Question 1

A country's balance of payments is:
A) an accounting record of household incomes and expenditures.
B) the difference between the government's revenues and expenditures.
C) a record of the country's receipts from and payments to other countries.
D) the difference between exports and imports of goods and services.

Accepted Answer

A country's balance of payments is a comprehensive record of all economic transactions between the residents of the country and the rest of the world, including trade in goods and services, financial transactions, and investments.

Question 2

In the balance of payments a net capital outflow from a country is:
A) equal to its deficit in the capital account.
B) always equal to the surplus in the current account.
C) equal to its surplus in the current account.
D) usually greater when interest rates are high.

Accepted Answer

Net capital outflow is essentially the mirror image of the current account surplus. When a country has a surplus in its current account, it means that its national savings exceed its domestic investment, leading to a net outflow of capital to foreign markets.

Question 3

The part of the balance of payments account that records all short-term flows of payments is called the:
A) current account.
B) capital account.
C) official reserves account.
D) balance of trade.

Accepted Answer

The current account records all short-term flows of payments, including trade in goods and services, primary income, and secondary income transactions between residents and non-residents.

Question 4

The part of the balance of payments account that records the amount of foreign currency the government buys or sells is the:
A) current account.
B) capital account.
C) official reserves account.
D) balance of trade.

Accepted Answer

The official reserves account is the part of the balance of payments that records transactions involving the purchase or sale of foreign currency by the government. It is used to stabilize the value of the home country's currency.

Question 5

If a Canadian company buys steel from Russia, then that purchase will be recorded in the:
A) Canadian current account.
B) Canadian capital account.
C) Canadian official reserves account.
D) Russian capital account.

Accepted Answer

This purchase is recorded in the Canadian current account because it involves the import of goods, affecting the trade balance, which is a component of the current account.

Question 6

If a French billionaire buys stock in the Bank of Montreal, then that purchase will be recorded in the:
A) Canadian current account.
B) French current account.
C) Canadian capital account.
D) Canadian services account.

Accepted Answer

When a foreign investor, such as a French billionaire, buys stock in a Canadian company like the Bank of Montreal, the transaction is recorded in the Canadian capital account. This account tracks the flow of investment into and out of the country, including investments in stocks, bonds, and real estate.

Question 7

If the balance on current account and the balance on capital account do not sum to zero:
A) international transactions will cease.
B) the government will run a budget deficit.
C) official reserves will change to offset the difference.
D) current account transactions must be reduced.

Accepted Answer

The balance of payments consists of the current account, the capital account, and the financial account, which includes official reserves. If the sum of the current and capital accounts does not equal zero, the discrepancy is offset by changes in official reserves. This adjustment ensures that the overall balance of payments remains balanced, as per the accounting principle that all transactions must net to zero.

Question 8

A balance of payments deficit will always occur if:
A) both the current and capital accounts are positive.
B) the official transaction account is negative.
C) the current account is negative.
D) the current and capital (excluding official reserve transactions) are negative.

Accepted Answer

A balance of payments deficit occurs when the sum of the current account and the capital account (excluding official reserve transactions) is negative. This means the country is spending more on foreign trade than it is earning, and is borrowing capital from foreign sources to make up the deficit. Options A, B, and C do not necessarily result in a balance of payments deficit.

Question 9

During the last decade, Canada ran large balance of trade surpluses. These trade surpluses imply:
A) a balance of payments deficit.
B) a balance of payments surplus.
C) a balance of payments equilibrium.
D) nothing about the overall balance of payments.

Accepted Answer

A trade surplus indicates that a country exports more than it imports, but it doesn't directly determine the overall balance of payments status. The balance of payments includes not just the trade balance but also financial flows and other transactions. Thus, a trade surplus could coexist with a balance of payments surplus, deficit, or equilibrium, depending on the net effect of all transactions.

Question 10

Capital account deals with all of the following except one, which one:
A) Flows of capital funds between countries.
B) Purchases of domestic bonds by foreigners.
C) Payments for buying foreign goods.
D) Inflow and outflow of financial capital.

Accepted Answer

The capital account in balance of payments accounting primarily deals with flows of investment and financial capital across borders (A, B, D). It does not deal with payments for buying foreign goods; that is recorded in the current account.

Question 11

Use the following terms and determine which of the following choices is wrong? Balance of current account (CA)
Balance in capital account (KA)
Change in official international reserves (?OR)
A) If CA is -5 and KA is +3, then ?OR is -2.
B) CA + KA - ?OR = zero.
C) If CA is +5 and KA is -3, then ?OR is +2.
D) If CA is +5 and KA is -3, then the balance of payment can be positive, negative or zero.

Accepted Answer

The balance of payments must always balance, meaning CA + KA - ?OR = 0. Therefore, if CA is +5 and KA is -3, ?OR must be -2 to balance the equation, making the balance of payments zero, not positive or negative.

Question 12

Suppose, the nominal exchange rate (er) of US dollar is $1.20, price (GDP deflator) in USA is 115 and the price (GDP deflator) in Canada in 112. The real exchange rate of US dollar is:
A) 1.30.
B) 1.23.
C) 1.14.
D) 1.10.

Accepted Answer

The real exchange rate is calculated as (Nominal Exchange Rate * Price of Domestic Goods) / Price of Foreign Goods. Here, it is (1.20 * 115) / 112 = 1.23214, which rounds to 1.23.

