Question 1

If a U.S.company imports 10 Toyotas from Japan at $15,000 each,and the Japanese company buys airline tickets on a U.S.airline with the money,how does this affect the U.S.balance of payments accounts?
A)Decline in merchandise trade; increase in financial account
B)Decline in financial account; increase in merchandise trade
C)Decline in merchandise trade; increase in services
D)Decline in services; increase in merchandise trade

Accepted Answer

The U.S. balance of payments accounts would show a decline in merchandise trade due to the import of vehicles (a debit) and an increase in services due to the purchase of airline tickets from a U.S. airline by the Japanese company (a credit).

Question 2

If all international factor payment flows are investment income,then net investment income from abroad equals
A)net exports.
B)the current account balance.
C)the trade balance.
D)net income from abroad.

Accepted Answer

Net investment income from abroad is a component of the net income from abroad, reflecting earnings on overseas investments minus payments made to foreign investors.

Question 3

The difference between the current account balance and net exports is
A)the capital account.
B)net unilateral transfers plus net factor payments from abroad.
C)adjustments in net foreign assets.
D)income receipts from foreign assets.

Accepted Answer

The difference between the current account balance and net exports is accounted for by net unilateral transfers (such as remittances) plus net factor payments from abroad (such as income from investments minus payments to foreign investors). These components, along with net exports, make up the current account balance.

Question 4

Suppose a wealthy Canadian donates $10 million to charities in Mexico.Mexican net exports ________ and the current account balance ________.
A)fall; rises
B)rise; rises
C)are unchanged; is unchanged
D)fall; is unchanged

Accepted Answer

The answer of Suppose a wealthy Canadian donates $10 million...

Question 5

If a country's merchandise exports exceed its merchandise imports it has a
A)trade surplus.
B)trade deficit.
C)current account surplus.
D)current account deficit.

Accepted Answer

A trade surplus occurs when a country's goods exports exceed its goods imports. A trade deficit, on the other hand, occurs when a country imports more goods than it exports. A current account surplus means that a country's total exports (goods and services) exceed its total imports (goods and services), while a current account deficit means the opposite - a country's imports exceed its exports. However, the question specifically asks about merchandise exports and imports, so the answer is trade surplus.

Question 6

Which of the following would be part of the nation's financial account?
A)A night club show seen by an American in Mexico City
B)A dividend from a British equity owned by an American
C)A payment to the Philippine government for the use of military bases in their country
D)One hundred shares of British Petroleum stock purchased by an American

Accepted Answer

The financial account in a nation's balance of payments records transactions that involve the purchase or sale of assets. When an American purchases shares of British Petroleum, it is a cross-border investment transaction, thus part of the financial account.

Question 7

If a French company sells 1000 gallons of Perrier to a U.S.company at 5 euros per gallon,and uses the money to buy stock in a Spanish cork company,how does this affect the French balance of payments accounts?
A)Decrease in financial account; increase in merchandise trade
B)Decrease in merchandise trade; increase in financial account
C)Decrease in net investment income from abroad; increase in financial account
D)Decrease in merchandise trade; increase in net income from abroad

Accepted Answer

The sale of Perrier (a good) to a U.S. company increases France's merchandise trade as it represents an export. Using the proceeds to buy stock in a Spanish company increases France's financial account, as it's an investment abroad.

Question 8

Which of the following transactions would not be included in the current account of the home country?
A)A consumer good is imported into the home country.
B)A home country resident makes a deposit in a foreign bank.
C)A foreign student pays tuition to a university in the home country.
D)A home country resident receives income on his or her foreign assets.

Accepted Answer

Depositing money in a foreign bank is considered a financial account transaction, not a current account transaction. The current account includes trade in goods and services, income receipts, and one-way transfers, not changes in financial assets and liabilities.

Question 9

If France has a trade deficit,then
A)imports into France exceed exports from France.
B)exports from France exceed imports into France.
C)imports into the United States from France exceed exports from the United States into France.
D)imports into France from the United States exceed exports from France into the United States.

