CHAPTER 5
The Balance of Payments and International Economic Linkages
EASY (definitional)
5.1 A balance of trade deficit results in a current account
a) deficit
b) surplus
c) IMF intervention
d) World Bank loan
Ans: c
Section: Current account
Level: Easy
5.2 The change in private domestic borrowing or lending required to keep payments in balance without adjusting official reserves is called
a) the net liquidity balance
b) the balance of payments
c) the balance on current account
d) the balance on capital account
Ans: a
Section: Balance-of-payment measures
Level: Easy
5.3 Tourism shows up on the ____ account.
a) merchandise
b) current
c) capital
d) official reserves
Ans: b
Section: Current account
Level: Easy
5.4 The accounting statement that summarizes all the economic transactions between residents of the home country and residents of all other countries is called the
a) balance of trade
b) current account balance
c) balance of payments
d) capital account balance
Ans: c
Section: Balance-of-payment categories
Level: Easy
5.5 The sale of US treasury bonds by a Frenchman shows up as
a) a credit on the capital account
b) a debit on the trade account
c) a credit on the official reserves account
d) none of the above
Ans: d
Section: Capital accounts
Level: Easy
5.6 The sale of American computers to the Spanish government shows up as
a) a debit on the official reserves account
b) a credit on the official reserves account
c) a credit on the trade account
d) a debit on the current account
Ans: c
Section: Current account
Level: Easy
5.7 Recent US trade deficits can be attributed to
a) Japanese protectionism
b) high US wages and benefits
c) lack of American competitiveness abroad
d) the US savings deficit
Ans: d
Section: The international flow of goods
Level: Easy
5.8 The US savings deficit can be attributed, in part, to
a) the growing US budget deficit
b) high real interest rates abroad
c) low American investment in plant and equipment
d) rising US taxes on capital accumulation
Ans: a
Section: The international flow of goods
Level: Easy
MEDIUM (applied)
5.9 In a freely floating exchange rate system, if the capital account surplus for the U.S. rises, what will most likely happen to the real value of the dollar?
a) it will decline
b) it will rise
c) there is no impact on the dollar
d) the IMF will step in to adjust rising exchange rates
Ans: b
Section: The link between the current and the capital accounts
Level: Medium
5.10 If a real value of a nation's freely floating currency increases, and the nation's current account is initially zero, its capital account will most likely be
a) in deficit
b) in surplus
c) adjusted for the rate of inflation
d) decreased by the amount of increase in the current account
Ans: b
Section: The link between the current and the capital accounts
Level: Medium
5.11 In a freely floating exchange rate system, if the capital account is running a deficit
a) the balance of payments must run a deficit
b) the balance of payments must be a deficit
c) the current account must run a deficit
d) the current account must run a surplus
Ans: d
Section: The link between the current and the capital accounts
Level: Medium
5.12 As the real value of the dollar rises, the balance on current account is likely to
a) increase
b) decrease
c) stay the same
d) move with the capital account adjustments factor
Ans: b
Section: The link between the current and the capital goods
Level: Medium
5.13 Which of the following accounts is the best measure of the change in private domestic borrowing or lending that is required to keep payments in balance without adjusting official reserves?
a) net liquidity balance
b) direct investment
c) basic balance
d) official reserve transactions balance
Ans: a
Section: The link between the current and the capital goods
Level: Medium
