Chapter 4 The Balance of Payments Multiple Choice and True/False Questions 4.1 Typical Balance of Payments Transactions

Fundamentals of Multinational Finance, 4e (Moffett)
Chapter 4 The Balance of Payments
Multiple Choice and True/False Questions
4.1 Typical Balance of Payments Transactions
1) The balance of payments as applied to a course in international finance may be defined as

A) the amount still owed by an exporting firm after making an initial down payment.
B) the amount still owed by governments to the International Monetary Fund.
C) the measurement of all international economic transactions between the residents of a country and
foreign residents.
D) the amount of a country's merchandise trade deficit or surplus.
Answer: C
Diff: 1
Topic: 4.1 Typical Balance of Payments Transactions
Skill: Conceptual
2) Balance of payment (BOP) data may be important for any of the following reasons:
A) BOP data helps to forecast a country's market potential, especially in the short run.
B) The BOP is an important indicator of a country's foreign exchange rate.
C) Changes in a country's BOP may signal a change in controls over payment of dividends and interest.
D) All of the above.
Answer: D
Diff: 1
Skill: Conceptual
3) Which of the following is NOT an item to be considered in BOP calculations?

A) A foreign resident purchases a U.S. Treasury Bill.
B) A U.S.-based firm manages the development of an oil field in Kazakhstan.
C) A consumer buys a VCR made in Korea from a Wal-Mart store.
D) A U.S. citizen living in Minnesota travels to Winnipeg, Canada and buys a case of LaBatt's Canadian
beer.
Answer: C
Diff: 1
Skill: Conceptual
4) A country experiencing a serious BOP ________ is more likely to ________ exports than otherwise.
A) surplus; contract
B) deficit; contract
C) deficit; expand
D) none of the above
Answer: A
Diff: 1
Skill: Analytical
1
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5) Expenditures by U.S. tourists in foreign countries for foreign goods or services are factored into BOP
calculations.
Answer: TRUE
Diff: 1
Skill: Recognition
6) Which of the following would NOT be considered a typical BOP transaction?

A) Toyota U.S.A. is a U.S. distributor of automobiles manufactured in Japan by its parent company.
B) The U.S. subsidiary of European financial giant, Credit Suisse, pays dividends to its parent in Zurich.
C) A U.S. tourist purchases gifts at a museum in London.
D) All are example of BOP transactions.
Answer: D
Diff: 1
Skill: Conceptual
7) Which of the following could be considered a typical BOP transaction?

A) An American tourists purchases a hotel room in Guanajuato, Mexico.
B) Mountaineers from Colorado, USA, pay for guides for their assent of Mt. Everest
C) General Electric Inc. pays for a new manufacturing facility in Chile.
D) All of the above are BOP transactions.
Answer: D
Diff: 1
Skill: Recognition
4.2 Fundamentals of Balance of Payments Accounting
1) The authors identify a tip for understanding BOP accounting. They recommend that you "follow the
cash flow."
Answer: TRUE
Diff: 1
Topic: 4.2 Fundamentals of Balance of Payments Accounting
Skill: Recognition
2) The balance of payments is most like a(an) ________.

A) cash flow statement
B) balance sheet
C) income statement
D) proxy statement
Answer: A
Diff: 1
Skill: Recognition
2
3) The BOP must be in balance but the current account need not be.
Answer: TRUE
Diff: 1
Skill: Recognition
4) According to the authors, the following types of transactions dominate the balance of payments:
A) the exchange of guns for butter.
B) the exchange of stocks and bonds.
C) the exchange of goods and services.
D) the exchange of real and financial assets.
Answer: D
Diff: 1
Skill: Conceptual
5) Which of the following is NOT an example of an exchange of financial assets?

