Test bank International Finance MCQ (word)Chap 4

Fundamentals of Multinational Finance, 3e (Moffett)Chapter 4 The Balance of Payments4.1 Multiple Choice and True/False Questions1) The balance of payments as applied to a course in international finance may be defined asA) the amount still owed by an exporting firm after making an initial down payment.B) the amount still owed by governments to the International Monetary Fund.C) the measurement of all international economic transactions between the residents of acountry and foreign residents.D) the amount of a country's merchandise trade deficit or surplus.Answer: CTopic: BOP IntroductionSkill: Conceptual2) Balance of payment (BOP) data may be important for any of the following reasons:A) BOP data helps to forecast a country's market potential, especially in the short run.B) The BOP is an important indicator of a country's foreign exchange rate.C) Changes in a country's BOP may signal a change in controls over payment of dividendsand interest.D) All of the above.Answer: DTopic: BOP IntroductionSkill: Conceptual3) A country experiencing a serious BOP ________ is more likely to ________ exports thanotherwise.A) surplus; contractB) deficit; contractC) deficit; expandD) none of the aboveAnswer: ATopic: BOP UnderstandingSkill: Analytical4) Which of the following would NOT be considered a typical BOP transaction?A) Toyota U.S.A. is a U.S. distributor of automobiles manufactured in Japan by its parentcompany.B) The U.S. subsidiary of European financial giant, Credit Suisse, pays dividends to itsparent in Zurich.C) A U.S. tourist purchases gifts at a museum in London.D) All are example of BOP transactions.Answer: DTopic: BOP UnderstandingSkill: Conceptual5) The authors identify a tip for understanding BOP accounting. They recommend that you"follow the cash flow."Answer: TRUETopic: BOP IntroductionSkill: Recognition6) The BOP must be in balance but the current account need not be.Answer: TRUETopic: Current AccountSkill: Recognition7) Which of the following is NOT a part of the Current Account of BOP?A) net export/import of goodsB) Balance of TradeC) net portfolio investmentD) net export/import of servicesAnswer: CTopic: Current AccountSkill: Recognition8) Which of the following is NOT part of the Financial Account of the BOP?A) net foreign direct investment.B) net import/export of servicesC) net portfolio investmentD) other Financial itemsAnswer: BTopic: Financial AccountSkill: Recognition9) Expenditures by U.S. tourists in foreign countries for foreign goods or services are factoredinto BOP calculations.Answer: TRUETopic: BOP UnderstandingSkill: Recognition10) Which of the following is NOT an item to be considered in BOP calculations?A) A foreign resident purchases a U.S. Treasury Bill.B) A U.S.-based firm manages the development of an oil field in Kazakhstan.C) A consumer buys a VCR made in Korea from a Wal-Mart store.D) A U.S. citizen living in Minnesota travels to Winnipeg, Canada and buys a case ofLaBatt's Canadian beer.Answer: CTopic: BOP UnderstandingSkill: Conceptual11) The balance of payments is most like a(an) ________.A) cash flow statementB) balance sheetC) income statementD) proxy statementAnswer: ATopic: Balance of paymentsSkill: Recognition12) The balance of paymentsA) determines the eligibility of countries for IMF aid.B) adds up the value of all assets and liabilities of a country on a specific date.C) records all international transactions for a country over a period of time.D) all of the above.Answer: CTopic: Balance of paymentsSkill: Recognition13) According to the authors, the following types of transactions dominate the balance ofpayments:A) the exchange of guns for butter.B) the exchange of stocks and bonds.C) the exchange of goods and services.D) the exchange of real and financial assets.Answer: DTopic: Balance of paymentsSkill: Conceptual14) Which of the following is NOT an example of an exchange of financial assets?A) the exchange of travel servicesB) the exchange of stocksC) the exchange of bondsD) loansAnswer: ATopic: Current AccountSkill: Conceptual15) Because current and financial/capital account balances use double-entry book keeping it isunusual to find serious discrepancies in the debits and credits.Answer: FALSETopic: Balance of paymentsSkill: Recognition16) Which of the following is NOT part of the balance of payments account?A) the current accountB) the financial/capital accountC) the official reserves accountD) All of the above are