Chapter 10 – Balance of Payments
Multiple Choice
1. A nation’s balance of payments is crucial in the development of:
A)fiscal policy
B)monetary policy
C)trade Policy
D)all of the above
Answer: D Page: 256
2. Which of the following is an example of acapital inflowfor the US?
A)A domestic increase of assets held by foreign investors
B)A domestic decrease of assets held by foreign investors
C)An increase in US foreign asset holdings
D)Importing of goods and services
Answer: A Page: 258
3. Which of the following is an example of acapital inflowfor the US?
A)A domestic decrease of assets held by foreign investors
B)A reduction in US foreign asset holdings
C)An increase in US foreign asset holdings
D)Importation of goods and services
Answer: B Page: 258
4. Which of the following is an example of acapital outflowfor the US?
A)A domestic increase of assets held by foreign investors
B)A reduction in US foreign asset holdings
C)An increase in US foreign asset holdings
D)Unilateral transfers from foreigners
Answer: C Page: 259
5. Which of the following is an example of acapital outflowfor the US?
A)A domestic increase of assets held by foreign investors
B)A reduction in US foreign asset holdings
C)Unilateral transfers from foreigners
D)A domestic decrease of assets held by foreign investors
Answer: D Page: 259
6. If a US firm exports $7,000 of goods which are to be paid for within six months, using a double-entry bookkeeping system, what entries should be made in the US balance of payments?
A)Goods export – credit of $7,000; Capital outflow – debit of $7,000
B)Accounts Receivable – debit of $7,000; Inventory – credit of $7,000
C)Goods export – debit of $7,000; Capital outflow – credit of $7,000
D)Accounts Receivable – credit of $7,000; Inventory – debit of $7,000
Answer: A Page: 261
7. If a US resident were to visit Japan and spend $500 on food and shelter, what entries would be made into the US balance of payments?
A)Travel services – credit of $500; Capital inflow – debit of $500
B)Accounts Payable – debit of $500; Goods imports – credit of $500
C)Travel services – debit of $500; Capital inflow – credit of $500
D)Accounts Payable – credit of $500; Inventory – debit of $500
Answer: C Page: 261
8. If the US government gives a US bank balance of $900 to the government of Argentina as aid, what entries would be made in the US balance of payments?
A)Goodwill – credit of $900; Cash – debit of $900
B)Unilateral transfers made – debit of $900; Capital inflow – credit of $900
C)Goodwill – debit of $900; Cash – credit of $900
D)Unilateral transfers made – credit of $900; Capital inflow – debit of $900
Answer: B Page: 261
9. If a US resident purchases a foreign stock for $750 and pays for it by increasing foreign bank balances in the US, what entries would be made in the US balance of payments?
A)Common stock – credit of $900; Cash – debit of $900
B)Capital outflow – credit of $900; Capital inflow – debit of $900
C)Common stock – debit of $900; Cash – credit of $900
D)Capital outflow – debit of $900; Capital inflow – credit of $900
Answer: D Page: 261
10. If a foreign investor purchases $800 of US treasury bills and pays by drawing down his bank balances in the US by an equal amount, what would the entries be in the US balance of payments?
A)Treasury stock – credit of $800; Cash – debit of $800
B)Capital outflow – credit of $800; Capital inflow – debit of $800
C)Treasury stock – debit of $800; Cash – credit of $800
D)Capital outflow – debit of $800; Capital inflow – credit of $800
Answer: D Page: 261
11. Which of the following are included in the current account?
A)Currently produced goods and services
B)Income on foreign investments
C)Unilateral transfers
D)All of the above
Answer: D Page: 265
12. Which of the following is an example of a deficit in the balance of payments?
A)The excess of debits over credits in the current and capital accounts
B)The excess of credits over debits in the current account
C)The excess of credits over debits in the capital account
D)Both b & c
Answer: A Page: 266
13. Which of the following is an example of a surplus in the balance of payments?
A)The excess of debits over credits in the current and capital accounts
B)The excess of credits over debits in the current account
C)The excess of credits over debits in the capital account
D)Both b & c
Answer: D Page: 266
14. The balance of payments is the sum of which of the following?
A)Current account balance
B)Current account balance + capital account balance
C)Current account balance + capital account balance + statistical discrepancy
D)None of the above
Answer: C Page: 266
15. _____________ are international transactions that take place for business or profit motives and independently of balance-of-payments considerations.