A) the exchange of travel services
B) the exchange of stocks
C) the exchange of bonds
D) loans
Answer: A
Diff: 1
Skill: Conceptual
6) Two types of business transactions dominate the balance of payments. Which of the following is
NOT such a transaction?
A) the exchange of real assets and financial assets
B) the exchange of real assets and political contributions
C) the exchange of goods and services and financial transactions such as loans
D) All of the above are business transactions.
Answer: B
Diff: 1
Skill: Recognition
4.3 The Accounts of the Balance of Payments
1) Which of the following is NOT a part of the Current Account of BOP?

A) net export/import of goods
B) Balance of Trade
C) net portfolio investment
D) net export/import of services
Answer: C
Diff: 1
Topic: 4.3 The Accounts of the Balance of Payments
Skill: Recognition
3
2) Which of the following is NOT part of the balance of payments account?
A) the current account
B) the financial/capital account
C) the official reserves account
D) All of the above are BOP accounts.
Answer: D
Diff: 1
Skill: Recognition
3) The ________ includes all international economic transactions with income or payment flows
occurring within the year.
A) capital account
B) current account
C) financial account
D) IMF account
Answer: B
Diff: 1
Skill: Recognition
4) If your company were to import and export textiles, the transactions would be recorded in the current
account subcategory of ________.
A) services trade
B) income trade
C) goods trade
D) current transfers
Answer: C
Diff: 1
Skill: Conceptual
5) The travel services provided to international travelers by United Airlines would be recorded in the
current account subcategory of ________.
A) services trade
B) income trade
C) goods trade
Answer: A
Diff: 1
Skill: Conceptual
4
6) Assume Anaconda Copper Inc. created a subsidiary in Chile last year to mine copper ore. The
proportion of net income paid back to the parent company as a dividend would be recorded in the
current account subcategory of ________.
A) services trade
B) income trade
C) goods trade
Answer: B
Diff: 1
Skill: Conceptual
7) The subcategory that typically dominates the current account is ________.

A) goods (merchandise) trade
B) services trade
C) income trade
D) transfer accounts
Answer: A
Diff: 1
Skill: Recognition
8) Over the last several years, the United States has run a ________ in the goods trade balance and a
________ in the services trade balance.
A) surplus; deficit
B) surplus; surplus
C) deficit; deficit
D) deficit; surplus
Answer: D
Diff: 1
Skill: Conceptual
9) In general, a country's exports decrease as foreign income decreases.

Answer: TRUE
Diff: 1
Skill: Conceptual
10) In 2001 the United States posted a current account deficit of -$393 billion. The bulk of the negative
value came from
A) a net transfer deficit.
B) an income balance deficit.
C) a goods trade deficit.
D) an income trade deficit.
Answer: C
Diff: 1
Skill: Recognition
5
11) In general, as a country's income increases, so does the demand for imports.
Answer: TRUE
Diff: 1
Skill: Conceptual
12) Because current and financial/capital account balances use double-entry book keeping it is unusual
to find serious discrepancies in the debits and credits.
Answer: FALSE
Diff: 1
Skill: Recognition
13) Which of the following is NOT part of the Financial Account of the BOP?
A) net foreign direct investment.
B) net import/export of services
C) net portfolio investment
D) other Financial items
Answer: B
Diff: 1
Skill: Recognition
4.4 The Capital and Financial Accounts
1) The ________ of the balance of payments measures all international economic transactions of
financial assets.
A) current account
B) merchandise trade account
C) services account
D) capital/financial account
Answer: D
Diff: 1
Topic: 4.4 The Capital and Financial Accounts
Skill: Recognition
2) The financial account consists COMPLETELY of which three components?