BOP accounts.Answer: DTopic: Balance of paymentsSkill: Recognitionoccurring within the year.A) capital accountB) current accountC) financial accountD) IMF accountAnswer: BTopic: Current AccountSkill: Recognition18) If your company were to import and export textiles, the transactions would be recorded inthe current account subcategory of ________.A) services tradeB) income tradeC) goods tradeD) current transfersAnswer: CTopic: Current AccountSkill: Conceptual19) The travel services provided to international travelers by United Airlines would be recordedin the current account subcategory of ________.A) services tradeB) income tradeC) goods tradeD) current transfersAnswer: ATopic: Current AccountSkill: Conceptual20) Anaconda Copper Inc. created a subsidiary in Chile last year to mine copper ore. Theproportion of net income paid back to the parent company as a dividend would be recorded in the current account subcategory of ________.A) services tradeB) income tradeC) goods tradeD) current transfersAnswer: BTopic: Current AccountSkill: Conceptual21) The subcategory that typically dominates the current account is ________.A) goods (merchandise) tradeB) services tradeC) income tradeD) transfer accountsAnswer: ATopic: Current AccountSkill: Recognitionand a ________ in the services trade balance.A) surplus; deficitB) surplus; surplusC) deficit; deficitD) deficit; surplusAnswer: DTopic: Current AccountSkill: Conceptual23) In general, the United States goods trade balance has grown increasingly positive over thelast 3 years.Answer: FALSETopic: Current AccountSkill: Recognition24) In 2001 the United States posted a current account deficit of -$393 billion. The bulk of thenegative value came fromA) a net transfer deficit.B) an income balance deficit.C) a goods trade deficit.D) an income trade deficit.Answer: CTopic: Current AccountSkill: Recognition25) In general, as a country's income increases, so does the demand for imports.Answer: TRUETopic: Economic TheorySkill: Conceptual26) In general, a country's exports decrease as foreign income decreases.Answer: TRUETopic: Economic TheorySkill: Conceptual27) Over the last two decades the surplus on U.S. services trade has typically been ________ thedeficit on U.S. goods trade.A) greater thanB) equal toC) less thanD) The relationship is constantly shifting from greater than to less than.Answer: CTopic: Balance of TradeSkill: Recognitionfinancial assets.A) current accountB) merchandise trade accountC) services accountD) capital/financial accountAnswer: DTopic: Capital/Financial AccountSkill: Recognition29) The financial account consists COMPLETELY of which three components?A) stock investment, bond investment, and mutual fund investmentB) direct investment, stock investment, and bond investmentC) direct investment, portfolio investment, and other asset investmentD) mutual fund investment, portfolio investment, and stock investmentAnswer: CTopic: Capital/Financial AccountSkill: Recognition30) When categorizing investments for the financial account component of the balance ofpayments the ________ is an investment where the investor has no control whereas the________ is an investment where the investor has control over the asset.A) direct investment; portfolio investmentB) direct investment; indirect investmentC) portfolio investment; indirect investmentD) portfolio investment; direct investmentAnswer: DTopic: Capital/Financial AccountSkill: Recognition31) Which of the following would NOT be considered a direct investment either into or from theUnited States?A) the purchase of U.S. Treasury (debt) securitiesB) Ford Motor Company building an assembly plant in MexicoC) Honda of Japan building a manufacturing plant in AlabamaD) intel purchasing a chip manufacturing plant in ThailandAnswer: ATopic: Capital/Financial AccountSkill: Conceptual32) International debt security purchases and sales are defined as portfolio investments forfinancial account purposes because by definition debt securities do not provide the buyer with ownership or control.Answer: TRUETopic: Capital/Financial AccountSkill: Recognition________ should be free.A) international investment; international goods tradeB) international investment; international tradeC) international trade; international goods tradeD) international trade; international investmentAnswer: DTopic: International InvestmentSkill: Conceptual34) The two major concerns about foreign direct investment areA) national defense and taxes.B) who controls the assets and who receives the profits.C) who receives the profits and taxes.D) who pays the taxes and who receives the taxes.Answer: BTopic: International InvestmentSkill: Conceptual35) Portfolio investment is capital invested in activities that are ________ rather than made for________.A) short term; the long termB) long term; profitC) profit motivated; controlD) control motivated; profitAnswer: CTopic: Capital/Financial AccountSkill: Recognition36) Most U.S. debt purchased by foreigners is denominated in ________ and most foreign debtissued by countries such as Russia, Mexico, and Brazil is issued in ________.A) U.S. dollars; the purchasing investor's domestic currencyB) the purchasing investor's domestic currency; the issuing country's domestic currencyC) U.S. dollars; the issuing country's domestic currencyD) U.S. dollars; U.S. dollarsAnswer: DTopic: Capital/Financial AccountSkill: Recognition37) Significant amounts of United States Treasury issues are purchased by foreign investors,therefore the U.S. must earn foreign currency to repay this debt.Answer: FALSETopic: Capital/Financial AccountSkill: ConceptualA) enhanced; floatingB) diminished; fixedC) enhanced; fixedD) None of the above apply.Answer: CTopic: Capital/Financial AccountSkill: Conceptual39) If most major economies are operating under a regime of fixed exchange rates, then a________ in a country's balance of payments suggests that the country should ________ its currency.A) surplus; revalueB) surplus; devalueC) deficit; revalueD) all of the aboveAnswer: ATopic: Capital/Financial AccountSkill: Conceptual40) Under an international regime of fixed exchange rates, countries with a BOP ________should consider ________ their currency while countries with a BOP ________ shouldconsider ________ their currency.A) deficit; revaluing; surplus; revaluingB) deficit; devaluing; surplus; devaluingC) surplus; devaluing; deficit; revaluingD) surplus; revaluing; deficit; devaluingAnswer: DTopic: Capital/Financial AccountSkill: Conceptual41) The era between 1880 and 1914, when the gold standard was in use, was characterized byincreasing capital mobility.Answer: TRUETopic: Capital MobilitySkill: Recognition42) The time from 1971 to today has predominately used a regime of variable exchange rates. Ithas also seen a decrease in capital mobility.Answer: FALSETopic: Capital MobilitySkill: RecognitionA) legal transfer of funds through the usual international payments mechanismsB) the transfer of cash into collectibles that are then transferred across bordersC) the cross-border purchase of assets that are then managed in a way that hide themovement of money and its ownershipD) false invoicing of international trade transactionsAnswer: CTopic: Capital MobilitySkill: Recognition44) The ________ is the difference between merchandise imports and exports and a measure of acountry's international trade in goods and services.A) balance of paymentsB) current accountC) capital accountD) balance of tradeAnswer: DTopic: Balance of TradeSkill: Recognition45) The United States experienced a balance of trade ________ during the 1980s and a balance oftrade ________ during the 1990s.A) surplus; surplusB) surplus; deficitC) deficit; deficitD) deficit; surplusAnswer: CTopic: Balance of TradeSkill: Recognition46) The largest single component of the United States current account is ________.A) current transfersB) income payments and receiptsC) goods (merchandise) imports and exportsD) services imports and exportsAnswer: CTopic: Current AccountSkill: Recognition47) An excess of merchandise exports over merchandise imports results in a balance of tradedeficit.Answer: FALSETopic: Balance of TradeSkill: Conceptual48) Portfolio investments are transactions that involve long-term financial assets and affect thetransfer of control.Answer: FALSETopic: Capital/Financial AccountSkill: Recognitionmoved from country to country?A) transfers via the usual international payments mechanism such as regular banktransfersB) transfers via a physical bearer such as smugglingC) the transfer of cash into collectiblesD) All of the above are mechanisms for moving capital from country to country.Answer: DTopic: Capital MobilitySkill: Recognition50) Which of the following statements about the balance of payments is not true?A) The BOP is the summary statement of all international transactions between onecountry and all other countries.B) The BOP is a flow statement, summarizing all international transactions