Question 13

Suppose, the purchasing power parity holds and real exchange rate remains constant. If the inflation rate in USA is 10% and Canada's inflation rate is 4%, then the nominal exchange rate of US dollar will:
A) decrease by approximately 10%
B) increase by approximately 10%
C) decrease by approximately 6%
D) increase by approximately 6%

Accepted Answer

According to the relative purchasing power parity, the nominal exchange rate change is approximately equal to the difference in inflation rates between the two countries. Here, the US inflation rate is 10% and Canada's is 4%, so the nominal exchange rate of the US dollar will decrease by approximately 6% (10% - 4%).

Question 14

Which of the following statements is false?
A) The purchasing power parity (PPP) holds in the long-run.
B) Higher the real exchange rate of US dollars, higher is the net exports from Canada.
C) If the purchasing power parity (PPP) holds and if the inflation rate in Canada is higher than that in USA, the nominal exchange rate of US dollars will decrease.
D) If the purchasing power parity (PPP) holds in the long-run, the real exchange rate will be one.

Accepted Answer

The answer of Which of the following statements is false?
A)...

Question 15

A Chinese purchase of a Canadian-made Bombardier aircraft is recorded in the Canadian balance of payments as:
A) a positive entry in the current account.
B) a positive entry in the capital account.
C) a negative entry in the current account.
D) a negative entry in the capital account.

Accepted Answer

When a Chinese entity purchases a Canadian-made Bombardier aircraft, it is considered an export of goods from Canada to China. This transaction increases Canada's exports, which is recorded as a positive entry in the current account of Canada's balance of payments. The current account tracks the trade balance, including exports and imports of goods and services, along with earnings on overseas investments minus payments made to foreign investors.

Question 16

An increase in Canadian real GDP will:
A) increase Canadian exports of goods and services.
B) increase US imports of Canadian goods and services.
C) lower real GDP in Canada's major trading partners.
D) reduce the current account balance in the Canadian balance of payments.

Accepted Answer

An increase in Canadian real GDP typically leads to higher domestic consumption, including imports, which can reduce the current account balance as imports rise relative to exports.

Question 17

An increase in US real GDP will:
A) have no effect on Canada's current account balance.
B) reduce the current account balance in the US and increase it in Canada.
C) increase the current account balance in the US and reduce it in Canada.
D) improve the current account balances in both countries.

Accepted Answer

An increase in US real GDP typically leads to increased imports as consumers and businesses have more income to spend, which can reduce the US current account balance due to a higher import bill. Conversely, Canada, being a close trading partner, is likely to experience an increase in exports to the US, improving its current account balance.

Question 18

Lower transport costs that result in lower prices for Chinese manufactures in the Canadian economy:
A) reduce Chinese domestic consumption of manufactured goods.
B) reduce Canadian imports of Chinese manufactures and increase the Canadian current account balance.
C) reduce Canadian exports of fuels and commodities to China and reduce the Canadian current account balance.
D) increase Canadian imports of Chinese manufactures and reduce the Canadian current account balance.

Accepted Answer

Lower transport costs make Chinese manufactured goods cheaper in Canada, leading to an increase in Canadian imports of these goods. This, in turn, would likely reduce the Canadian current account balance as more money flows out of Canada to pay for these imports.

Question 19

The price of imported goods and services compared to domestic goods and services is:
A) the real exchange rate.
B) the consumer price index.
C) the import price deflator.
D) the nominal exchange rate.

Accepted Answer

The real exchange rate compares the price of domestic goods and services to the price of foreign goods and services, taking into account the exchange rate and inflation differences between the two countries.

Question 20

If the domestic currency depreciates, raising the nominal exchange rate but leaving other things unchanged, the real exchange rate will:
A) decrease.
B) increase.
C) not be affected.
D) none of the above.

Accepted Answer

When the domestic currency depreciates, it means that more units of the domestic currency are needed to purchase a unit of foreign currency, effectively raising the nominal exchange rate. The real exchange rate, which adjusts the nominal exchange rate by the relative prices of domestic and foreign goods, will increase if the domestic currency depreciates and other factors remain constant. This is because the domestic goods become cheaper relative to foreign goods, making the real exchange rate—the price of domestic goods in terms of foreign goods—higher.

Quiz 12: An AD As Model of the Inflation Rate and Real GDP

A country's balance of payments is:

In the balance of payments a net capital outflow from a country is:

The part of the balance of payments account that records all short-term flows of payments is called the:

The part of the balance of payments account that records the amount of foreign currency the government buys or sells is the:

If a Canadian company buys steel from Russia, then that purchase will be recorded in the:

If a French billionaire buys stock in the Bank of Montreal, then that purchase will be recorded in the:

If the balance on current account and the balance on capital account do not sum to zero:

A balance of payments deficit will always occur if:

During the last decade, Canada ran large balance of trade surpluses. These trade surpluses imply:

Capital account deals with all of the following except one, which one:

Use the following terms and determine which of the following choices is wrong? Balance of current account (CA) Balance in capital account (KA) Change in official international reserves (?OR)

Suppose, the nominal exchange rate (er) of US dollar is $1.20, price (GDP deflator) in USA is 115 and the price (GDP deflator) in Canada in 112. The real exchange rate of US dollar is:

Suppose, the purchasing power parity holds and real exchange rate remains constant. If the inflation rate in USA is 10% and Canada's inflation rate is 4%, then the nominal exchange rate of US dollar will:

Which of the following statements is false?

A Chinese purchase of a Canadian-made Bombardier aircraft is recorded in the Canadian balance of payments as:

An increase in Canadian real GDP will:

An increase in US real GDP will:

Lower transport costs that result in lower prices for Chinese manufactures in the Canadian economy:

The price of imported goods and services compared to domestic goods and services is:

If the domestic currency depreciates, raising the nominal exchange rate but leaving other things unchanged, the real exchange rate will: