RobertA

Which of these statements about international finance is most accurate?

A) Purchasing power parity implies that exchange rates should adjust so that investments in any country offer the same risk-adjusted return.

B) Investments in a country by foreign citizens and foreign investments by that country’s own citizens will be reflected in the capital account.

C) Exchange rates tend to be more volatile than the quantity of a currency traded because the factors that affect the supply of a currency are independent of the factors that affect the demand for a currency.

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The capital account measures the principal value of inward investments by foreign citizens and outward investments by domestic citizens. The idea that investments in any country with the same amount of risk should offer the same return is an implication of interest rate parity, not purchasing power parity. Volatility in exchange rates that is large compared to changes in trading volume arises from the fact that the same factors (domestic interest rates and expected future exchange rates) affect both supply and demand for a currency.

RobertA

In response to exchange rate volatility, a central bank intervenes in the currency market by buying foreign currencies. What effect will this intervention most likely have on the foreign exchange value of the domestic currency and on the country’s official reserves, respectively?

A) Only one will increase.

B) Both will decrease.

C) Both will increase.

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If the central bank intervenes by buying foreign currencies, then it is selling its domestic currency, which will decrease the domestic currency’s foreign exchange value. Official reserves consist of a government’s foreign currency holdings. Buying foreign currencies will increase official reserves.

RobertA

In 20X5, Tunisia’s merchandise imports exceeded the value of its merchandise exports. In this case, Tunisia would most likely have which of the following?

A) Balance of trade surplus.

B) Capital account surplus.

C) Current account surplus.

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The capital account includes investment in real assets and financial securities. If a country is running a current account deficit, as in the case of Tunisia, a way to make up the difference in the current account is to be a net borrower creating a surplus in the capital account.

RobertA

At an International Trade forum in Shanghai, China, a special panel of leaders advocating free trade was discussing the balance of payments in their respective countries. During the forum the following statements were made:

China’s Delegate: 2006 was a wonderful year for China economically speaking. However, the U.S. has experienced greater difficulties because of its widening trade deficit. The U.S. is running a trade deficit because it is spending more on public services than it is raising in tax revenues.

Uruguay’s Delegate: Since 1997 the U.S. has run a current account deficit and a smaller surplus in its capital account. This has led to a small surplus in the country’s official reserve account in order to balance the balance-of-payments account.

With respect to these statements:

A) only one is correct.

B) both are correct.

C) both are incorrect.

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If the U.S. is spending more on public services than it is collecting in tax revenues, it is experiencing a budget deficit, not a trade deficit. If the U.S. is experiencing a current account deficit that is larger than its capital account surplus there will be a change in the country’s official reserve account so that its balance-of-payments will net to zero.

RobertA

The current account balance reflects the exchange of:

A) goods, services, and investment income.

B) goods, services, investment income, and unilateral transfers.

C) goods and services only.

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The current account balance reflects the exchange of merchandise, services, investment income, and unilateral transfers.

RobertA

Which of the following statements is most accurate for a country with a current account surplus? The current account surplus must be:

A) exactly offset by a deficit in the financial account.

B) exactly offset by a deficit in the sum of the financial and official reserve accounts.

C) accompanied by surpluses in the financial and official reserve accounts.

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By definition: current account + financial account + official reserve account = 0.

RobertA

Under a system of flexible exchange rates, a nation that has a surplus on current account transactions will experience a:

A) deficit on its financial accounts transactions.

B) surplus on its financial accounts transactions.

C) deficit on its balance of payments.

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A surplus on current account transactions must be offset by a deficit in its financial accounts in order to have a balance on a nation’s account transactions, a balance of payments

RobertA

If a nation is running a deficit in the current account, the sum of the financial account and the official reserve account must be:

A) negative.

B) positive.

C) zero.

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The balance of payments equation is: Current account balance + financial account balance + official reserve account balance = 0. If the current account balance is in deficit, the others must be positive for the sum of these balances to be zero.

RobertA

In balance of payments accounting, the net inflow of debt and equity investment funds into the country appears in the:

A) official reserve account.

B) current account.

C) financial account.

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The financial account measures the flow of debt and equity investment funds into and out of the country.

RobertA

Which of the following statements regarding the balance of payments accounts is most accurate?

A) The total of the balance of payments accounts does not have to equal zero.

B) A current account surplus is an indication of economic strength.

C) Running a deficit in the current account balance means a country imports more than it exports.

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The balance of payments (BOP) equation is:
Current Account + Capital Account + Official Reserve Account = 0
The current account measures the exchange of merchandise goods, services, investment income, and unilateral transfers (gifts to and from other nations) between nations. The BOP equation must equal zero and a surplus or deficit in any account does not indicate an economic strength or weakness.