A) stock investment, bond investment, and mutual fund investment
B) direct investment, stock investment, and bond investment
C) direct investment, portfolio investment, and other asset investment
D) mutual fund investment, portfolio investment, and stock investment
Answer: C
Diff: 1
Skill: Recognition
6
3) When categorizing investments for the financial account component of the balance of payments the
________ is an investment where the investor has no control whereas the ________ is an investment
where the investor has control over the asset.
A) direct investment; portfolio investment
B) direct investment; indirect investment
C) portfolio investment; indirect investment
D) portfolio investment; direct investment
Answer: D
Diff: 1
Skill: Recognition
4) International debt security purchases and sales are defined as portfolio investments for financial
account purposes because by definition debt securities do not provide the buyer with ownership or
control.
Answer: TRUE
Diff: 1
Skill: Recognition
5) In general there is consensus that ________ should be free but there is no such consensus that
________ should be free.
A) international investment; international goods trade
B) international investment; international trade
C) international trade; international goods trade
D) international trade; international investment
Answer: D
Diff: 1
Skill: Conceptual
6) The role of official reserves is ________ under a ________ exchange rate regime.
A) enhanced; floating
B) diminished; fixed
C) enhanced; fixed
D) None of the above apply.
Answer: C
Diff: 1
Skill: Conceptual
7
7) If most major economies are operating under a regime of fixed exchange rates, then a ________ in a
country's balance of payments suggests that the country should ________ its currency.
A) surplus; revalue
B) surplus; devalue
C) deficit; revalue
D) all of the above
Answer: A
Diff: 1
Skill: Conceptual
8) Under an international regime of fixed exchange rates, countries with a BOP ________ should
consider ________ their currency while countries with a BOP ________ should consider ________ their
currency.
A) deficit; revaluing; surplus; revaluing
B) deficit; devaluing; surplus; devaluing
C) surplus; devaluing; deficit; revaluing
D) surplus; revaluing; deficit; devaluing
Answer: D
Diff: 1
Skill: Conceptual
9) The two major concerns about foreign direct investment are

A) national defense and taxes.
B) who controls the assets and who receives the profits.
C) who receives the profits and taxes.
D) who pays the taxes and who receives the taxes.
Answer: B
Diff: 1
Skill: Conceptual
10) China's "double surplus" in the current account and the financial account is typical for large
economies in the modern era.
Answer: FALSE
Diff: 1
Skill: Conceptual
11) Ordinarily countries will demonstrate an inverse relationship between their current and financial
accounts. A surplus in one will usually result in a deficit in the other.
Answer: TRUE
Diff: 1
Skill: Conceptual
8
12) China holds a massive amount of foreign exchange reserves. As of 1010 they held nearly $2,500
billion. This huge foreign exchange reserve should allow China to:
A) Manage the value of the Chinese yuan to maintain competitiveness in world markets.
B) Maintain a relatively stable managed fixed exchange rate for the yuan for years to come.
C) Remain a very important player in world trade for at least the next several years.
D) All of the above.
Answer: D
Diff: 1
Skill: Conceptual
4.5 The Balance of Payments in Total
1) The ________ is the difference between merchandise imports and exports and a measure of a
