Test bank International Finance MCQ(word)Chap 4

Fundamentals of Multinational Finance, 3e (Moffett) Chapter 4 The Balance of Payments 4.1 Multiple Choice and True/False Questions

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

Topic: BOP Introduction

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

Topic: BOP Introduction

Skill: Conceptual

3) 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

Topic: BOP Understanding

Skill: Analytical

4) 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

Topic: BOP Understanding

Skill: Conceptual

5) The authors identify a tip for understanding BOP accounting. They recommend that you

\Answer: TRUE

Topic: BOP Introduction

Skill: Recognition

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6) The BOP must be in balance but the current account need not be.

Answer: TRUE

Topic: Current Account

Skill: Recognition

7) 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

Topic: Current Account

Skill: Recognition

8) 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

Topic: Financial Account

Skill: Recognition

9) Expenditures by U.S. tourists in foreign countries for foreign goods or services are factored

into BOP calculations. Answer: TRUE

Topic: BOP Understanding

Skill: Recognition

10) 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

Topic: BOP Understanding

Skill: Conceptual

11) The balance of payments is most like a(an) ________. A) cash flow statement

B) balance sheet

C) income statement

D) proxy statement

Answer: A

Topic: Balance of payments

Skill: Recognition

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12) The balance of payments

A) determines the eligibility of countries for IMF aid.

B) adds up the value of all assets and liabilities of a country on a specific date.

C) records all international transactions for a country over a period of time.

D) all of the above.

Answer: C

Topic: Balance of payments

Skill: Recognition

13) 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

Topic: Balance of payments

Skill: Conceptual

14) 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

Topic: Current Account

Skill: Conceptual

15) 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

Topic: Balance of payments

Skill: Recognition

16) 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

Topic: Balance of payments

Skill: Recognition

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17) 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

Topic: Current Account

Skill: Recognition

18) 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

Topic: Current Account

Skill: Conceptual

19) 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

D) current transfers

Answer: A

Topic: Current Account

Skill: Conceptual

20) 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

D) current transfers

Answer: B

Topic: Current Account

Skill: Conceptual

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

A) goods (merchandise) trade

B) services trade

C) income trade

D) transfer accounts

Answer: A

Topic: Current Account

Skill: Recognition

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22) 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

Topic: Current Account

Skill: Conceptual

23) In general, the United States goods trade balance has grown increasingly positive over the

last 3 years.

Answer: FALSE

Topic: Current Account

Skill: Recognition

24) 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

Topic: Current Account

Skill: Recognition

25) In general, as a country's income increases, so does the demand for imports.

Answer: TRUE

Topic: Economic Theory

Skill: Conceptual

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

Answer: TRUE

Topic: Economic Theory

Skill: Conceptual

27) Over the last two decades the surplus on U.S. services trade has typically been ________ the

deficit on U.S. goods trade. A) greater than

B) equal to

C) less than

D) The relationship is constantly shifting from greater than to less than.

Answer: C

Topic: Balance of Trade

Skill: Recognition

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28) 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

Topic: Capital/Financial Account

Skill: Recognition

29) 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

Topic: Capital/Financial Account

Skill: Recognition

30) 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

Topic: Capital/Financial Account

Skill: Recognition

31) Which of the following would NOT be considered a direct investment either into or from the

United States?

A) the purchase of U.S. Treasury (debt) securities

B) Ford Motor Company building an assembly plant in Mexico

C) Honda of Japan building a manufacturing plant in Alabama

D) intel purchasing a chip manufacturing plant in Thailand

Answer: A

Topic: Capital/Financial Account

Skill: Conceptual

32) 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

Topic: Capital/Financial Account

Skill: Recognition

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33) 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

Topic: International Investment

Skill: Conceptual

34) 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

Topic: International Investment

Skill: Conceptual

35) Portfolio investment is capital invested in activities that are ________ rather than made for

________.

A) short term; the long term

B) long term; profit

C) profit motivated; control

D) control motivated; profit

Answer: C

Topic: Capital/Financial Account

Skill: Recognition

36) Most U.S. debt purchased by foreigners is denominated in ________ and most foreign debt

issued by countries such as Russia, Mexico, and Brazil is issued in ________. A) U.S. dollars; the purchasing investor's domestic currency

