Deck 11: International Investment and International Finance

Question 1

Intermediate goods are shown in the circular flow diagram as:

A) a payments flow from individuals to producers.
B) a circular payments flow that starts and ends with individuals because they never enter into the normal transactions between producers and consumers.
C) a payments flow between the financial sector and producers because producers essentially acquire intermediate goods by borrowing to pay for them.
D) a circular payments flow that starts and ends with producers.

Answer 1

a circular payments flow that starts and ends with producers.

Question 2

Transfers occur in the open-economy circular flow between:

A) government and individuals.
B) government and producers.
C) individuals and foreigners.
D) All of the above.
E) None of the above.

Answer 2

All of the above.

Question 3

Which of the following are functions of the financial sector shown at the top of the open-economy circular flow diagram?

A) Lending to individuals so that they can consume more than they currently earn.
B) Forcing the government to fully cover all expenditures with tax collections.
C) Channeling savings from savers to borrowers.
D) All of the above.
E) a and c only.

Answer 3

a and c only.

Question 4

According to the definitions of the payment flows shown in the open-economy circular flow diagram, total foreign transactions are in balance when:

A) (X-IM) + (S_F + r_F) + Tr_F = 0
B) (X-IM) + S_F = 0
C) (X-IM) + (S_F + r_F) > Tr_F
D) X = IM

Question 5

The balance of payments implies all of the following except:

A) total payments flowing out of the country equal total payments flowing into the country.
B) total credits equal total debits.
C) total "+" items equal total "?" items.
D) exports equal imports.
E) there are no exceptions; all of the above are implied.

Question 6

The purchase of 100 shares of IBM shares on the New York stock exchange by a Brazilian investor will appear in the U.S. balance of payments as a:

A) credit.
B) debit.
C) unilateral transfer.
D) service import.

Question 7

The purchase of 10,000 shares in a Swiss pharmaceutical firm on the Zurich Stock Exchange by an American mutual stock fund will appear in the U.S. balance of payments as a:

A) credit.
B) debit.
C) unilateral transfer.
D) asset sale to foreigners.

Question 8

The purchase of a ticket on Southwest Airlines, a U.S. airline, by an French tourist traveling to Las Vegas to see the Eifel Tower at the Paris Casino appears in the U.S. balance of payments as a:

A) service export.
B) debit.
C) unilateral transfer.
D) service import.

Question 9

United States foreign direct investment (FDI) refers to:

A) the acquisition of U.S. domestic firms by foreign firms.
B) the acquisition of any quantity of shares in foreign firms by U.S. investors.
C) investment that is also often referred to as portfolio investment.
D) All of the above.
E) None of the above.

Question 10

Which if the following statements is true?

A) Portfolio investment implies a controlling interest in foreign firms.
B) Foreign investment in U.S. stocks and bonds slowed drastically during the 1990s.
C) Official asset transactions refer to the purchase and sale of currencies and financial assets by central banks for the purpose of intervening in foreign exchange markets.
D) The merchandise trade balance is part of the financial account.

Question 11

Using the notation defined in this chapter, the current account of the balance of payments can be represented as:

A) (X?IM)
B) (X?IM) ? Tr_F ? r_F
C) (X?IM) + Tr_F + r_F
D) (X?IM) ? Tr_F

Question 12

The statistical discrepancy in a country's balance of payments is never zero because:

A) individuals and firms engaged in international transactions are not required to report every detail of their activities, and therefore they don't.
B) the customs service only spot checks imports and exports.
C) many indirect estimates of payments flows are used, and they are not very accurate.
D) All of the above.
E) None of the above.

Question 13

The merchandise trade balance is:

A) the same thing as the current account.
B) a component of the financial account.
C) the net sum of imports and exports of goods and services.
D) a component of the current account.

Question 14

The following item does not appear in the balance of payments:

A) unilateral transfers abroad.
B) direct foreign investment.
C) total stock of U.S. Treasury bonds held by foreigners.
D) private capital inflows.

Question 15

The planet Earth's true balance of payments:

A) must net out to zero.
B) has had a highly negative current account in recent years.
C) has fluctuated from negative to positive.
D) has gone from zero to sharply negative in recent years.

Question 16

Which of the following belongs in the financial account of the balance of payments?

A) Merchandise imports.
B) Net transfers.
C) Net change in foreign securities held in the U.S.
D) None of the above.

Question 17

Which of the following does not accurately describe the international investment position?

A) It is a measure of the country's net stock of overseas assets, measured at a certain moment in time.
B) It is a compilation of flows of payments over a period of time, usually a year.
C) It measures the net stock of domestically-owned foreign assets and foreign-owned domestic assets.
D) It reflects the present value of past foreign asset accumulation.

Question 18

The international investment position of the United States during the 1980s:

A) went from negative to positive.
B) went from positive to negative.
C) remained unchanged.
D) fluctuated randomly.

Question 19

In 2000, the single largest category of international investment was:

A) portfolio investment.
B) foreign direct investment.
C) bank lending.
D) foreign aid.

Question 20

The following is a characteristic of international investment in recent years:

A) The total value of international investment is less than the value of international trade in goods and services during the same year.
B) International investment was much greater than the volume of international trade.
C) International portfolio investment has been severely limited by the lack of growth of bond and stock markets throughout the world.
D) Bank lending was by far the largest category of international capital flows.