country's international trade in goods and services.
A) balance of payments
B) current account
C) capital account
D) balance of trade
Answer: D
Diff: 1
Topic: 4.5 The Balance of Payments in Total
Skill: Recognition
2) The United States experienced a balance of trade ________ during the 1990s and a balance of trade
________ during the 2000s.
A) surplus; surplus
B) surplus; deficit
C) deficit; deficit
D) deficit; surplus
Answer: C
Diff: 1
Topic: 4.5 The Balance of Payments in Total
Skill: Recognition
4.6 The Balance of Payments Interaction with Key Macroeconomic Variables
1) In a static (accounting) sense, a nation's GDP can be represented by the following equation: where C
= consumption spending, I = investment spending, G = government spending, X = exports of goods and
services, and M = imports of goods and services.
A) GDP = C + I + G + M - X
B) GDP = C + I + G + X - M
C) GDP = C + I - G + X - M
D) GDP = C + I + G + X + M
Answer: B
Diff: 1
Topic: 4.6 The Balance of Payments Interaction with Key Macroeconomic Variables
Skill: Recognition
9
2) ________ has increasingly focused on cost reduction through imports from less costly (lower wage)
foreign locations.
A) Exchange rate management
B) Inflation rate management
C) Supply chain management
D) Interest rate management
Answer: C
Diff: 1
Skill: Recognition
3) A positive current account balance (surplus) contributes directly to increasing the measure of GDP.
Answer: TRUE
Diff: 1
Skill: Conceptual
4.7 Trade Balances and Exchange Rates
1) The J-curve adjustment path for trade balance adjustments assumes that export products are
predominantly priced in the ________ currency and that import products are predominantly priced in the
________ currency.
A) domestic; domestic
B) domestic; foreign
C) foreign; foreign
D) foreign; domestic
Answer: B
Diff: 1
Topic: 4.7 Trade Balances and Exchange Rates
Skill: Recognition
2) The J-curve adjustment path for trade balance adjustments assumes that ________ products are
predominantly priced in the domestic currency and that ________ products are predominantly priced in
the foreign currency
A) import; import
B) import; export
C) export; export
D) export; import
Answer: D
Diff: 1
Skill: Recognition
10
3) Assume that a country is experiencing a balance of trade deficit and then suffers a rapid depreciation
of its currency. J-curve theory suggests that the trade balance will adjust in three distinct periods in the
following order:
A) quantity adjustment period; pass-through period; currency contract period
B) pass-through period; currency contract period; quantity adjustment period
C) currency contract period; pass-through period; quantity adjustment period
D) pass-through period; quantity adjustment period; currency contract period
Answer: C
Diff: 1
Skill: Conceptual
4) The immediate impact on the balance of trade (BOT) for a country in deficit when there is an
immediate devaluation of its currency is likely to be an even larger BOT deficit than prior to
devaluation.
Answer: TRUE
Diff: 1
Skill: Recognition
5) It is possible that the J-curve path for BOT adjustments may be elongated or even inapplicable if
exports are NOT predominately priced in the domestic currency and/or imports are NOT predominately
priced in the foreign currency.
Answer: TRUE
Diff: 1
Skill: Conceptual
4.8 Capital Mobility
1) The era between 1880 and 1914, when the gold standard was in use, was characterized by increasing
capital mobility.
Answer: TRUE
Diff: 1
Topic: 4.8 Capital Mobility
Skill: Recognition
2) Which of the following is the best definition of money laundering?

