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test bank 9

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test bank 9

    CHAPTER 10

    THE BALANCE OF PAYMENTS

    MULTIPLE-CHOICE QUESTIONS

     1. On the balance-of-payments statements, merchandise imports are classified in the:

    a. Current account

    b. Capital account

    c. Unilateral transfer account

    d. Official settlements account

     2. The balance of international indebtedness is a record of a country’s international:

    a. Investment position over a period of time

    b. Investment position at a fixed point in time

    c. Trade position over a period of time

    d. Trade position at a fixed point in time

     3. Which balance-of-payments item does not directly enter into the calculation of the U.S.

    gross domestic product?

    a. Merchandise imports

    b. Shipping and transportation receipts

    c. Direct foreign investment

    d. Service exports

     4. Which of the following is considered a capital inflow?

    a. A sale of U.S. financial assets to a foreign buyer

    b. A loan from a U.S. bank to a foreign borrower

    c. A purchase of foreign financial assets by a U.S. buyer

    d. A U.S. citizen’s repayment of a loan from a foreign bank

     5. Which of the following would call for inpayments to the United States?

    a. American imports of German steel

    b. Gold flowing out of the United States

    c. American unilateral transfers to less-developed countries

    d. American firms selling insurance to British shipping companies

     6. In a country’s balance of payments, which of the following transactions are debits?

    a. Domestic bank balances owned by foreigners are decreased

    b. Foreign bank balances owned by domestic residents are decreased

    c. Assets owned by domestic residents are sold to nonresidents

    d. Securities are sold by domestic residents to nonresidents

     7. Which of the following is classified as a credit in the U.S. balance of payments?

    a. U.S. exports

    b. U.S. gifts to other countries

    c. A flow of gold out of the U.S.

    d. Foreign loans made by U.S. companies

    Table 10.1 gives hypothetical figures for U.S. International Transactions. On the basis of this

    information, answer Questions 8 and 9.

    Table 10.1. U.S. International Transactions

     Amount

     Transaction (billions of dollars)

    Merchandise imports ....................................... 110 Military transactions, net.................................. 5

    Remittances, pensions, transfers....................... 20

    U.S. private assets abroad ................................ 50

    Merchandise exports ........................................ 115 Investment income, net .................................... 15 U.S. government grants (excluding military) .... 5

    Foreign private assets in the U.S. ..................... 25 Compensation of employees ............................ 5

    Allocation of SDRs .......................................... 5 Travel and transportation receipts, net .............. 20

     8. Refer to Table 10.1. The goods and services balance equals:

    a. $5 billion

    b. $15 billion

    c. $20 billion

    d. $25 billion

     9. Refer to Table 10.1. The current account balance equals:

    a. $5 billion

    b. $10 billion

    c. $15 billion

    d. $20 billion

     10. Unlike the balance of payments, the balance of international indebtedness indicates the

    international:

    a. Investment position of a country at a given moment in time b. Investment position of a country over a one-year period c. Trade position of a country at a given moment in time d. Trade position of a country over a one-year period

     11. Which of the following indicates the international investment position of a country at a

    given moment in time?

    a. The balance of payments

    b. The capital account of the balance of payments

    c. The current account of the balance of payments

    d. The balance of international indebtedness

     12. Concerning the U.S. balance of payments, which account is defined in essentially the same

    way as the net export of goods and services, which comprises part of the country’s gross

    domestic product?

    a. Merchandise trade account

    b. Goods and services account

    c. Current account

    d. Capital account

     13. If an American receives dividends from the shares of stock she or he owns in Toyota, Inc., a

    Japanese firm, the transaction would be recorded on the U.S. balance of payments as a:

    a. Capital account debit

    b. Capital account credit

    c. Current account debit

    d. Current account credit

     14. If the United States government sells military hardware to Saudi Arabia, the transaction

    would be recorded on the U.S. balance of payments as a:

    a. Current account debit

    b. Current account credit

    c. Capital account debit

    d. Capital account credit

     15. The U.S. balance of trade is determined by:

    a. Exchange rates

    b. Growth of economies overseas

    c. Relative prices in world markets

    d. All of the above

     16. U.S. military aid granted to foreign countries is entered in the:

    a. Merchandise trade account

    b. Capital account

    c. Current account

    d. Official settlements account

     17. If the U.S. faces a balance-of-payments deficit on the current account, it must run a surplus

    on:

    a. The official settlements account

    b. The capital account

    c. Either the official settlements account or the capital account

    d. Both the official settlements account and the capital account

     18. The current account of the U.S. balance of payments does not include:

    a. Investment income

    b. Merchandise exports and imports

    c. The sale of securities to foreigners

    d. Unilateral transfers

     19. The U.S. has a balance of trade deficit when its:

    a. Merchandise exports exceed its merchandise imports

    b. Merchandise imports exceed its merchandise exports

    c. Goods and services exports exceed its goods and services imports d. Goods and services imports exceed its goods and services exports

     20. The value to American residents of income earned from overseas investments shows up in

    which account in the U.S. balance of payments?

    a. Current account

    b. Trade account

    c. Unilateral transfers account

    d. Capital account

     21. Consider Table 10.2. The U.S. balance of international indebtedness suggests that the United

    States is a net:

    a. Debtor

    b. Creditor

    c. Spender

    d. Exporter

     Table 10.2. International Investment Position of the United States

U.S. assets abroad

     U.S. government assets........................ $800 billion

     U.S. private assets ............................... $200 billion Foreign assets in the U.S.

     Foreign official assets .......................... $600 billion

     Foreign private assets .......................... $300 billion

    22. For the first time since World War I, in 1985 the United States became a net international:

    a. Exporter

    b. Importer

    c. Debtor

    d. Creditor

     23. A country that is a net international debtor initially experiences: a. An augmented savings pool available to finance domestic spending b. A higher interest rate, which leads to lower domestic investment c. A loss of funds to trading partners overseas

    d. A decrease in its services exports to other countries

     24. Credit (+) items in the balance of payments correspond to anything that: a. Involves receipts from foreigners

    b. Involves payments to foreigners

    c. Decreases the domestic money supply

    d. Increases the demand for foreign exchange

     25. Debt () items in the balance of payments correspond to anything that:

    a. Involves receipts from foreigners

    b. Involves payments to foreigners

    c. Increases the domestic money supply

    d. Decreases the demand for foreign exchange

     26. When all of the debit or credit items in the balance of payments are combined:

    a. Merchandise imports equal merchandise exports

    b. Capital imports equal capital exports

    c. Services exports equal services imports

    d. The total surplus or deficit equals zero

     27. In the balance of payments, the statistical discrepancy is used to:

    a. Ensure that the sum of all debits matches the sum of all credits

    b. Ensure that trade imports equal the value of trade exports

    c. Obtain an accurate account of a balance-of-payments deficit

    d. Obtain an accurate account of a balance-of-payments surplus

     28. All of the following are credit items in the balance of payments except:

    a. Investment inflows

    b. Merchandise exports

    c. Payments for American services to foreigners

    d. Private gifts to foreign residents

     29. All of the following are debit items in the balance of payments except:

    a. Capital outflows

    b. Merchandise exports

    c. Private gifts to foreigners

    d. Foreign aid granted to other nations

     30. The role of ________ is to direct one nation’s savings into another nation’s investments.

    a. Merchandise trade flows

    b. Services flows

    c. Current account flows

    d. Capital flows

     31. When a country realizes a deficit on its current account:

    a. Its net foreign investment position becomes positive

    b. It becomes a net demander of funds from other countries

    c. It realizes an excess of imports over exports on goods and services

    d. It becomes a net supplier of funds to other countries

     32. Reducing a current account deficit requires a country to:

    a. Increase private saving relative to investment

    b. Increase private consumption relative to saving

    c. Increase private investment relative to consumption

    d. Increase private investment relative to saving

     33. Reducing a current account deficit requires a country to:

    a. Increase the government’s deficit and increase private investment relative to saving

    b. Increase the government’s deficit and decrease private investment relative to saving

    c. Decrease the government’s deficit increase private investment relative to saving

    d. Decrease the government’s deficit and decrease private investment relative to saving

     34. Reducing a current account surplus requires a country to:

    a. Increase the government’s deficit and increase private investment relative to saving

    b. Increase the government’s deficit and decrease private investment relative to saving

    c. Decrease the government’s deficit and increase private investment relative to saving

    d. Decrease the government’s deficit and decrease private investment relative to saving

     35. Concerning a country’s business cycle, rapid growth of production and employment is

    commonly associated with:

    a. Large or growing trade deficits and current account deficits

    b. Large or growing trade deficits and current account surpluses

    c. Small or shrinking trade deficits and current account deficits

    d. Small or shrinking trade deficits and current account surpluses

     36. The burden of a current account deficit would be the least if a nation uses what it borrows to

    finance:

    a. Unemployment compensation benefits

    b. Social Security benefits

    c. Expenditures on food and recreation

    d. Investment on plant and equipment

     37. Concerning a country’s business cycle, ________ is commonly associated with large or

    growing current account deficits.