Question 21

One often mentioned downside to international investment is its:

A) volatility.
B) profitability.
C) harmful effect on international trade.
D) stability.

Question 22

International investment:

A) has been the slowest growing component of globalization.
B) has, over the past two decades, grown twice as fast as international trade.
C) has not grown much because people are not very interested in buying foreign assets or selling assets to foreigners.
D) is not a major component of globalization.

Question 23

International investment includes:

A) the purchase of financial and real assets by a firm from a financial organization in another country.
B) the sale of financial assets to a foreign government.
C) the sale of a building by a real estate developer in one country to a firm from another country.
D) All of the above.
E) None of the above; international investment is undertaken only by banks.

Question 24

In real terms, in 2000 the volume of net foreign assets purchased by U.S. investors was:

A) approaching the volume of U.S. exports.
B) smaller than it was in 1970.
C) more than twice as great than it was in 1970.
D) about equal to what it was in 1970.

Question 25

International investment occurs in the form of:

A) bank loans.
B) bond purchases.
C) direct acquisition of real foreign assets.
D) All of the above.
E) None of the above.

Question 26

Diversification:

A) permits asset holders to reduce the risk of their holdings by reducing the expected return.
B) does not permit asset holders to reduce the risk of their holdings without reducing their returns.
C) permits asset holders to reduce the risk of their holdings without reducing the expected return.
D) permits asset holders to increase their expected returns but only at the cost of increasing risk.

Question 27

The motive for international investment referred to as intertemporal consumption smoothing is based on the result that international investment:

A) distorts how consumers allocate their consumption expenditures over time.
B) channels savings to the highest return investments wherever they may be in the world.
C) permits investors to reduce risk by pooling assets from different countries, which are less closely correlated than assets located within a single country.
D) permits consumers to more efficiently allocate their consumption expenditures over time.

Question 28

The gross domestic product (GDP) of a country is the value of:

A) output generated by factors of production owned by the citizens of a country, no matter where the production takes place.
B) output produced within a country's borders, regardless of who owns the factors of production used in the production and receives their returns.
C) consumption by domestic consumers.
D) output produced by domestic firms located within the country's borders.

Question 29

Since we are ultimately interested in the welfare of people, not the level of production in some geographic territory:

A) gross domestic product (GDP) is a better proxy for national welfare than gross national product (GNP) for measuring the effects of international investment.
B) GNP is a better proxy for national welfare than GDP if international investment is large.
C) GNP and GDP are equally good measures for measuring the effects of international investment.
D) neither GDP and GNP can capture the national welfare effects of international investment.

Question 30

Suppose that the return to investment is given by the slope of the standard diminishing returns production function that relates the level of output, Y, to the stock of capital, K. In this case, all other things equal the slope of the production function is steeper the smaller is:

A) the stock of capital.
B) the stock of other substitute factors of production.
C) the level of technology.
D) All of the above.
E) None of the above.

Question 31

Why doesn't capital flow from rich countries to poor countries?

A) Technology is not as well disseminated and developed in low income economies.
B) People have more human capital in poor countries.
C) Intertemporal transactions between countries are not as difficult to carry out between countries as they are between individuals within a country.
D) Government restrictions on international investment have been eliminated.

Question 32

The statistical evidence on the growth effects of international investment suggests that foreign investment:

A) is closely correlated with technology transfers from high technology countries to low technology countries.
B) has no noticeable effect on a country's rate of economic growth.
C) increases an economy's steady state level of output but does not change its long-run rate of technological progress.
D) causes economic growth to decline.

Question 33

Martin Feldstein and Charles Horioka found that after the liberalization of international investment in the late twentieth century:

A) economic growth reduced the amount of international investment.
B) saving and investment still remained roughly in balance in each of the individual countries included in their study.
C) most developed economies became either large net borrowers or net lenders.
D) nearly all of the countries included in their study began to borrow heavily overseas.

Question 34

Among the reasons presented as to why international investment is smaller than models of international investment suggest it should be is:

A) the increasing use of government barriers to international investment at the very end of the twentieth century.
B) the improvement in legal protection of property rights and contract enforcement.
C) the continued, albeit diminished, use of explicit government barriers to international investment.
D) the formation of the European Union.

Question 35

The risk of default can be reduced by:

A) pooling.
B) diversification.
C) collateral.
D) All of the above.
E) None of the above.

Question 36

The risk of default can be reduced by:

A) financial repression.
B) charging higher interest rates.
C) collateral.
D) All of the above.
E) None of the above.

Question 37

A fundamental problem inherent in any intertemporal trade is that:

A) one party to the agreement has an incentive to accept a payment or good now and then not deliver on the future obligation.
B) one party to the agreement may know more about the future than the other.
C) the party obligated to make the future payment becomes less motivated to ensure that the obligation will be met after receiving the initial payment.
D) All of the above.
E) None of the above.

Question 38

Adverse selection and moral hazard problems are likely to be worse in an international setting because:

A) local legal systems may make it difficult for foreign lenders to claim collateral.
B) cultural differences make legal systems incompatible and courts in different countries often interpret issues very differently.
C) in some countries, legal systems are simply corrupt.
D) All of the above.
E) None of the above.

Question 39

Asymmetric information is a fundamental cause of:

A) adverse selection.
B) moral hazard.
C) international investment.
D) All of the above.
E) a and b only.