A) legal transfer of funds through the usual international payments mechanisms
B) the transfer of cash into collectibles that are then transferred across borders
C) the cross-border purchase of assets that are then managed in a way that hide the movement of money
and its ownership
D) false invoicing of international trade transactions
Answer: C
Diff: 1
Skill: Recognition
11
3) The time from 1971 to today has predominately used a regime of variable exchange rates. It has also
seen a decrease in capital mobility.
Answer: FALSE
Diff: 1
Skill: Recognition
4) Which of the following does NOT represent a possible mechanism by which capital can be moved
from country to country?
A) transfers via the usual international payments mechanism such as regular bank transfers
B) transfers via a physical bearer such as smuggling
C) the transfer of cash into collectibles
D) All of the above are mechanisms for moving capital from country to country.
Answer: D
Diff: 1
Skill: Recognition
Essay Questions
4.1 Typical Balance of Payments Transactions
1) There are no essay questions in this section.

4.2 Fundamentals of Balance of Payments Accounting
4.3 The Accounts of the Balance of Payments
1) What is a country's balance of (merchandise) trade and why is it so widely reported in the financial
and popular press?
Answer: The balance of trade (BOT) is the largest and most important subset of a country's current
account. It measures the difference in a country's imports and exports over a specified time period. It is
often reported because it is intuitively easy to understand (i.e., we either sell more or buy more from
foreign countries) and it is a reasonable representation of the total current account balance. (For
example, for the U.S. the BOT was -$504B in 2009 while the current account balance was -$378B.
Diff: 3
12
4.4 The Capital and Financial Accounts
1) What is the Official Reserves Account (ORA) and why is it more important for countries under a
fixed exchange rate regime than for ones under a floating exchange rate regime?
Answer: The ORA is the total reserves held by official monetary authorities within the country. Under a
fixed exchange regime a country's currency is convertible into a fixed amount of another country's
currency. To keep the relationship between currencies at equilibrium, it may become necessary for the
government to buy or sell official reserves until the equilibrium is restored. Under a variable rate regime
this is not necessary as exchange rates are allowed to change and official reserves no longer serve the
same purpose as under the fixed rate regime.
Diff: 3
4.5 The Balance of Payments in Total
4.6 The Balance of Payments Interaction with Key Macroeconomic Variables
1) Construct , in a static (accounting) form the equation for a nations GDP as presented by the authors.
Identify each term (e.g., r = interest rate). How does a positive BOP account balance affect a country's
GDP?
Answer: GDP = C + I + G + X - M, where: GDP = gross domestic product, C = consumption spending,
I = investment spending, G = government spending, X = exports of goods and services, and M = imports
of goods and services. An increase (surplus) in the account balance will increase GDP.
Diff: 3
4.7 Trade Balances and Exchange Rates
1) Identify and explain the three stages of the J-curve adjustment path of the trade balance adjustment
process.
Answer: Countries will sometimes devalue their own currencies after a period of large and sustained
trade deficits. The adjustment process for the trade imbalances may take on the appearance of the letter
"j" as a country realizes a greater trade imbalance at the time of the devaluation followed by an
improving trade imbalance and perhaps even a surplus.
The first stage is the currency contract period. Since many international trades are already in place a
country may realize even further deficits as they are forced to honor contracts with a weakened currency
thus costing even more money. The second stage is the exchange rate pass-through period. As markets
have time to adjust to new prices the trade imbalance begins to improve. In the third stage, called the
quantity adjustment period, the balance of trade target is realized. These adjustment periods can combine
to take from 3 months to well over a year.
Diff: 3
13
4.8 Capital Mobility
1) Your authors identify five primary mechanisms by which capital may be moved from one country to
another. Identify and briefly explain/define three of those methods.
Answer: The five primary mechanisms are: 1. Transfers via the usual international payment
mechanisms. 2. Transfer of physical currency by bearer. 3. Cash may be transferred into collectibles or
precious metals which is then carried across international borders. 4. Money laundering in some fashion
to hide the sources of the movement of money. and 5. False invoicing of international trade transactions.
Diff: 3
14

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Chapter 4 The Balance of Payments Multiple Choice and True/False Questions 4.1 Typical Balance of Payments Transactions

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Fundamentals of Multinational Finance, 4e (Moffett)

Chapter 4 The Balance of Payments

Multiple Choice and True/False Questions

4.1 Typical Balance of Payments Transactions

1) The balance of payments as applied to a course in international finance may be defined as

3) Which of the following is NOT an item to be considered in BOP calculations?

6) Which of the following would NOT be considered a typical BOP transaction?

7) Which of the following could be considered a typical BOP transaction?

4.2 Fundamentals of Balance of Payments Accounting

2) The balance of payments is most like a(an) ________.

5) Which of the following is NOT an example of an exchange of financial assets?

4.3 The Accounts of the Balance of Payments

1) Which of the following is NOT a part of the Current Account of BOP?

7) The subcategory that typically dominates the current account is ________.

9) In general, a country's exports decrease as foreign income decreases.

4.4 The Capital and Financial Accounts

2) The financial account consists COMPLETELY of which three components?

9) The two major concerns about foreign direct investment are

4.5 The Balance of Payments in Total

4.6 The Balance of Payments Interaction with Key Macroeconomic Variables

4.7 Trade Balances and Exchange Rates

4.8 Capital Mobility

2) Which of the following is the best definition of money laundering?

4.1 Typical Balance of Payments Transactions

1) There are no essay questions in this section.

1) There are no essay questions in this section.

4.3 The Accounts of the Balance of Payments

4.5 The Balance of Payments in Total

1) There are no essay questions in this section.

4.6 The Balance of Payments Interaction with Key Macroeconomic Variables

4.7 Trade Balances and Exchange Rates

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