Question 1

Although a net-debtor country may initially benefit from an inflow of savings from abroad,over the long run continued borrowing results in growing dividend payments to foreigners and a drain on the debtor-country's economic resources.

Accepted Answer

This statement is true as the continued borrowing by a net-debtor country results in growing dividend payments to foreigners, which ultimately drains the economic resources of the debtor-country.

Question 2

That German investors collect interest income on their holdings of U.S.Treasury bills constitutes a credit transaction on the U.S.balance of payments.

Accepted Answer

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Question 3

If a country consistently realizes a current-account surplus in its balance of payments,it likely will become a "net debtor" in its balance of international indebtedness.

Accepted Answer

If a country consistently realizes a current-account surplus in its balance of payments, it means that it is exporting more goods and services than it is importing, which will result in a buildup of foreign reserves. This can actually make the country a "net creditor" as it accumulates more foreign assets.

Question 4

How do we measure the international investment position of the United States at any point in time? How did the U.S.become a net debtor nation so rapidly?

Accepted Answer

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Question 5

Concerning the balance of international indebtedness,when is a country a net creditor or a net debtor?

Accepted Answer

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Question 6

By the mid-1980s,the United States had evolved from the status of a net-creditor nation to a net-debtor nation in its balance of international indebtedness.

Accepted Answer

This statement is true. By the mid-1980s, the United States had a balance of international indebtedness in which it owed more money to foreign creditors than it was owed by other countries.

Question 7

Often,countries realizing rapid economic growth rates possess long-run current account deficits.

Accepted Answer

Rapid economic growth often leads to increased imports and investments, which can result in a long-run current account deficit.

Question 8

A current account deficit for the United States necessarily reduces the standard of living for American households.

Accepted Answer

A current account deficit does not necessarily reduce the standard of living for American households. While a current account deficit may lead to an outflow of funds from the country, it can also indicate greater investment in the economy and higher levels of economic growth. Additionally, American households may still benefit from lower-priced imports resulting from the deficit.

Question 9

Rapid growth of production and employment is commonly associated with large or growing trade surpluses and current account surpluses.

Accepted Answer

Rapid growth of production and employment can occur in economies with trade and current account deficits, as domestic demand drives economic expansion, not just export-led growth.

Question 10

What does a current account deficit mean?

Accepted Answer

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Question 11

To reduce a current account deficit,a country should either decrease the budget deficit of its government or reduce investment spending relative to saving.

Accepted Answer

This is because a current account deficit occurs when a country is importing more goods and services than it is exporting. If a country reduces its government's budget deficit, it will boost investor confidence in the country, which will lead to more investment flows into the country. The increased investment can improve the current account balance. Alternatively, if a country reduces investment spending relative to saving, it will reduce the demand for imported goods and services, which will improve the current account balance.

Question 12

For the United States,a consequence of its current account deficit is a growing foreign ownership of the capital stock of the United States and a rising fraction of U.S.income that must be diverted abroad in the form of interest and dividends to foreigners.

Accepted Answer

A current account deficit means that a country is importing more than it is exporting, leading to a net outflow of currency. To finance this deficit, the country must borrow from foreign investors, leading to a growing foreign ownership of its capital stock. As these foreign investors own a larger share of the capital stock, a rising fraction of the country's income must be paid out to them in the form of interest and dividends, thus diverting income abroad.

Question 13

If an American purchases a ticket from Scandinavian Airlines,paying by a personal check,which entries result in the balance-of-payments accounts of Norway or the United States?

Accepted Answer

When an American buys a ticket from Scandinavian Airlines, it is a service export for Norway, resulting in a credit in Norway's service account.

Question 14

The net-debtor status,that the United States achieved in its balance of international indebtedness by the mid-1980s,reflected the continuous current-account surplus that the United States attained in its balance of payments during the 1970s.

Accepted Answer

The statement is incorrect. The net-debtor status that the United States achieved in the mid-1980s was a result of continuous current-account deficits in the balance of payments during the 1970s and 1980s.

Question 15

What are the components of the current account of the balance of payments?

Accepted Answer

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Question 16

Most economists contend that any reduction in the current account deficit is better achieved through increased national saving than through reduced domestic investment.

Accepted Answer

When a country saves more, it decreases the amount it has to borrow from other countries to finance its investment and consumption, which reduces the current account deficit. On the other hand, reducing domestic investment can have negative effects on the economy, such as slower growth and job creation, which may not necessarily lead to a reduction in the current account deficit. Therefore, most economists argue that increasing national saving is a better strategy for reducing the current account deficit.

Question 17

That U.S.importers purchase bananas from Brazil constitutes a debit transaction on the U.S.balance of payments.

Accepted Answer

Purchasing bananas from Brazil involves sending money out of the U.S, which is a debit transaction on the balance of payments.

Question 18

Most economists belief that in the 1980s,a massive outflow of capital caused a current account deficit for the United States.

Accepted Answer

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Question 19

That U.S.charities donate funds to combat starvation in Africa constitutes a debit transaction on the U.S.balance of payments.

Accepted Answer

Charitable donations from the U.S. to other countries, including those aimed at combating starvation in Africa, are considered a debit transaction on the U.S. balance of payments because money is flowing out of the country.

Question 20

The official reserve assets of the United States consist of holdings of gold and foreign corporate securities.

Accepted Answer

The official reserve assets of the United States consist of holdings of gold, foreign currencies, and SDRs (Special Drawing Rights), but not foreign corporate securities.

Quiz 10: The Balance-of-payments