Q: Which of the following best describes the balance of payments identity?

$$\text{Current Account} + \text{Capital and Financial Account} + \text{Official Settlements Account} = 0$$

Q: If the U.S. current account balance is $$-200$$ billion, net interest income is $$10$$ billion, and net transfers are $$-5$$ billion, what are net exports (NX)?

$$\text{NX} = -200 + 10 + 5 = -185$$ billion

Question 1

Which of the following best describes the balance of payments identity?

Accepted Answer

$$	ext{Current Account} + 	ext{Capital and Financial Account} + 	ext{Official Settlements Account} = 0$$

Question 2

Suppose the U.S. imports $$\100$ million worth of electronics from Japan, paying with a wire transfer. How is this transaction recorded in the U.S. balance of payments?

Accepted Answer

Debit in the current account; credit in the capital and financial account

Question 3

If the U.S. current account balance is $$-200$$ billion, net interest income is $$10$$ billion, and net transfers are $$-5$$ billion, what are net exports (NX)?

Accepted Answer

$$	ext{NX} = -200 + 10 + 5 = -185$$ billion

Question 4

Which of the following would cause the demand curve for U.S. dollars in the foreign exchange market to shift rightward?

Accepted Answer

An increase in world demand for U.S. exports

Question 5

If the U.S. dollar appreciates relative to the euro, what is the most likely effect on U.S. net exports?

Accepted Answer

Net exports decrease because U.S. goods become more expensive for Europeans

Question 6

Which of the following best defines the real exchange rate ($$Q$$)?

Accepted Answer

$$Q = \dfrac{E \cdot P^*}{P}$$, where $$E is $$the nominal exchange rate, $$P^* is $$the foreign price level, and $$P is $$the domestic price level

Question 7

If the expected future exchange rate for the U.S. dollar rises, what happens in the foreign exchange market?

Accepted Answer

Demand for U.S. dollars increases and the demand curve shifts rightward

Question 8

Which of the following is an example of a transaction recorded in the capital and financial account?

Accepted Answer

A U.S. resident purchases shares in a Japanese company

Question 9

Suppose the U.S. interest rate rises relative to foreign interest rates. What is the likely effect on the supply of U.S. dollars in the foreign exchange market?

Accepted Answer

The supply of U.S. dollars decreases and the supply curve shifts leftward

Question 10

Which of the following statements about purchasing power parity (PPP) is correct?

Accepted Answer

PPP holds when one unit of currency buys the same quantity of goods and services in different countries

Question 11

A country that has borrowed more from the rest of the world than it has lent over its entire history is called:

Accepted Answer

A debtor nation

Question 12

If the U.S. demand for imports increases, what is the effect on the supply of U.S. dollars in the foreign exchange market?

Accepted Answer

The supply of U.S. dollars increases and the supply curve shifts rightward

Question 13

Which of the following best describes interest rate parity?

Accepted Answer

Interest rate parity exists when the returns on two currencies are equal, accounting for interest rates and expected appreciation

Question 14

Suppose the expected future exchange rate for the U.S. dollar falls. What is the likely effect on the current exchange rate?

Accepted Answer

The current exchange rate depreciates

Question 15

Which of the following is NOT included in the current account?

Accepted Answer

U.S. investment in foreign stocks

Question 16

If the U.S. dollar depreciates, what is the most likely effect on U.S. exports and imports?

Accepted Answer

Exports increase and imports decrease

Question 17

Which of the following best describes arbitrage in the foreign exchange market?

Accepted Answer

Buying currency in one market and selling it in another to profit from price differences

Question 18

If the U.S. official reserves increase, what is the sign of the official settlements account?

Accepted Answer

Negative

Question 19

Which of the following would shift the supply curve of U.S. dollars to the left in the foreign exchange market?

Accepted Answer

A rise in the U.S. interest rate differential

Question 20

Which of the following equations correctly represents the current account balance (CAB)?

Accepted Answer

$$	ext{CAB} = NX + 	ext{Net interest income} + 	ext{Net transfers}$$

The Open Economy: Balance of Payments, Exchange Rates, and the Foreign Exchange Market

Study Guide - Practice Questions

Study Guide - Flashcards