A)Automated transactions
B)Autonomous transactions
C)Accommodating transactions
D)Below-the-line-transactions
Answer: B Page: 267
16. _____________ are transactions in official reserve assets that are required to balance international transactions.
A)Automated transactions
B)Autonomous transactions
C)Accommodating transactions
D)None of the above
Answer: C Page: 267
17. Which of the following does the international investment position consider?
A)The total amount of a nation's assets abroad at the end of the year
B)The distribution of a nation's assets abroad at the end of the year
C)The foreign assets in the nation at the end of the year
D)All of the above
Answer: D Page: 267
18. The information contained in a nation's balance of payments is also useful to whom?
A)Banks
B)Firms
C)Individuals directly or indirectly involved with international trade
D)All of the above
Answer: D Page: 257
19. Which of the following is true about the balance of payments?
A)Although there are millions of transactions each year, it is necessary to keep a detailed record of them for accurate accounting purposes
B)The balance of payments aggregates all merchandise trade into a few major categories
C)The balance of payments does not include transactions in which the residents of foreign nations are not directly involved
D)Not only are the net balances of each type of international capital flow included in the balance of payments, but a detailed breakdown of these transactions is accounted for as well
Answer: C Page: 257
20. ____________ are balance of payments transactions involving the receipt of payments from foreigners.
A)Debit transactions
B)Credit transactions
C)Accommodating transactions
D)Autonomous transactions
Answer: B Page: 258
21. ____________ are balance of payments transactions involving payments to foreigners.
A)Debit transactions
B)Credit transactions
C)Accommodating transactions
D)Autonomous transactions
Answer: A Page: 258
22. _____________ is an example of a credit transaction in the balance of payments.
A)Imports of goods and services
B)Exports of goods and services
C)Unilateral transfers to foreigners
D)Capital outflows
Answer: B Page: 258
23. ____________ is an example of a credit transaction in the balance of payments.
A)Exports of goods and services
B)Unilateral transfers
C)Capital inflows
D)All of the above
Answer: D Page: 258
24. ____________ is an example of a debit transaction in the balance of payments.
A)Exports of goods and services
B)Unilateral transfers from foreigners
C)Unilateral transfers to foreigners
D)Capital inflows
Answer: C Page: 258
25. ____________ is an example of a debit transaction in the balance of payments.
A)Imports of goods and services
B)Unilateral transfers to foreigners
C)Capital outflows
D)All of the above
Answer: D Page: 258
26. During the fiscal year 2002, how much did the US export in dollars?
A)$1 - $1.5 billion
B)$100 - $500 million
C)$500 million - $1 billion
D)$5 - $10 billion
Answer: A Page: 263
27. In a country’s balance of payments, which of the following transactions are debits?
A)Domestic bank balances owned by foreigners are decreased
B)Foreign bank balances owned by domestic residents are decreased
C)Assets owned by domestic residents are sold to nonresidents
D)Securities are sold by domestic residents to nonresidents
Answer: A Page: 258
28. Which of the following is classified as a credit in the US balance of payments?
A)US exports
B)US gifts to other countries
C)A flow of gold out of the US
D)Foreign loans made by US companies
Answer: A Page: 258
29. ____________ indicates the international investment position of a country at a given point in time.
A) The balance of payments
B) The capital account of the balance of payments
C) The current account of the balance of payments
D) The balance of international indebtedness
Answer: D Page: 271
30. If the US government sells military hardware to Egypt, the transaction would be recorded on the US balance of payments as a:
A)Current account debit
B)Current account credit
C)Capital account debit
D)Capital account credit
Answer: B Page: 264
31. In which of the following is a statistical discrepancy likely to occur?
A)Sales and purchases of goods and services
B)Short term private capital flows
C)Unilateral transfers
D)Gifts made to foreigners and vice versa
Answer: B Page: 265
32. During the fiscal year of 2002, what was the net balance in the US current account?
A)+ $481 billion
B)+ $805 billion
C)- $481 billion
D)- $3 billion
Answer: C Page: 267
33. The sharp deterioration of the US trade balance on goods after the 1970’s was due in large part to which of the following?
