

Question 71

When looking at exchange rates between two countries, there is a _____ relationship between the rate of depreciation in one country's currency and the extent to which the country's _____ exceeds that of the other country.

A) positive; inflation rate
B) positive; tariff value
C) negative; inflation rate
D) negative; tariff value

Question 72

Dynamic purchasing power theory claims that relatively high inflation in a country will cause:

A) a rapid increase in production.
B) an exception to the law of one price.
C) a depreciation in the country's currency.
D) an appreciation in the country's currency.

Question 73

In 2005, one unit of Econia's currency cost eight units of Macroland's currency. In 2015, the exchange rate changes so that one unit of Econia's currency costs 16 units of Macroland's currency. Over that time period, Econia's currency _____, and Macroland's currency:

A) appreciated; appreciated.
B) appreciated; depreciated.
C) depreciated; appreciated.
D) depreciated; depreciated.

Question 74

The average price of a country's goods and services relative to the average price of the same goods and services in another country when expressed in a common currency is known as the:

A) real exchange rate.
B) dynamic purchasing power parity.
C) neutral exchange rate.
D) equity level rate.

Question 75

The actual exchange rate times the ratio of domestic price level and foreign price level in local currencies is known as the:

A) ratio-adjusted exchange rate.
B) dynamic parity rate.
C) nominal exchange rate.
D) real exchange rate.

Question 76

A market basket of goods and services costs $260 in the United States. Buying the same group of goods and services in Mexico would require $220 to be exchanged for pesos. What is the real exchange rate of the U.S. dollar in this situation?

A) .15
B) .85
C) 1.18
D) 5.5

Question 77

A market basket of goods and services costs $120 in the United States. Buying the same group of goods and services in Peru would require $150 to be exchanged for Peruvian sols. What is the real exchange rate of the U.S. dollar in this situation?

A) .8
B) 1.25
C) 4
D) .25

Question 78

A market basket of goods and services costs $90 in the United States. Buying the same group of goods and services in the Philippines would require $110 to be exchanged for Philippine pesos. What is the real exchange rate of the U.S. dollar in this situation?

A) 1.22
B) 4.55
C) .18
D) .82

Question 79

When referring to a currency as strong or weak, economists typically use which of the following indicators?

A) A real exchange rate below 1 or falling means strong, and a real exchange rate above 1 or rising means weak.
B) A real exchange rate above 1 or rising means strong, and a real exchange rate below 1 or falling means weak.
C) A nominal exchange rate below 1 or falling means strong, and a nominal exchange rate above 1 or rising means weak.
D) A nominal exchange rate above 1 or rising means strong, and a nominal exchange rate below 1 or falling means weak.

Question 80

The economic theory that exchange rates will adjust gradually to offset any differences in interest rates between two countries is known as:

A) purchasing power parity.
B) interest neutrality.
C) interest rate parity.
D) real interest exchange rates.