    a. Rapid growth rates of production and employment

    b. Slow growth rates of production and employment

    c. Falling interest rates on government securities

    d. Falling interest rates on corporate securities

     38. According to researchers at the Federal Reserve, the loss of jobs associated with a deficit in

    the current account tends to be:

    a. Offset by the increase of jobs associated with a surplus in the capital account

    b. Reinforced by the decrease of jobs associated with a surplus in the capital account

    c. A threat to the level of employment for the economy as a whole

    d. Of no long-run economic consequence for workers who lose their jobs TRUE-FALSE QUESTIONS

    Table 10.3 shows hypothetical transactions, in billions of U.S. dollars, that took place during a

    year. Answer the Questions 17 on the basis of this information.

    Table 10.3. International Transactions of the United States

     Amount

     Transaction (billions of dollars)

    Allocation of SDRs ............................................ 10

    Changes in U.S. assets abroad ............................ 100

    Statistical discrepancy........................................ 15

    Merchandise imports ......................................... 400

    Payments on foreign assets in U.S. ..................... 20

    Remittances, pensions, transfers......................... 60

    Travel and transportation receipts, net ................ 30

    Military transactions, net.................................... 10

    Investment income, net ...................................... 100

    Merchandise exports .......................................... 350

    U.S. government grants (excluding military) ...... 20

    Changes in foreign assets in the U.S................... 190

    Other services, net ............................................. 80

    Receipts on U.S. investments abroad.................. 30

    Compensation of employees .............................. 10

    T F 1. The merchandise-trade balance registered a deficit of $50 billion. T F 2. The services balance registered a surplus of $100 billion. T F 3. The goods-and-services balance registered a surplus of $50 billion. T F 4. The unilateral-transfers balance registered a deficit of $40 billion. T F 5. The current-account balance registered a surplus of $30 billion. T F 6. The “net exports” component of the U.S. gross domestic product registered $110

    billion.

    T F 7. The payments data suggest that the United States was a “net demander” of $30

    billion from the rest of the world.

    T F 8. The balance of payments refers to the stock of trade and investment transactions

    that exists at a particular point in time.

    T F 9. In reference to the balance-of-payments statement, an international transaction

    refers to the exchange of goods, services, and assets between residents of one

    country and those abroad.

    T F 10. The balance of payments includes international transactions of households and

    businesses, but not government.

    T F 11. Because the balance of payments utilizes double-entry accounting, merchandise

    exports will always be in balance with merchandise imports.

    T F 12. On the U.S. balance-of-payments statement, the following transactions are credits,

    leading to the receipt of dollars from foreigners: merchandise exports, transporta-

    tion receipts, income received from investments abroad, and investments in the

    United States by foreign residents.

    T F 13. On the U.S. balance of payments, the following transactions are debits, leading to

    payments to foreigners: merchandise imports, travel expenditures, gifts to foreign

    residents, and overseas investments by U.S. residents.

    T F 14. The “goods and services” account of the balance of payments shows the mone-

    tary value of international flows associated with transactions in goods, services,

    and unilateral transfers.

    T F 15. An increase in import restrictions by the U.S. government tends to promote a

    merchandise-trade surplus.

    T F 16. Services transactions on Canada’s balance-of-payments statement would include

    Canadian ships transporting lumber to Japan, foreign tourists spending money in

    Canada, and Canadian engineers designing bridges in China.

    T F 17. On the balance-of-payments statement, dividend and interest income are classi-

    fied as capital-account transactions.

    T F 18. A surplus on Germany’s goods-and-services balance indicates that Germany has

    sold more goods and services to foreigners than it has bought from them over a

    one-year period.

    T F 19. The merchandise-trade account on the balance-of-payments statement is defined

    the same way as “net exports” which constitutes part of the nation’s gross domes-

    tic product.

    T F 20. A positive balance on the goods-and-services account of the balance of payments

    indicates an excess of exports over imports which must be added to the nation’s

    gross domestic product.

    T F 21. For the United States, merchandise trade has generally constituted the largest

    portion of its goods-and-services account.

    T F 22. Unilateral transfers refer to two-sided transactions, reflecting the movement of

    goods and services in one direction with corresponding payments in the other

    direction.