that occuracross the geographic borders over a period of time, typically a year.C) Although the BOP must always balance in theory, in practice there are substantialimbalances as a result of statistical errors and misreporting of current account andfinancial account flows.D) All of the above are true.Answer: DTopic: Balance of paymentsSkill: Recognition51) Which of the following is not a component of the financial accounts?A) direct investment abroadB) direct investment domesticC) goods importsD) portfolio investmentAnswer: CTopic: BOPSkill: Recognition52) The BOP should always balance.Answer: TRUETopic: BOPSkill: Recognition53) ________ is an entry in the balance of payments measuring the difference between themonetary value of merchandise exports and merchandise imports.A) Balance of paymentsB) Balance of tradeC) Import-export spreadD) None of the aboveAnswer: BTopic: BOTSkill: Recognition54) The beauty of the J-curve adjustment path for trade balance adjustments is that the process isvery quick, typically taking only a month or so to complete.Answer: FALSETopic: BOTSkill: Recognition55) The J-curve adjustment path for trade balance adjustments assumes that export products arepredominantly priced in the ________ currency and that import products are predominantly priced in the ________ currency.A) domestic; domesticB) domestic; foreignC) foreign; foreignD) foreign; domesticAnswer: BTopic: BOTSkill: Recognition56) The J-curve adjustment path for trade balance adjustments assumes that ________ productsare predominantly priced in the domestic currency and that ________ products arepredominantly priced in the foreign currencyA) import; importB) import; exportC) export; exportD) export; importAnswer: DTopic: BOTSkill: Recognition57) Assume that a country is experiencing a balance of trade deficit and then suffers a rapiddepreciation of it's currency. J-curve theory suggests that the trade balance will adjust in three distinct periods in the following order:A) quantity adjustment period; pass-through period; currency contract periodB) pass-through period; currency contract period; quantity adjustment periodC) currency contract period; pass-through period; quantity adjustment periodD) pass-through period; quantity adjustment period; currency contract periodAnswer: CTopic: BOTSkill: Conceptual58) The immediate impact on the balance of trade (BOT) for a country in deficit when there is animmediate devaluation of it's currency is likely to be an even larger BOT deficit than prior to devaluation.Answer: TRUETopic: BOTSkill: Recognition59) It is possible that the J-curve path for BOT adjustments may be be elongated or eveninapplicable if exports are NOT predominately priced in the domestic currency and/orimports are NOT predominately priced in the foreign currency.Answer: TRUETopic: BOTSkill: Conceptual60) The United States, as of May 2007, had the largest official foreign exchange reserves of anynation.Answer: FALSETopic: BOTSkill: Recognition61) China, as of May 2007, had the largest official foreign exchange reserves of any nation.Answer: TRUETopic: BOTSkill: Recognition4.2 Essay Questions1) What is a country's balance of (merchandise) trade and why is it so widely reported in thefinancial and popular press?Answer: The balance of trade (BOT) is the largest and most important subset of a country's current account. It measures the difference in a country's imports and exports over aspecified time period. It is often reported because it is intuitively easy to understand(i.e., we either sell more or buy more from foreign countries) and it is a reasonablerepresentation of the total current account balance. (For example, for the U.S. the BOTwas -$779B in 2005 while the current account balance was -$792B.2) What is the Official Reserves Account (ORA) and why is it more important for countriesunder a fixed exchange rate regime than for ones under a floating exchange rate regime?Answer: The ORA is the total reserves held by official monetary authorities within the country.Under a fixed exchange regime a country's currency is convertible into a fixed amountof another country's currency. To keep the relationship between currencies atequilibrium, it may become necessary for the government to buy or sell officialreserves until the equilibrium is restored. Under a variable rate regime this is notnecessary as exchange rates are allowed to change and official reserves no longerserve the same purpose as under the fixed rate regime.。