B) the purchasing investor's domestic currency; the issuing country's domestic currency

C) U.S. dollars; the issuing country's domestic currency

D) U.S. dollars; U.S. dollars

Answer: D

Topic: Capital/Financial Account

Skill: Recognition

37) Significant amounts of United States Treasury issues are purchased by foreign investors,

therefore the U.S. must earn foreign currency to repay this debt. Answer: FALSE

Topic: Capital/Financial Account

Skill: Conceptual

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38) 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

Topic: Capital/Financial Account

Skill: Conceptual

39) 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

Topic: Capital/Financial Account

Skill: Conceptual

40) 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

Topic: Capital/Financial Account

Skill: Conceptual

41) The era between 1880 and 1914, when the gold standard was in use, was characterized by

increasing capital mobility. Answer: TRUE

Topic: Capital Mobility

Skill: Recognition

42) 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

Topic: Capital Mobility

Skill: Recognition

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43) 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

Topic: Capital Mobility

Skill: Recognition

44) 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

Topic: Balance of Trade

Skill: Recognition

45) The United States experienced a balance of trade ________ during the 1980s and a balance of

trade ________ during the 1990s. A) surplus; surplus

B) surplus; deficit

C) deficit; deficit

D) deficit; surplus

Answer: C

Topic: Balance of Trade

Skill: Recognition

46) The largest single component of the United States current account is ________.

A) current transfers

B) income payments and receipts

C) goods (merchandise) imports and exports

D) services imports and exports

Answer: C

Topic: Current Account

Skill: Recognition

47) An excess of merchandise exports over merchandise imports results in a balance of trade

deficit.

Answer: FALSE

Topic: Balance of Trade

Skill: Conceptual

48) Portfolio investments are transactions that involve long -term financial assets and affect the transfer of control. Answer: FALSE

Topic: Capital/Financial Account

Skill: Recognition

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49) 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

Topic: Capital Mobility

Skill: Recognition

50) Which of the following statements about the balance of payments is not true?

A) The BOP is the summary statement of all international transactions between one

country and all other countries.

B) The BOP is a flow statement, summarizing all international transactions that occur

across the geographic borders over a period of time, typically a year.

C) Although the BOP must always balance in theory, in practice there are substantial

imbalances as a result of statistical errors and misreporting of current account and financial account flows. D) All of the above are true.

Answer: D

Topic: Balance of payments

Skill: Recognition

51) Which of the following is not a component of the financial accounts?

A) direct investment abroad

B) direct investment domestic

C) goods imports

D) portfolio investment

Answer: C

Topic: BOP

Skill: Recognition

52) The BOP should always balance.

Answer: TRUE

Topic: BOP

Skill: Recognition

53) ________ is an entry in the balance of payments measuring the difference between the

monetary value of merchandise exports and merchandise imports. A) Balance of payments

B) Balance of trade

C) Import -export spread D) None of the above

Answer: B

Topic: BOT

Skill: Recognition

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54) The beauty of the J -curve adjustment path for trade balance adjustments is that the process is

very quick, typically taking only a month or so to complete. Answer: FALSE

Topic: BOT

Skill: Recognition

55) 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

Topic: BOT

Skill: Recognition

56) 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

Topic: BOT

Skill: Recognition

57) Assume that a country is experiencing a balance of trade deficit and then suffers a rapid

depreciation of it's 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

Topic: BOT

Skill: Conceptual

58) The immediate impact on the balance of trade (BOT) for a country in deficit when there is an

immediate devaluation of it's currency is likely to be an even larger BOT deficit than prior to devaluation. Answer: TRUE

Topic: BOT

Skill: Recognition

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59) It is possible that the J -curve path for BOT adjustments may be 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

Topic: BOT

Skill: Conceptual

60) The United States, as of May 2007, had the largest official foreign exchange reserves of any

nation.

Answer: FALSE

Topic: BOT

Skill: Recognition

61) China, as of May 2007, had the largest official foreign exchange reserves of any nation.

Answer: TRUE

Topic: BOT

Skill: Recognition

4.2 Essay Questions

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 -$779B in 2005 while the current account balance was -$792B. 2) 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.

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