Accepted Answer

A trade deficit occurs when a country imports more goods and services than it exports. Therefore, choice A is the correct answer as it describes the condition of France having a trade deficit.

Question 10

A country has a current account surplus if
A)the value of its exports exceeds the value of its imports, assuming net income from foreign assets and net unilateral transfers have a value of zero.
B)the value of its net exports of services exceeds the value of its net exports of goods.
C)it receives more income from foreign assets than it pays to foreigners for foreign-owned domestic assets.
D)its capital inflows exceed its capital outflows.

Accepted Answer

A current account surplus occurs when a country's exports exceed its imports, after taking into account net income from foreign assets and net unilateral transfers. This means that the country is earning more foreign currency than it is spending, resulting in a surplus on its current account. B is incorrect because the current account balance includes both goods and services, not just one or the other. C refers to the income and capital account, not the current account. D refers to the overall balance of payments, not the current account specifically.

Question 11

If a French company exports $2 million of machinery to Italy and French tourists spend $2 million at Italian beaches,the French merchandise trade balance ________,and the French financial account balance ________.
A)rises; rises
B)rises; is unchanged
C)is unchanged; is unchanged
D)is unchanged; rises

Accepted Answer

The answer of If a French company exports $2 million...

Question 12

Which of the following would be part of the nation's current account?
A)An old house purchased by an American in Italy
B)The purchase of a U.S. Treasury bond by a foreigner
C)The interest an American earns on a British bond
D)A factory built by the Japanese in the United States

Accepted Answer

The current account includes transactions in goods, services, primary income, and secondary income between residents and non-residents. The interest an American earns on a British bond falls under primary income, which is part of the current account. Choices A, B, and D involve capital transfers or investments, which are part of the financial account, not the current account.

Question 13

The current account balance consists of
A)the trade balance plus the services balance.
B)net exports of goods and services, minus net unilateral transfers.
C)net exports of goods and services, plus net income from abroad, plus net unilateral transfers.
D)net exports of goods and services, plus net income from abroad, plus net unilateral transfers, minus the financial account balance.

Accepted Answer

The current account balance includes the balance of trade in goods and services, net income from abroad, and net unilateral transfers. Therefore, option C is the correct answer. Option A only includes the trade balance and services balance, while option B includes only net exports and unilateral transfers. Option D adds the financial account balance, which is not a part of the current account.

Question 14

The balance of payments equals
A)the sum of the current account and the financial account.
B)the current account minus net unilateral transfers.
C)net investment income from abroad.
D)the net increase in a country's official reserve assets.

Accepted Answer

The answer of The balance of payments equals
A)the sum of...

Question 15

If the United States sells computers to Russia,and uses the proceeds to buy shares of stock in Russian companies,the U.S.trade balance ________ and the U.S.financial account balance ________.
A)rises; rises
B)rises; falls
C)falls; falls
D)falls; rises

Accepted Answer

The U.S. trade balance rises because it exports goods (computers) to Russia, increasing exports. The financial account balance falls because the U.S. uses the proceeds to buy shares in Russian companies, which is a financial outflow.

Question 16

If the United States donates footballs to Japan,how is the transaction recorded on the U.S.balance of payments accounts?
A)Decline in merchandise trade; increase in financial account
B)Decline in financial account; increase in merchandise trade
C)Decline in net unilateral transfers; increase in merchandise trade
D)Decline in merchandise trade; increase in net unilateral transfers

Accepted Answer

The answer of If the United States donates footballs to...

Question 17

If a French company exports $2 million of machinery to Italy and French tourists spend $2 million at Italian beaches,the Italian current account balance ________,and the Italian financial account balance ________.
A)rises; rises
B)rises; is unchanged
C)is unchanged; is unchanged
D)is unchanged; rises

Accepted Answer

The current account balance is the balance of trade in goods and services, so the $2 million of machinery exports and $2 million of tourist spending offset each other. Therefore, the current account balance is unchanged. The financial account balance deals with capital flows between countries, and since there is no information given about capital flows, it cannot be determined whether it rises or is unchanged. Therefore, the best answer is C, is unchanged; is unchanged.

