Deck 21: The Balance of Payments, Exchange Rates, and Trade Deficits

Question 1

U.S. imports:

A) Increase the foreign demand for foreign currencies
B) Increase the domestic demand for foreign currencies
C) Decrease the foreign supply of foreign currencies
D) Increase the domestic supply of foreign currencies

Answer 1

Increase the domestic demand for foreign currencies

Question 2

Which of the following transactions represents a credit on the financial account of the U.S. balance of payments?

A) Oil is imported from Venezuela
B) United States firms pay dividends to foreigners
C) United States citizens purchase foreign securities
D) A Canadian firm increases its direct investment in its U.S. branch

Answer 2

A Canadian firm increases its direct investment in its U.S. branch

Question 3

U.S. exports create a:

A) Supply of foreign currencies and a demand for dollars in the foreign exchange markets
B) Demand for foreign currencies and a supply of dollars in the foreign exchange markets
C) Supply of foreign currencies and a supply of dollars in the foreign exchange markets
D) Demand for foreign currencies and a demand for dollars in the foreign exchange markets

Answer 3

Supply of foreign currencies and a demand for dollars in the foreign exchange markets

Question 4

When a U.S. company purchases a factory in Singapore, this will be a:

A) Credit on the current account of the U.S. balance of payments
B) Debit on the current account of the U.S. balance of payments
C) Credit on the financial account of the U.S. balance of payments
D) Debit on the financial account of the U.S. balance of payments

Question 5

A nation's balance of trade on goods is equal to its exports of goods less its imports of:

A) Goods
B) Capital
C) Financial assets
D) Official reserves

Question 6

The equilibrium exchange rate between two currencies is determined by the supply and demand in the:

A) Traded goods markets
B) Stock exchange markets
C) Foreign exchange markets
D) Money markets

Question 7

French and German farmers wanting to buy equipment from an American manufacturer based in the U.S. will be:

A) Supplying dollars and also supplying euros in the foreign exchange market
B) Demanding dollars and also demanding euros in the foreign exchange market
C) Supplying dollars and demanding euros in the foreign exchange market
D) Supplying euros and demanding dollars in the foreign exchange market

Question 8

When a U.S. agribusiness company sells 10,000 units of cow vaccine to a company in France, this transaction will represent a:

A) Credit on the current account of the U.S. balance of payments
B) Debit on the current account of the U.S. balance of payments
C) Credit on the financial account of the U.S. balance of payments
D) Debit on the financial account of the U.S. balance of payments

Question 9

Which transaction represents a debit in the current account section of the U.S. balance of payments?

A) The Arab Capital Investment Corporation makes a loan to a U.S. firm
B) A U.S. subsidiary exports raw materials to the Canadian parent company
C) U.S. tourists in Great Britain purchase pounds with dollars in order to buy souvenirs
D) U.S. firms and individuals receive dividends from their investments in Latin America

Question 10

The current account on a nation's balance of payments statement includes all of the following except:

A) The nation's goods exports
B) The nation's goods imports
C) Net investment income
D) Net purchases of assets abroad

Question 11

Which one of the following is part of the financial account on the U.S. balance of payments?

A) Net transfers
B) Net investment income
C) U.S. goods exports
D) U.S. purchases of assets abroad

Question 12

A nation's current account balance is equal to its exports less its imports of:

A) Goods and services
B) Goods and services, minus U.S. purchases of assets abroad
C) Goods and services, plus net investment income and net transfers
D) Goods and services, plus foreign purchases of assets in the United States

Question 13

When a Japanese company buys a U.S. software company, this transaction will be a:

A) Credit on the current account of the U.S. balance of payments
B) Debit on the current account of the U.S. balance of payments
C) Credit on the financial account of the U.S. balance of payments
D) Debit on the financial account of the U.S. balance of payments

Question 14

Which of the following statements about the financing of international trade is correct?

