Reading 19: Foreign Exchange Parity Relations - LOS c ～ black, Foreign, exchange, class

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1．Under a flexible exchange rate system, a nation that offers more attractive investment opportunities than its trading partners will be likely to experience a:

A)   surplus on current account transactions.

B)   balance of merchandise trade surplus.

C)   deficit on current account transactions.

D)   deficit on its capital account transactions.

2．A current account surplus:

A)   is an indication of significant foreign investment in the domestic market.

B)   is an indication of the strength of the economy.

C)   occurs when a country exports less than it imports.

D)   is not an indication of a nation's economic health.

3．Current account deficits are:

A)   an indication that the economy is growing rapidly.

B)   usually accompanied by a deficit in the financial account.

C)   the result of a country importing less than it exports.

D)   not an indication of a nation's economic health.

4．Which of the following statements is TRUE?

A)   Capital inflows from foreigners are not bad even if the foreigners buy up domestic real estate, domestic industries and own other productive assets.

B)   A nation's current account surplus or deficit is a good measure of the health of its economy.

C)   Running a deficit in the current account balance simply means a country imports more than it exports, but a country can do this only for a short time.

D)   Countries that run current account deficits also run financial account deficits.

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答案和详解如下：

1．Under a flexible exchange rate system, a nation that offers more attractive investment opportunities than its trading partners will be likely to experience a:

A)   surplus on current account transactions.

B)   balance of merchandise trade surplus.

C)   deficit on current account transactions.

D)   deficit on its capital account transactions.

The correct answer was C)

Higher interest rates attract foreign investment and discourage domestic investment from leaving the country. Thus, the increased aggregate demand encourages imports, which moves the current account towards deficit.

2．A current account surplus:

A)   is an indication of significant foreign investment in the domestic market.

B)   is an indication of the strength of the economy.

C)   occurs when a country exports less than it imports.

D)   is not an indication of a nation's economic health.

The correct answer was D)

A current account surplus occurs when a country exports more than it imports, and it is not an indication of economic health. There is no requirement that the current account balance be zero, in surplus, or in deficit.

3．Current account deficits are:

A)   an indication that the economy is growing rapidly.

B)   usually accompanied by a deficit in the financial account.

C)   the result of a country importing less than it exports.

D)   not an indication of a nation's economic health.

The correct answer was D)

A current account deficit occurs when a country imports more than it exports, and it is not an indication of economic health. There is no requirement that the current account balance be zero, in surplus or in deficit.

4．Which of the following statements is TRUE?

A)   Capital inflows from foreigners are not bad even if the foreigners buy up domestic real estate, domestic industries and own other productive assets.

B)   A nation's current account surplus or deficit is a good measure of the health of its economy.

C)   Running a deficit in the current account balance simply means a country imports more than it exports, but a country can do this only for a short time.

D)   Countries that run current account deficits also run financial account deficits.

The correct answer was A)

All statements except for the capital inflows statement are false. Current account deficits are neither good nor bad and countries can run such deficits for long periods of time. Current account deficits are usually accompanied by financial account surpluses that can sustain current account deficits for long periods.