Question 1

Intermediate goods are shown in the circular flow diagram as:

Accepted Answer

Intermediate goods are typically exchanged between producers for the purpose of producing final goods. Therefore, in the circular flow diagram, these transactions are represented as a flow that starts and ends with producers, as they buy and sell these goods among themselves before producing the final goods for consumers.

Question 2

Transfers occur in the open-economy circular flow between:

Accepted Answer

Transfers in the open-economy circular flow can occur between government and individuals (such as social security payments, subsidies), government and producers (such as grants, tax incentives), and individuals and foreigners (such as remittances, gifts). Therefore, all the options listed are correct.

Question 3

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

Accepted Answer

The financial sector facilitates the flow of funds from savers to borrowers, enabling lending to individuals for consumption or investment, which corresponds to options A and C. It does not force the government to cover expenditures with taxes, as that is a fiscal policy decision.

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:

Accepted Answer

The correct answer is A because it represents the balance of total foreign transactions when exports minus imports (X-IM), plus net unilateral transfers (Tr_F), plus net income from abroad (r_F) and net capital transfers (S_F) sum to zero. This equation captures all components of the balance of payments, ensuring that all transactions are accounted for and balanced.

Question 5

The balance of payments implies all of the following except:

Accepted Answer

The balance of payments encompasses all transactions between a country's residents and the rest of the world, including trade, financial transfers, and investments. It is structured so that total inflows and outflows (credits and debits) should balance, but it does not imply that exports must equal imports. That condition specifically pertains to the balance of trade, a subset of the balance of payments.

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:

Accepted Answer

The purchase of shares by a foreign investor is considered a capital inflow, which is recorded as a credit in the U.S. balance of payments.

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:

Accepted Answer

The purchase of shares in a foreign company by an American entity represents a financial outflow from the United States, which is recorded as a debit in the financial account of the U.S. balance of payments.

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:

Accepted Answer

When a French tourist purchases a ticket on Southwest Airlines, a U.S. airline, for travel to the United States, it is considered a service export for the U.S. This is because the service (air travel) is being provided by a U.S. company to a foreign resident.

Question 9

United States foreign direct investment (FDI) refers to:

Accepted Answer

United States foreign direct investment (FDI) refers to U.S. investors acquiring a significant degree of control in foreign firms, typically through ownership of 10% or more of the foreign company's shares, not the acquisition of U.S. firms by foreign entities or portfolio investments.

Question 10

Which if the following statements is true?

Accepted Answer

Official asset transactions indeed refer to the activities of central banks in buying and selling currencies and financial assets, primarily to influence the value of their own currency in the foreign exchange market.

Question 11

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

Accepted Answer

The current account of the balance of payments typically includes the trade balance (exports minus imports, represented as (X-IM)), net income from abroad (such as interest and dividends, which could be represented by the term involving "r"), and net current transfers (such as remittances, represented by "Tr"). Therefore, option C correctly combines these elements, indicating the sum of the trade balance, net income from abroad, and net current transfers.

Question 12

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

Accepted Answer

The statistical discrepancy in a country's balance of payments arises due to a combination of factors including incomplete reporting by individuals and firms, limited customs checks, and the use of indirect and sometimes inaccurate estimates for payment flows.

Question 13

The merchandise trade balance is:

Accepted Answer

The merchandise trade balance specifically refers to the net sum of a country's exports and imports of goods only, not services, and is a major component of the current account, which also includes services, primary income, and secondary income.

Question 14

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

Accepted Answer

The balance of payments records transactions between residents of a country and the rest of the world in a given period. It includes unilateral transfers, direct foreign investment, and private capital inflows. However, the total stock of U.S. Treasury bonds held by foreigners is a stock variable, not a flow variable, and thus does not appear in the balance of payments, which records flows.

Question 15

The planet Earth's true balance of payments:

Accepted Answer

The planet Earth's true balance of payments must net out to zero because it is a closed system with no external trade partners. Transactions within the Earth, such as exports and imports, are balanced by corresponding financial flows in the opposite direction.

Question 16

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

Accepted Answer

The financial account of the balance of payments records transactions that involve the purchase or sale of assets. Net change in foreign securities held in the U.S. falls under this category, as it represents cross-border investments in financial assets.

Question 17

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

Accepted Answer

The international investment position is a snapshot of a country's financial assets and liabilities at a specific point in time, not a compilation of flows of payments over a period. Flows of payments are measured by the balance of payments, not the international investment position.

Question 18

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

Accepted Answer

During the 1980s, the international investment position of the United States went from being the world's largest creditor nation to becoming the world's largest debtor nation, indicating a shift from positive to negative.

Question 19

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

Accepted Answer

In 2000, foreign direct investment (FDI) was the single largest category of international investment, surpassing portfolio investment, bank lending, and foreign aid. FDI involves investing in a foreign country with a long-term relationship in mind and typically includes management control of the foreign business.

Question 20

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

Accepted Answer

The answer of The following is a characteristic of international...

Quiz 11: International Investment and International Finance