A) International trade means the trading of financial assets for foreign exchange
B) Most international transactions are made with gold
C) Imports are more important than exports to the economy of a nation
D) Exports provide the foreign currencies needed to pay for imports

Question 15

When a U.S. importer buys 100,000 pairs of pants from a Hong Kong company, this transaction will represent a:

A) Credit on the current account of the U.S. balance of payments
B) Debit on the current account of the U.S. balance of payments
C) Credit on the financial account of the U.S. balance of payments
D) Debit on the financial account of the U.S. balance of payments

Question 16

U.S. exports represent two flows:

A) An outflow of goods or services, and an outflow of payments
B) An inflow of goods or services, and an outflow of payments
C) An outflow of goods or services, and an inflow of payments
D) An inflow of goods or services, and an inflow of payments

Question 17

The purchase of a British Rolls-Royce by a U.S. citizen would result in all of the following except a(n):

A) Supply of payments to England
B) Sale of dollars and the purchase of British pounds
C) Increase in imports to the United States
D) Gain of foreign exchange for the United States

Question 18

If a financial portfolio manager in the U.S. buys British company stocks in the London Stock Exchange, this would involve:

A) A demand for British pounds in the foreign exchange market
B) A supply of British pounds in the foreign exchange market
C) No effect on the demand for British pounds in the foreign exchange market
D) A demand for U.S. dollars in the foreign exchange market

Question 19

U.S. businesses are demanders of foreign currencies because they need them to:

A) Sell goods and services exported to foreign countries
B) Pay for goods and services imported from foreign countries
C) Receive interest payments from foreign governments
D) Receive interest payments from foreign businesses

Question 20

Which of the following shows the net difference between how much Americans forgave in debts owed to them by foreigners compared with how much foreigners forgave debts owed to them by Americans?

A) Current account
B) Capital account
C) Financial account
D) Net transfers

Question 21

The following table contains hypothetical data for the U.S. balance of payments in a year. Answer the following question on the basis of these data. All figures are in billions of dollars. U.S.
Refer to the table above. The balance of trade in goods and services was:

A) $107 billion surplus
B) $82 billion deficit
C) $115 billion deficit
D) $55 billion surplus

Question 22

The following table contains hypothetical data for the U.S. balance of payments in a year. Answer the following question on the basis of these data. All figures are in billions of dollars. U.S.
Refer to the table above. What does the figure for net investment income indicate?

A) Americans invested more abroad than the amount foreigners invested in the U.S.
B) The size of the net inflow of foreign investment to the United States in that year
C) The net amount Americans received as interest and dividends on existing American investments abroad
D) The net amount Americans paid as interest and dividends on existing foreign investments in the United States

Question 23

If there is a small surplus in the combined current account plus capital and financial account for a certain year, then to make the two accounts balance there will be:

A) An increase in the exchange rate
B) A decrease in the exchange rate
C) An increase in official reserve holdings
D) A decrease in official reserve holdings

Question 24

The following table contains hypothetical data for the U.S. balance of payments in a year. Answer the following question on the basis of these data. All figures are in billions of dollars. U.S.
Refer to the table above. The figure for net transfers indicates that the United States:

A) Received a net public and private transfer of $22 billion from the rest of the world
B) Sent a net public and private transfer of $22 billion in remittances to the rest of the world
C) Sent a net private transfer of $22 billion to the rest of the world
D) Received a net private transfer of $22 billion from the rest of the world

Question 25

Remittances of Mexican workers in the U.S. to their families in Mexico are included in the U.S. balance of payments as a debit in the section on:

A) Trade in services
B) Net international transfers
C) Financial accounts
D) Capital accounts

Question 26

The following table contains hypothetical data for the U.S. balance of payments in a year. Answer the following question on the basis of these data. All figures are in billions of dollars. U.S.
Refer to the table above. The data indicate that there was a trade:

A) Deficit in goods and also a trade deficit in services
B) Surplus in goods and also a trade surplus in services
C) Deficit in goods and a trade surplus in services
D) Surplus in goods and a trade deficit in services

Question 27

Which of the following is an item in the current account balance of the United States? The purchase of:

A) A U.S. company by a foreign company
B) Stock in a foreign corporation by a U.S. company
C) Insurance in the United States by a foreign company
D) A United States Treasury bond by a wealthy foreigner

Question 28

Official reserves used to achieve a balance of payments between nations engaging in international trade are held by:

A) Private businesses engaging in trade
B) Central banks of the nations engaged in trade
C) Commercial banks which make loans to businesses engaging in trade
D) Commercial banks which make loans to governments which engage in trade

Question 29

In one year the United States had a current account deficit of $461 billion. The balance on the capital account was -$8 billion. What was the balance on the financial account?

