Question 1

An example of inflation is, if the amount of money in a country doubled, but the production of goods and services stayed the same, the price of all goods and services would decline by about half, assuming that other factors, such as external trade, were constant.

Accepted Answer

If the amount of money in a country doubled, it would lead to an increase in demand for goods and services, which would ultimately lead to an increase in their prices. This is because there is now more money chasing the same amount of goods and services, leading to inflation and not a decline in prices as stated in the question.

Question 2

Whether the trade balance is positive (surplus)or negative (deficit)is important because it provides a measure of the financing needs of a particular country. Hence, the trade balance is more important than current account balance.

Accepted Answer

The current account balance is broader and more important as it includes the trade balance (exports minus imports of goods and services), net income from abroad, and net current transfers, providing a more comprehensive measure of a country's international financial position.

Question 3

Security investments have little impact on the BOP's financial account.

Accepted Answer

Security investments, such as the purchase or sale of stocks and bonds, directly impact the financial account of the Balance of Payments (BOP) by reflecting cross-border investments and affecting the flow of capital.

Question 4

Of the following, which is NOT listed in the text as a reason why currency values can change?

Accepted Answer

WTO mandates are not listed as a reason why currency values can change. The other four options - different price levels, mispricing, varying interest rates, and differential inflation - are all mentioned in the text as factors that can affect currency values.

Question 5

Balance of payments is generally split into two major components with major business implications: (1)the current account and (2)the _____ account.

Accepted Answer

The current account is concerned with the trade of goods and services, while the financial account is concerned with financial investments and capital flows. The financial account is particularly relevant for businesses involved in international investment and capital flows.

Question 6

The International Monetary Fund (IMF)was established under the Bretton Woods Agreement to help ensure the stability of the international monetary and financial system.

Accepted Answer

The International Monetary Fund (IMF) was indeed established under the Bretton Woods Agreement to help ensure the stability of the international monetary and financial system.

Question 7

One forecasting approach is to use a multiple regression model to estimate the relationship between changes in spot rates and fundamental factors.

Accepted Answer

Multiple regression models can be used to estimate the relationship between changes in spot rates and various fundamental factors, such as inflation, GDP, and interest rates. This approach allows for a quantitative analysis of the impact of these factors on the spot rates, and can be used to forecast future movements in the rates.

Question 8

Which of the following rose substantially in value against most other currencies as well as served as a reserve asset in many countries during the global economic and financial crises of 2008-2009?

Accepted Answer

During times of economic uncertainty, investors tend to flock to safe-haven assets, including the U.S. dollar. Additionally, many countries hold their foreign exchange reserves in the form of U.S. dollars, further strengthening its position as a reserve asset.

Question 9

Together, the dollar, euro, and yen account for around 60 percent of the world economy.

Accepted Answer

According to the International Monetary Fund, as of 2020, the US dollar accounts for approximately 40 percent of the world's Gross Domestic Product (GDP), the Euro accounts for around 20 percent, and the Japanese yen accounts for around 1 percent, adding up to a total of around 61 percent.

Question 10

Indirect quotes give the number of dollars per one unit of foreign currency.

Accepted Answer

Indirect quotes give the number of units of foreign currency per one dollar. Direct quotes give the number of dollars per one unit of foreign currency.

Question 11

In flow of funds analysis, money moving into a country is a debit (negative sign), while money leaving the same country is a credit (plus sign).

Accepted Answer

In flow of funds analysis, money moving into a country is a credit (plus sign), while money leaving the same country is a debit (negative sign).

Question 12

If the dollar was expected to appreciate in the 60-day forward market against the Japanese yen, it would be selling at a premium.

Accepted Answer

A currency is said to be selling at a premium in the forward market when its forward exchange rate is higher than its spot exchange rate. If the dollar is expected to appreciate against the yen in the 60-day forward market, it means that the forward exchange rate for the dollar is higher than its spot exchange rate, indicating a premium.

Question 13

The statistical discrepancy line reconciles any remaining imbalance to ensure that all debit and credit entries in the BOP statement sum to zero. This line captures statistical inconsistencies in the recording of the credit and debit entries as well as illegal trade.

Accepted Answer

The statement is true. The statistical discrepancy line is included in the BOP statement to ensure that all credit and debit entries sum up to zero, capturing any discrepancies or illegal trade.

Question 14

The net of services exports and imports is called the ______.

Accepted Answer

The net of services exports and imports is called the services balance. This refers to the balance of payments for services, such as transportation, tourism, and other intangible goods. The trade balance refers to the balance of payments for physical goods, while the income balance refers to the balance of payments for income received from investments and other sources. The services deficit would refer to a negative balance in the services account. The services transfer ratio is not a common term used in economics.

Question 15

According to the Big Mac Index, the dollar interest rate on U.S. and European bonds should be the same. Otherwise, there would be no arbitrage opportunities for investors.

Accepted Answer

The Big Mac Index, created by The Economist, is a tool to measure purchasing power parity (PPP) between nations, using the price of a McDonald's Big Mac as the benchmark. It does not directly relate to or predict interest rates on bonds in the U.S. and Europe. Interest rates can differ due to various factors including monetary policy, inflation expectations, and economic conditions, independent of PPP or the Big Mac Index. Arbitrage opportunities in financial markets can exist even when the Big Mac Index suggests a PPP imbalance.

Question 16

Which of the following is NOT a subaccount of the current account?

Accepted Answer

The financial account is not a subaccount of the current account, but rather a separate account that tracks international financial flows such as investment and borrowing. The other options are all subaccounts of the current account, which measures the flow of goods and services, income, and transfers between countries.

Question 17

The EMU introduced the euro as a new currency to replace the currencies of the member countries in the Eurozone, which has since grown to 29 members.

Accepted Answer

The Eurozone, which uses the euro as its currency, consists of 19 of the 27 European Union member countries, not 29.

Question 18

The forex market consists of spot, forward, and discount markets.

Accepted Answer

The forex market consists of spot, forward, and swap markets, not discount markets. Discount markets are more commonly associated with instruments like bills of exchange.

Question 19

One factor affecting change in currency values is different price levels in different countries for the same goods and services.

Accepted Answer

This is known as the concept of purchasing power parity, where a currency's value is affected by the relative prices of goods and services in different countries. If the same good costs less in one country compared to another, then the currency of the country where the good is cheaper will appreciate relative to the other country's currency.

Question 20

According to the law of one price, identical goods should sell for the same price in different countries according to the local currencies.

Accepted Answer

The law of one price states that identical goods should sell for the same price in different countries after accounting for exchange rates. This assumes that there are no trade barriers or transportation costs that would affect pricing.

Quiz 4: The International Flow of Funds and Exchange Rates