Question 18

Net exports of goods are known as
A)the balance of payments.
B)the merchandise trade balance.
C)the current account.
D)the financial account.

Accepted Answer

Net exports of goods refer specifically to the balance of trade in goods, which is captured in the merchandise trade balance. The balance of payments (A) includes all transactions between a country and the rest of the world, including goods, services, transfers, and financial flows. The current account (C) includes the balance of trade in goods, but also includes the balance of trade in services, income, and transfers. The financial account (D) tracks financial flows between a country and the rest of the world.

Question 19

If a U.S.firm buys tulips from a Dutch firm and the Dutch firm uses the dollars it gets to buy U.S.stocks,the U.S.trade balance ________ and the U.S.financial account ________.
A)rises; rises
B)rises; falls
C)falls; falls
D)falls; rises

Accepted Answer

When a U.S. firm buys tulips from a Dutch firm, it means that the U.S. is importing goods from the Netherlands, which decreases the U.S. trade balance. However, when the Dutch firm uses the dollars it gets from selling tulips to buy U.S. stocks, it means that the Netherlands is now investing in the U.S., which increases the U.S. financial account. Therefore, the U.S. trade balance falls while the U.S. financial account rises.

Question 20

If a Japanese company sells 200 VCRs to a French company and uses the money to buy U.S.government bonds,the Japanese merchandise trade balance ________,and the Japanese financial account balance ________.
A)rises; rises
B)rises; falls
C)falls; falls
D)falls; rises

Accepted Answer

Selling 200 VCRs to a French company will result in an increase in export revenue, hence the merchandise trade balance will rise. However, using the money to buy U.S. government bonds will lead to a decrease in foreign exchange reserves and an increase in a foreign investment in the US, hence the financial account balance will fall. Therefore, the best choice is B (rises; falls).

Quiz 5: Saving and Investment in the Open Economy

If a U.S.company imports 10 Toyotas from Japan at $15,000 each,and the Japanese company buys airline tickets on a U.S.airline with the money,how does this affect the U.S.balance of payments accounts?

If all international factor payment flows are investment income,then net investment income from abroad equals

The difference between the current account balance and net exports is

Suppose a wealthy Canadian donates $10 million to charities in Mexico.Mexican net exports and the current account balance .

If a country's merchandise exports exceed its merchandise imports it has a

Which of the following would be part of the nation's financial account?

If a French company sells 1000 gallons of Perrier to a U.S.company at 5 euros per gallon,and uses the money to buy stock in a Spanish cork company,how does this affect the French balance of payments accounts?

Which of the following transactions would not be included in the current account of the home country?

If France has a trade deficit,then

A country has a current account surplus if

If a French company exports $2 million of machinery to Italy and French tourists spend $2 million at Italian beaches,the French merchandise trade balance ,and the French financial account balance .

Which of the following would be part of the nation's current account?

The current account balance consists of

The balance of payments equals

If the United States sells computers to Russia,and uses the proceeds to buy shares of stock in Russian companies,the U.S.trade balance and the U.S.financial account balance .

If the United States donates footballs to Japan,how is the transaction recorded on the U.S.balance of payments accounts?

If a French company exports $2 million of machinery to Italy and French tourists spend $2 million at Italian beaches,the Italian current account balance ,and the Italian financial account balance .

Net exports of goods are known as

If a U.S.firm buys tulips from a Dutch firm and the Dutch firm uses the dollars it gets to buy U.S.stocks,the U.S.trade balance and the U.S.financial account .

If a Japanese company sells 200 VCRs to a French company and uses the money to buy U.S.government bonds,the Japanese merchandise trade balance ,and the Japanese financial account balance .