A) -$461 billion
B) +$469 billion
C) -$469 billion
D) +$453 billion

Question 30

The following table contains hypothetical data for the U.S. balance of payments in a year. Answer the following question on the basis of these data. All figures are in billions of dollars. U.S.
Refer to the table above. If there was a net inflow of $7 billion in official reserves in the capital and financial account that year, the United States experienced a balance-of-payments:

A) Surplus of $7 billion
B) Deficit of $7 billion
C) Surplus of $99 billion
D) Deficit of $99 billion

Question 31

A trade deficit means a net:

A) Inflow of payments for goods and services
B) Outflow of goods and services
C) Inflow of goods and services
D) Excess of exports over imports

Question 32

Which of the following appears as a positive item on the balance of payments accounts for the United States?

A) U.S. government sending aid to natural-disaster victims in Asia
B) American tourists spending money in the other countries
C) The buying of U.S. Treasury bonds by a foreign bank
D) The payment of stock dividends by U.S. firms to foreign shareholders

Question 33

The following table contains hypothetical data for the U.S. balance of payments in a year. Answer the following question on the basis of these data. All figures are in billions of dollars. U.S.
Refer to the table above. The balance on the current account was a:

A) $51 billion surplus
B) $92 billion deficit
C) $22 billion surplus
D) $82 billion deficit

Question 34

Answer the question on the basis of the following balance of payments data for the hypothetical nation of Econland. All figures are in billions of dollars. (1) Goods exports +$220
(2) Goods imports -328
(3) Exports of services +54
(4) Imports of services -55
(5) Net investment income +18
(6) Net transfers -11
(7) Capital account -1
(8) Foreign purchases of Econland assets +124
(9) Econland purchases of foreign assets -21
Refer to the table above. Econland's balance on the current account shows a:

A) Deficit of $91 billion
B) Deficit of $102 billion
C) Deficit of $109 billion
D) Surplus of $109 billion

Question 35

The settling of any net deficit in the combined current, and capital and financial accounts is done with:

A) Capital reserves
B) Official reserves
C) Net transfers
D) Net investment income

Question 36

Which of the following would be an indication that a nation has a balance of payments deficit?

A) It is buying gold abroad
B) Its imports exceed its exports
C) Its holdings of official reserves are declining
D) It is borrowing abroad to finance capital investments

Question 37

Answer the question on the basis of the following balance of payments data for the hypothetical nation of Econland. All figures are in billions of dollars. (1) Goods exports +$220
(2) Goods imports -328
(3) Exports of services +54
(4) Imports of services -55
(5) Net investment income +18
(6) Net transfers -11
(7) Capital account -1
(8) Foreign purchases of Econland assets +124
(9) Econland purchases of foreign assets -21
Refer to the table above. Econland's balance of trade in goods and services shows a:

A) Net inflow of payments of $109 billion
B) Net outflow of payments of $109 billion
C) Net inflow of payments of $108 billion
D) Net outflow of payments of $108 billion

Question 38

The following table contains hypothetical data for the U.S. balance of payments in a year. Answer the following question on the basis of these data. All figures are in billions of dollars. U.S.
Refer to the table above. The balance on the financial account was a:

A) $92 billion surplus
B) $97 billion surplus
C) $92 billion deficit
D) $97 billion deficit

Question 39

In the Balance of Payments statement, a current account surplus will be matched by a:

A) Capital and financial accounts deficit
B) Capital and financial accounts surplus
C) Trade deficit
D) Trade surplus

Question 40

A nation's annual balance of payments statement must always balance because:

A) A nation's imports are limited to the value of its exports
B) A nation's exports and imports are always paid with dollars
C) All international transactions must be settled in one way or another
D) A trade deficit must be matched by an equal surplus of investment income

Question 41

If the exchange rate is $1 = 0.7841 euro, then a French DVD priced at 20 euros would cost to an American buyer (excluding taxes and other fees):

A) $15.68
B) $20.78
C) $25.51
D) $27.84

Question 42

The exchange rate for the Mexican peso changes from $1 = 5 pesos to $1 = 6 pesos. This change will lead to:

A) U.S. goods becoming less expensive for Mexicans
B) Mexican goods becoming more expensive for Americans
C) An increase in U.S. exports to Mexico
D) A decrease in U.S. exports to Mexico

Question 43

The following table contains data for the U.S. balance of payments in a prior year. Answer the question on the basis of this information. All figures are in billions of dollars. U.S. goods exports +$793
U.S. goods imports -1573
U.S. exports of service +280
U.S. imports of services -222
Net investment income +5
Net transfers -81
Capital account -5
Foreign purchases of assets in the U.S. +1198
U.S. purchases of foreign assets -395
Refer to the table above. There was a:

A) Trade deficit, but a current account surplus
B) Trade surplus, but a current account deficit
C) Trade surplus, and a current account surplus
D) Trade deficit, and a current account deficit

Question 44

Answer the question on the basis of the following balance of payments data for the hypothetical nation of Econland. All figures are in billions of dollars. (1) Goods exports +$220
(2) Goods imports -328
(3) Exports of services +54
(4) Imports of services -55
(5) Net investment income +18
(6) Net transfers -11
(7) Capital account -1
(8) Foreign purchases of Econland assets +124
(9) Econland purchases of foreign assets -21
Refer to the table above. Econland's balance on the capital and financial accounts is a:

A) Deficit of $110 billion
B) Surplus of $92 billion
C) Surplus of $102 billion
D) Surplus of $103 billion

Question 45

In one year the dollar would buy 162 Japanese yen, but ten years later, it would buy only 123 yen. Relative to the yen, the value of the dollar:

A) Increased by about 32 percent
B) Decreased by about 24 percent
C) Decreased by about 32 percent
D) Increased by about 24 percent

Question 46

In a graph showing the market supply and demand for British pounds in terms of U.S. dollars, the supply-of-pounds curve is upsloping because:

A) Fewer British pounds can be purchased per dollar if U.S. dollars become more expensive
B) Fewer U.S. dollars can be purchased per pound if the British pounds become less expensive
C) The British will purchase more U.S. goods or services when the dollar price of pounds rises
D) The British will purchase more U.S. goods or services when the dollar price of pounds falls

Question 47

If the U.S. dollar appreciates relative to the British pound, then:

A) The pound will appreciate relative to the U.S. dollar
B) The pound will depreciate relative to the U.S. dollar
C) British goods will be more expensive for Americans
D) American goods will be less expensive for the British

Question 48

In a graph showing the market supply and demand for British pounds in terms of U.S. dollars, the demand-for-pounds curve is downsloping because:

A) Fewer British pounds can be purchased if pounds become less expensive
B) Fewer U.S. dollars can be purchased if British pounds become less expensive
C) More U.S. dollars can be purchased if British pounds become more expensive
D) More British pounds can be purchased if pounds become less expensive

Question 49

Foreign exchange rates refer to the:

A) Price at which purchases and sales of foreign goods take place
B) Rate of exchange of goods and services between two trading nations
C) Price of one nation's currency in terms of another nation's currency
D) Difference between exports and imports of a particular nation with another

Question 50

If an American can purchase 40,000 British pounds for $90,000, the dollar rate of exchange for the pound is:

A) $0.44
B) $0.23
C) $2.25
D) $2.00

Question 51

Assume an exchange rate of $1 = .60 British pounds. A U.S. product sells in Britain for 18 pounds. By what percentage will dollar revenues change if the dollar price of a pound falls to .50 pounds?

A) -20 percent
B) -16 percent
C) +16 percent
D) +20 percent

Question 52

All else being equal, increased U.S. exports to nations in the European Union create a:

A) Demand for euros
B) Supply of euros
C) Shortage of euros
D) Surplus of euros

Question 53

If a European importer can buy $10,000 for 11,100 euros, the exchange rate for the euro is:

A) 1 euro = $0.80
B) 1 euro = $0.90
C) 1 euro = $0.95
D) 1 euro = $1.11

Question 54

In equilibrium, if $1 = 0.5 pound sterling and 1 pound sterling = 40 Swiss francs, the exchange rate between dollar and franc will be:

A) 1 franc = $.10
B) 1 franc = $.20
C) $1 = 80 francs
D) $1 = 20 francs

Question 55

An increase in the dollar price of the British pounds will:

