Question

24. If the overall balance in the balance of payments account is in _____, there can be an accumulation of official reserve assets by the country or a decrease in foreign official reserve holdings of the country's assets.

1. surplus
2. deficit
3. equilibrium
4. remission

Answer:

25. The current account balance does NOT equal:

1. the difference between domestic product and domestic expenditure.
2. the difference between national saving and domestic investment.
3. net foreign investment.
4. the difference between government saving and government investment.

Answer:

26. A nation is considered to be a(n) _____ in the international market, if its current account is in deficit.

1. importer
2. exporter
3. borrower
4. lender

Answer: A

27. A country that is saving more than it is investing domestically:

1. has a current account surplus.
2. has a financial account deficit.
3. has a trade balance.
4. has a trade disequilibrium.

Answer:

28. A deficit in the overall balance of payments of a nation generally is an indication that:

1. the country’s monetary authority is selling foreign currency.
2. the country’s monetary authority is buying foreign currency.
3. the country’s monetary authority is buying domestic government bonds.
4. the country’s monetary authority is selling domestic currency.

Answer:

29. A statement of the stocks of a country’s foreign assets and foreign liabilities at a point in time represents the country’s:

1. government budget surplus or deficit
2. balance of payments
3. financial account balance
4. international investment position.

Answer:

30. During the 20^th century and into the 21^st, the U.S. net international investment position has:

1. been consistently positive.
2. been consistently negative.
3. gone from negative to positive and back to negative.
4. gone from positive to negative and back to positive.

Answer:

31. A nation is called a lender if:

1. its financial account is in deficit during a time period.
2. its current account is in surplus during a time period.
3. its current account is in deficit during a time period.
4. its net stock of foreign assets is positive.

Answer:

32. A nation is called a creditor if:

1. it provided financial assets to other countries.
2. its net stock of foreign assets is positive.
3. its current account is in surplus during a time period.
4. its current account is in deficit during a time period.

Answer:

33. The international investment position of a country shows:

1. its stocks of international assets during a time period.
2. its stocks of international liabilities during a time period.
3. its stocks of international assets and liabilities at a point in time.
4. whether its current account is in deficit or surplus at a point in time.

Answer:

34. The current account balance of the balance of payments account equals:

1. the sum of national savings and domestic capital formation.
2. net foreign investment.
3. the domestic production of goods and services.
4. net credits minus debits involving changes in nonofficial foreign financial assets and liabilities.

Answer:

35. If the balance of payments accounts of a country shows a current account deficit, it means that:

1. it is acting as a net lender to the rest of the world.
2. its foreign assets are growing slower than its foreign liabilities.
3. its foreign assets are growing faster than its foreign liabilities.
4. its exports are higher than its imports.

Answer:

True/False Questions

36. A credit item is an item for which a country must pay.

Answer: F

37. Capital inflows are debits and capital outflows are credits.

Answer: F

38. The net value of the flow of goods, services, income, and gifts is the current account balance.

Answer:

39. The net flow of financial assets and similar claims is the private current account balance.

Answer:

40. At present, the majority of a nation’s official reserve transactions are done by using foreign exchange assets instead of gold.

Answer:

41. A country's nonofficial financial account balance equals its net foreign investment.

Answer:

42. A country has a current account deficit if it is saving more than it is investing domestically.

Answer:

43. The official settlements balance is the sum of the capital account balance and the public current account balance.

Answer:

44. A nation's international investment position shows its stock of international assets and liabilities at a point in time.

Answer: T

45. A foreign resident increasing her holdings of a U.S. financial asset will be recorded as a debit item in the financial account of the U.S. balance of payments.

Answer:

46. Gold is a major reserve asset that is currently being used in official reserve transactions.

Answer:

47. The current account balance is equal to the difference between domestic product and national expenditure.

Answer:

48. In 2013, U.S. households, businesses, and government were buying more goods and services than they were producing.

Answer:

49. A nation is a borrower if its current account is in deficit at a point in time.

Answer:

Essay Questions

50. Which of the following transactions could contribute to a British current account surplus? Discuss.

1. A French firm sells defense equipment to the British government for 250 million pounds in bank deposits

POSSIBLE RESPONSE:

2. Great Britain makes a gift of $500 million to the Iraqi government in the form of equipment to aid in reconstruction.

POSSIBLE RESPONSE:

51. You are provided with the following information about a country's international transactions during a given year (in millions):

Service exports                                                               $346

Service imports                                                              $354

Merchandise exports                                                      $480

Merchandise imports                                                     $348

Income flows, net                                                           $153

Gifts to foreigners                                                          $142

Increase in the country’s holding of foreign assets, net          $352

             (excluding official reserves assets)

Increase in foreign holdings of the country’s assets, net                  $252

             (excluding official reserves assets)

Statistical discrepancy, net credit                                            $154

Calculate the official settlements balance and the current account balance.

Is the country increasing or decreasing its net holdings of official reserve assets? Why?

POSSIBLE RESPONSE: The calculations are furnished as below:

Current account balance:

Official settlements balance:

Here we see that the country’s overall balance is________. This has to be counter balanced by an _________ in the official reserve holdings.

Change in official reserve assets (net) = official settlements balance =__________

Thus, the country is increasing its net holdings of official reserve assets by __________.

52. Every international transaction recorded in the balance of payments has both a credit item and a debit item. In the case of a U.S. foreign aid, a debit in the balance of payments, what is the offsetting credit? Explain.

POSSIBLE RESPONSE:

53. When countries have severe balance of payments difficulties caused by unsustainable current account deficits, they can approach the International Monetary Fund (IMF) for assistance. In providing financial assistance, the IMF generally insists that the country implement a series of policy changes designed to reduce the deficit. These programs are controversial as they tend to focus on demand reduction. Explain why demand reduction would solve a current account deficit problem. Would a program designed to increase the nation’s GDP growth rate be a method of reducing a current account deficit? Why or why not?

POSSIBLE RESPONSE:

54. We often hear that trade deficits are bad for a country. Do you agree or disagree with this viewpoint? Explain carefully.

POSSIBLE RESPONSE:

55. Explain the three different viewpoints (meanings) of the current account balance. Discuss the macroeconomic interpretations of a current account deficit.

POSSIBLE RESPONSE:

Answer 1

1.The correct answer is Surplus.Since accumulation of official reserve assets by the country or a decrease in foreign official reserve holdings of the country's assets result in surplus balance in the balance of payments account.

Therefore correct answer is option A

2.The current account balance does NOT equal the difference between government saving and government investment.

Therefore correct answer is Option d.

3.A nation is considered to be a borrower in the international market, if its current account is in deficit.

Therefore correct answer is Option C

4.A country that is saving more than it is investing domestically has a current account surplus.

Therefore correct answer is Option A