Deck 6: Balance of Payments and Foreign Exchange Markets

Question 1

A domestic firm exports a tractor. This would be recorded as a credit entry in the goods category of the balance of payments framework.

Answer 1

True

Question 2

A U.S. resident purchases a $1,000 bond issued by a foreign government. The impact of this transaction on the current account is:

A) a debit of $1,000.
B) a credit of $1,000.
C) both a debit and credit of $1,000.
D) no impact on the current account.

Answer 2

D

Question 3

The current value of an effective rate of exchange for a particular currency is 125. This tells us the currency has appreciated:

A) 125 percent since the base year.
B) 25 percent since the base year.
C) 125 percent since the previous year.
D) 25 percent since the previous year.

Answer 3

D

Question 4

A domestic firm exports a computer server to a foreign firm. In the domestic country-s balance of payments we would record:

A) a debit in the services account.
B) a credit in the goods account.
C) a debit in unilateral transfers.
D) a credit in the private capital and financial account.

Question 5

The sum of the debits is less than the sum of the credits in the current account and private capital account. This country has a:

A) balance of payments equilibrium.
B) positive value in the official settlements account.
C) balance of payments deficit.
D) balance of payments surplus.

Question 6

A domestic firm has a plant located in another nation. This firm has a:

A) covered exposure.
B) translation exposure.
C) transaction exposure.
D) economic exposure.

Question 7

The spot rate of exchange between the U.S. dollar and the euro is 1.35 (dollar/euro) and the three-month forward rate of exchange is 1.29.

A) The euro is selling at a premium and the standard forward premium is 15.78 percent.
B) The euro is selling at a discount and the standard forward discount is 17.78 percent.
C) The euro is selling at a premium and the standard forward premium is 18.60 percent.
D) The euro is selling at a discount and the standard forward discount is 18.60 percent.

Question 8

Recent increases in household income in China have led to more Chinese residents wanting to tour Europe and attend universities in Europe. All other things held constant, this would result in:

A) an increase in supply of the euro and a depreciation of the euro.
B) a decrease in supply of the euro and an appreciation of the euro.
C) an increase in demand of the euro and an appreciation of the euro.
D) a decrease in demand for the euro and a depreciation of the euro.

Question 9

A foreign exchange option contract that allows the holder to buy or sell an amount of a currency on any day up to and including the day the contract expires is called:

A) a call option.
B) a currency swap.
C) an American option.
D) a European option.

Question 10

A contract to deliver to another party a standardized quantity of a specific nation-s currency at a designated date is called a:

A) forward exchange contract.
B) currency swap.
C) currency futures contract.
D) currency option contract.

Question 11

A domestic resident receives a dividend payment on a bond from a foreign government. This transaction would be recorded in the:

A) goods account.
B) service account.
C) income payments and receipts account.
D) unilateral transfer account.

Question 12

The rate of exchange between the Mexican peso and the U.S. dollar is 12.650 (peso/dollar) and the rate of exchange between the U.S. dollar and the euro is 1.350 (dollar/euro) The cross-rate of exchange between the peso and the euro is 9.370.

Question 13

On Monday the spot rate of exchange between the Mexican peso and the U.S. dollar is 12.650 (peso/dollar) On the following Tuesday the rate is 13.250. We can say that the U.S. dollar appreciated 2.5 percent relative to the Mexican peso.

Question 14

The overall balance of payments is necessarily equal to zero.

Question 15

A foreign firm is hired by a domestic firm to provide accounting services. This would be recorded as a debit entry in the services category of the balance of payments framework.

Question 16

The domestic government of a country recently affected by an earthquake receives medical supplies from another country. The foreign government expects no payment in return, so this transaction has only one entry.

Question 17

A balance of payments surplus corresponds to a negative official settlements account balance.

Question 18

A weighted-average measure of a currency relative to two or more currencies is an effective exchange rate.

Question 19

A Canadian firm must make a payment denominated in euros in the near future. The firm is said to be long the euro.

Question 20

The spot rate of exchange between the dollar and the pound is 1.50 (dollar/pound) The forward rate of exchange is 1.60 (dollar/pound) We can say that the pound is selling at a premium in the forward market.

Question 21

An exchange of payment flows denominated in different currencies is called a currency option.

Question 22

On Monday the spot rate of exchange between the Mexican peso and the U.S. dollar is 12.650 (peso/dollar) On the following Tuesday the rate is 13.250. We can say that the U.S. dollar appreciated relative to the Mexican peso.

Question 23

Which of the following statements about the foreign exchange market is correct?

A) It is a relatively new market.
B) It is a small market compared with global exports of goods and services.
C) It primarily comprises transactions in hard currency.
D) The average daily turnover is in the trillions of dollars.