A)The sharp rise in the price of imported petroleum products during the 1970s
B)The high international value of the dollar in the 1980s
C)The more rapid growth of the United States than Europe and Japan during the 1990s
D)All of the above
Answer: D Page: 267
34. Which of the following must be considered when examining a nation's balance of payments?
A)Too much attention is placed on the balance of goods and on short-term data
B)International transactions are independent so that an attempt to reduce the US trade deficit with one nation doesn't affect the surplus the US has with another.
C)Measuring the deficit in the balance of payments is strictly correct under a flexible exchange rate system and not under a fixed exchange rate system.
D)None of the above
Answer: A Page: 271
35. A nation’s international investment position is also called its:
A)Balance of international capital flow
B)Balance of international indebtedness
C)International capital accumulation standing
D)Current account balance
Answer: B Page: 272
36. US military aid granted to foreign countries is entered in the:
A)Merchandise trade account
B)Capital account
C)Current account
D)Official settlements account
Answer: C Page: 264
37. In the balance of payments, the statistical discrepancy is used to:
A)Ensure that the sum of all debits matches the sum of all credits
B)Ensure that trade imports equal trade exports
C)Obtain an accurate account of the trade deficit
D)Obtain an accurate account of the balance of payments deficit
Answer: A Page: 265
38. What was the US international investment position in 2002?
A)$+2,387 billion
B)$-288 billion
C)$-2,387 billion
D)$+780 million
Answer: C Page: 272
True/False
39. True or False? A balance of payments is a summary statement of all the transactions of the residents of a nation with the rest of the world during some period of time.
Answer: True Page: 256
40. True or False? Credit transactions involve the receipt of payments from foreigners.
Answer: True Page: 258
41. True or False? Debit transactions involve the receipt of payments from foreigners.
Answer: False Page: 258
42. True or False? Unilateral transfers are loans to be paid back in a single lump sum at a date specified by the lender.
Answer: False Page: 260
43. True or False? A statistical discrepancy is the entry made in a nation’s balance of payments to make total credits equal to total debits, as required by double-entry bookkeeping.
Answer: True Page: 265
44. True or False? Financial reserve assets are excluded from the capital account because changes in reserves reflect government policy rather than market forces.
Answer: True Page: 266
45. True or False? The official reserve account is relatively simple to account for since it only measures the change in the US official reserve assets.
Answer: False Page: 266
46. True or False? Gifts are not accounted for in a nation's balance of payments because no currency changes hands.
Answer: False Page: 257
47. True or False? The earnings received from abroad for the services of US assets abroad are recorded in the capital account.
Answer: False Page: 263
48. True or False? The capital account is the value of US assets abroad and foreign assets in the United States, other than official reserve assets.
Answer: False Page: 266
49. True or False? The official settlements balance is the net credit or debit balance in the official reserve account.
Answer: True Page: 267
Essay
50. Briefly discuss the international investment position of the United States and how it has changed over the course of the past two decades.
Answer: To start the international investment position of a nation measures the amount and distribution of that nation's assets abroad and foreign assets within the nation at the end of the fiscal year. A statement of this position can be used to forecast the flow of income from foreign investments. For the United States, if we were to look at the international investment position over the past twenty years in five year increments we would see that it has deteriorated relatively quickly and severely. Between 1980 and 1985 it dropped from $361 billion to $55 billion, although in this case the large decline can be attributed to the fall in the market price for gold. This continues as a trend for the next 17 years to the point where the international investment position has deteriorated to -$2,387 in 2002. Three important things to note about this are that: 1) the US became a net debtor in 1986, for the first time since 1914 and 2) US private assets abroad were almost double foreign assets in the US in 1980, but were much smaller in 2002. As a result of the decline in private assets abroad relative to foreign investment mentioned in the second point just made, the US had become the largest debtor nation in the 1990s.