A) Increase the pound price of dollars
B) Decrease the pound price of dollars
C) Leave the pound price of dollars unchanged
D) Cause Britain's terms of trade with the United States to deteriorate

Question 56

To Americans buyers, there is a decrease in the relative prices of Japanese goods when the:

A) Yen appreciates
B) Dollar appreciates
C) Inflation rate in the United States is higher than the inflation rate in Japan, and there are flexible exchange rates
D) Inflation rate in Japan is higher than the inflation rate in the United States and there are fixed exchange rates

Question 57

When the exchange rate between pounds and dollars moves from $2 = 1 pound to $1 = 1 pound, we say that the dollar has:

A) Depreciated
B) Appreciated
C) Inflated
D) Deflated

Question 58

The following table contains data for the U.S. balance of payments in a prior year. Answer the question on the basis of this information. All figures are in billions of dollars. U.S. goods exports +$793
U.S. goods imports -1573
U.S. exports of service +280
U.S. imports of services -222
Net investment income +5
Net transfers -81
Capital account -5
Foreign purchases of assets in the U.S. +1198
U.S. purchases of foreign assets -395
Refer to the table above. The data indicate that Americans:

A) Bought foreign assets abroad more than foreigners bought assets in the U.S.
B) Invested abroad more than foreigners invested in America
C) Earned more from their investments abroad than foreigners earned from their investments in America
D) Sold more products to buyers abroad than what foreign producers sold to buyers in America

Question 59

The following table contains data for the U.S. balance of payments in a prior year. Answer the question on the basis of this information. All figures are in billions of dollars. U.S. goods exports +$793
U.S. goods imports -1573
U.S. exports of service +280
U.S. imports of services -222
Net investment income +5
Net transfers -81
Capital account -5
Foreign purchases of assets in the U.S. +1198
U.S. purchases of foreign assets -395
By how much did Americans forgive debt owed to them by foreigners than foreigners forgave debt owed to them by Americans?

A) +$5 billion
B) -$5 billion
C) +$72 billion
D) -$72 billion

Question 60

If the Canadian dollar price of United States dollars increases from C$.80 to C$1.00, it can be concluded that:

A) Both countries are on the international gold standard
B) The Canadian dollar has appreciated in value relative to the United States dollar
C) The United States dollar has depreciated in value relative to the Canadian dollar
D) The Canadian dollar has depreciated in value relative to the United States dollar

Question 61

If there is a recession in the United Kingdom and a reduction in British imports, and an economic boom in the United States and an increase in U.S. imports, then these events are most likely to cause the British pound to:

A) Appreciate and the U.S. dollar to appreciate
B) Depreciate and the U.S. dollar to depreciate
C) Appreciate and the U.S. dollar to depreciate
D) Depreciate and the U.S. dollar to appreciate

Question 62

All of the following would add to the demand for U.S. dollars except:

A) Long-term capital inflows
B) Foreign travel by United States citizens
C) Exports of commodities from the United States
D) Travel by foreigners on United States airlines

Question 63

United States exports, international tourism in the United States, and foreign capital inflow into the United States all give rise to:

A) Depreciation of the U.S. dollar
B) A supply of foreign currencies to the United States
C) A demand for foreign currencies in the United States
D) Decreased foreign exchange reserves in the United States

Question 64

Which of the following statements is correct?

A) Under the gold standard, exchange rates fluctuate without restraint and thereby correct any international balance of payment disequilibrium
B) If nations X and Y are on the international gold standard, and X's exports to Y exceed X's imports from Y, then gold will flow from X to Y
C) If the dollar price of pounds rises, then the pound price of dollars will also rise
D) American exports tend to increase, while American imports tend to decrease, the supplies of foreign monies owned by American banks

Question 65

If Japanese autos surge in popularity in the United States, then this event is most likely to cause the Japanese yen to:

A) Appreciate and the U.S. dollar to depreciate
B) Depreciate and the U.S. dollar to appreciate
C) Appreciate and the U.S. dollar to appreciate
D) Depreciate and the U.S. dollar to depreciate

Question 66

Refer to the graph above. If Canadian investors buy more U.S. financial and real assets, then:

A) The demand curve will shift left
B) The demand curve will shift right
C) The supply curve will shift left
D) The supply curve will shift right