    T F 23. Unilateral transfers consist of private-sector transfers, such as church contribu-

    tions to alleviate starvation in Africa, as well as governmental transfers, such as

    foreign aid.

    T F 24. Current-account transactions include direct foreign investment, purchases of foreign

    government securities, and commercial bank loans made abroad.

    T F 25. On the U.S. balance-of-payments statement, a capital inflow would occur if a

    Swiss resident purchases the securities of the U.S. government.

    T F 26. If Toyota Inc. of Japan builds an automobile assembly plant in the United States,

    the Japanese capital account would register an outflow.

    T F 27. If Bank of America receives repayment for a loan it made to a Mexican firm, the

    U.S. capital account would register an inflow.

    T F 28. On the balance-of-payments statement, a capital inflow can be likened to the

    import of goods and services.

    T F 29. The capital account of the balance of payments includes private-sector transac-

    tions as well as official-settlements transactions of the home country’s central

    bank.

    T F 30. If the current account of the balance of payments registers a deficit, the capital

    account registers a surplus, and vice versa.

    T F 31. Concerning the balance of payments, a current-account surplus means an excess

    of exports over imports of goods, services, investment income, and unilateral

    transfers.

    T F 32. If a country realizes a current-account deficit in its balance of payments, it

    becomes a net supplier of funds to the rest of the world.

    T F 33. Concerning the balance of payments, a current-account deficit results in a

    worsening of a country’s net foreign investment position.

    T F 34. In the balance-of-payments statement, statistical discrepancy is treated as part of

    the merchandise trade account because merchandise transactions are generally

    the most frequent source of error.

    T F 35. Because a large number of international transactions fail to get recorded, statisti-

    cians insert a residual, known as statistical discrepancy, to ensure that total debits

    equal total credits.

    T F 36. Concerning the balance of payments, the goods-and-services balance is com-

    monly referred to as the “trade balance” by the news media.

    T F 37. Since the 1970s, the merchandise trade account of the U.S. balance of payments

    has registered deficit.

    T F 38. Although the United States has realized merchandise trade deficits since the early

    1970s, its goods-and-services balance has always registered surplus. T F 39. In the past two decades, the U.S. services balance has generally registered surplus. T F 40. The U.S. unilateral-transfers balance has consistently registered surplus in the

    past two decades.

    T F 41. Because the balance of payments is a record of the economic transactions of a

    country over a period of time, it is a “flow” concept.

    T F 42. The United States would be a “net creditor” if the value of U.S. assets abroad

    exceeded the value of foreign assets in the United States.

    T F 43. If a country consistently realizes a current-account surplus in its balance of pay-

    ments, it likely will become a “net debtor” in its balance of international indebt-

    edness.

    T F 44. By the mid-1980s, the United States had evolved from the status of a net-creditor

    nation to a net-debtor nation in its balance of international indebtedness. T F 45. The net-debtor status, that the United States achieved in its balance of inter-

    national indebtedness by the mid-1980s, reflected the continuous current-account

    surplus that the United States attained in its balance of payments during the

    1970s.

    T F 46. Although a net-debtor country may initially benefit from an inflow of savings

    from abroad, over the long run, continued borrowing results in growing dividend

    payments to foreigners and a drain on the debtor-country’s economic resources.

    T F 47. The official reserve assets of the United States consist of holdings of gold and

    foreign corporate securities.

    T F 48. That U.S. importers purchase bananas from Brazil constitutes a debit transaction

    on the U.S. balance of payments.

    T F 49. That German investors collect interest income on their holdings of U.S. Treasury

    bills constitutes a credit transaction on the U.S. balance of payments. T F 50. That U.S. charities donate funds to combat starvation in Africa constitutes a debit

    transaction on the U.S. balance of payments.

    T F 51. To reduce a current account deficit, a country should either decrease the budget

    deficit of its government or reduce investment spending relative to saving. T F 52. Most economists belief that in the 1980s, a massive outflow of capital caused a

    current account deficit for the United States.

    T F 53. A current account deficit for the United States necessarily reduces the standard of

    living for American households.

    T F 54. Rapid growth of production and employment is commonly associated with large

    or growing trade surpluses and current account surpluses.

    T F 55. Often, countries realizing rapid economic growth rates possess long-run current

    account deficits.

    T F 56. For the United States, a consequence of its current account deficit is a growing

    foreign ownership of the capital stock of the United States and a rising fraction of

    U.S. income that must be diverted abroad in the form of interest and dividends to

    foreigners.

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