Question 67

When real interest rates in other countries rise relative to that in the U.S., other things being equal, we would expect the U.S. dollar to:

A) Appreciate
B) Depreciate
C) Inflate
D) Deflate

Question 68

Consider the currency market for British pounds and U.S. dollars. A decrease in the supply of British pounds results in:

A) An appreciation of the pound and a depreciation of the dollar
B) A depreciation of the pound and a depreciation of the dollar
C) An appreciation of the pound and an appreciation of the dollar
D) A depreciation of the pound and an appreciation of the dollar

Question 69

Other things being equal, the international value of foreign currencies will increase against the U.S. dollar if:

A) U.S. citizens reduce spending on imports
B) The U.S. Federal Reserve raises real interest rates
C) There is an increase in the number of foreign tourists in the United States
D) There are withdrawals of funds by foreigners from U.S. money markets

Question 70

If currency speculators believe South Korea will have much lower inflation in the future than the United States, then this event is most likely to cause the South Korean won to:

A) Depreciate and the U.S. dollar to depreciate
B) Depreciate and the U.S. dollar to appreciate
C) Appreciate and the U.S. dollar to appreciate
D) Appreciate and the U.S. dollar to depreciate

Question 71

Consider the currency market for British pounds and U.S. dollars. An increase in the supply of British pounds:

A) Results in an appreciation of the pound and a depreciation of the dollar
B) Results in a depreciation of the pound and a depreciation of the dollar
C) Is equivalent to an increase in the demand for the U.S. dollar
D) Is equivalent to a decrease in the demand for the U.S. dollar

Question 72

A currency depreciation in the foreign exchange market will:

A) Encourage imports into the country whose currency has depreciated
B) Discourage imports into the country whose currency has depreciated
C) Discourage exports from the country whose currency has depreciated
D) Encourage foreign travel by the citizens of the country whose currency has depreciated

Question 73

When the U.S. dollar decreases in value relative to foreign currencies the:

A) Demand for U.S. exports will decrease
B) Supply of U.S. exports will decrease
C) Demand for U.S. exports will increase
D) Supply of U.S. exports will remain constant

Question 74

Consider the currency market for British pounds and U.S. dollars. An increase in the demand for British pounds results in:

A) An appreciation of the pound and a depreciation of the dollar
B) A depreciation of the pound and a depreciation of the dollar
C) An appreciation of the pound and an appreciation of the dollar
D) A depreciation of the pound and an appreciation of the dollar

Question 75

Refer to the graph above. Higher inflation in the United States relative to that in Canada, ceteris paribus, will cause a(n):

A) Decrease in the supply of U.S. dollars
B) Increase in the demand for U.S. dollars
C) Decrease in the value of the U.S. dollar in terms of the Canadian dollar
D) Increase in the value of the U.S. dollar in terms of the Canadian dollar

Question 76

If real interest rates rise in the United Kingdom relative to the United States, then this event is most likely to cause the British pound to:

A) Depreciate and the U.S. dollar to depreciate
B) Depreciate and the U.S. dollar to appreciate
C) Appreciate and the U.S. dollar to appreciate
D) Appreciate and the U.S. dollar to depreciate

Question 77

Refer to the graph above. If U.S. citizens flock to Canada for summer vacations and buy more Canadian goods and services, then the:

A) The supply curve will shift left
B) The demand curve will shift right
C) The price of U.S. dollars in Canadian dollars will rise
D) The price of U.S. dollars in Canadian dollars will fall

Question 78

Other things being equal, an increase in the U.S. rate of inflation is likely to cause an increase in the:

A) Quantity of U.S. exports
B) Quantity of U.S. imports
C) Demand for U.S. dollars
D) International value of the U.S. dollar

Question 79

An increase in the income of country A relative to the income of country B will usually lead to an increase in country:

A) A's exports to country B
B) B's imports from country A
C) A's demand for the currency of country B
D) B's demand for the currency of country A

Question 80

Other things being equal, which of the following is a necessary consequence of a depreciation of the U.S. dollar against other currencies?

A) The terms of trade will move in favor of the United States
B) The United States will experience an increase in the volume of imports
C) International speculators will buy U.S. dollars and sell other currencies
D) U.S. exports will become cheaper relative to other nations' products