Question 1

__________ occurs at the start of a financial crisis. It results in the loss of the financial account surplus,creating a severe deficit in the country's overall balance of payments.

Accepted Answer

Capital flight occurs when investors and savers in a country withdraw their financial assets and investments from the country in response to economic instability or perceived risks. This results in the loss of the financial account surplus and a severe deficit in the country's overall balance of payments. It is commonly observed at the start of a financial crisis.

Question 2

According to Obstfeld and Taylor,which era was characterized by continuously increasing capital openness as more and more countries adopted the gold standard and expanded international relations?

Accepted Answer

Obstfeld and Taylor argue that the period from 1860 to 1914 was characterized by increasing capital openness as more countries adopted the gold standard and expanded international relations. This era is also known as the first era of globalization, as it saw unprecedented growth in international trade and investment.

Question 3

The United States typically includes all of the following subcategories of its capital account balance EXCEPT:

Accepted Answer

The capital account balance of the United States includes direct investment, portfolio investment, financial derivatives, and other investment. However, goods trade falls under the current account balance rather than the capital account balance.

Question 4

With a(n)_____ exchange rate,the government of a country officially declares that its currency is convertible into a fixed amount of some other currency.

Accepted Answer

A fixed exchange rate is when a government sets the value of its currency in relation to another currency, typically the US dollar. This is done by buying or selling their own currency in the foreign exchange market to maintain the fixed value.

Question 5

Rather than declaring that a currency is convertible into a fixed amount of some other currency,the exchange rate for the Canadian dollar instead fluctuates based on supply and demand. Canada uses what type of exchange rate?

Accepted Answer

The description of the exchange rate for the Canadian dollar fluctuating based on supply and demand indicates that Canada uses a floating exchange rate.

Question 6

________ refers to legal restraints on what a foreign investor may own or control in another country.

Accepted Answer

The answer of ________ refers to legal restraints on what...

Question 7

The ____________ account is the total currency and metallic reserves held by official monetary authorities within the country.

Accepted Answer

Official reserves refer to the total currency and metallic reserves held by official monetary authorities within a country.

Question 8

According to Obstfeld and Taylor,which era was characterized by floating exchange rates,economic volatility,and rapidly expanding cross-border capital flows?

Accepted Answer

The era characterized by floating exchange rates, economic volatility, and rapidly expanding cross-border capital flows is the period from 1971 to 2000. This period is also known as the post-Bretton Woods era, which followed the breakdown of the Bretton Woods exchange rate system in 1971. During this period, exchange rates were allowed to float freely, leading to increased volatility in exchange rates, and there was a rapid expansion of cross-border capital flows.

Question 9

Obstfeld and Taylor argued that due to two wars and a worldwide depression,the period of ________ was a period of global economic destruction.

Accepted Answer

Obstfeld and Taylor argued that the two world wars and the Great Depression resulted in a period of global economic destruction from 1914 to 1945. Bretton Woods refers to a conference in 1944 that established a new monetary system, while the other options refer to time periods after the period of global economic destruction.

Question 10

A U.S.firm has recently built a new textile factory in Malaysia. This falls under which component of the financial account?

Accepted Answer

Direct investment is when a foreign company builds or acquires a physical asset in another country, such as a factory. Therefore, the U.S. firm building a textile factory in Malaysia would fall under the direct investment component of the financial account. The other options (B) portfolio investment, (C) financial derivatives, (D) goods trade, and (E) other investment, do not apply to this scenario.

Question 11

As a result of the global financial crisis in 2008 and 2009,the U.S.government was often criticized for "bailing out" large financial institutions. Such bailouts are examples of:

Accepted Answer

Bailouts of large financial institutions can be seen as an example of corporate socialism, where the government intervenes to support private businesses with public funds. The decision to bail out these institutions was made to prevent the collapse of the financial system, but it was widely criticized for benefiting corporate interests at the expense of taxpayers. Corporate governance refers to the systems and processes by which companies are directed and controlled, and financial negligence would refer to irresponsible financial practices. Capitalism involves the private ownership of the means of production and the market-based allocation of resources, and deregulation refers to the reduction or elimination of government regulations.

Question 12

Which international firm collects balance of payments statistics for more than 160 countries around world?

Accepted Answer

The International Monetary Fund (IMF) collects balance of payments statistics for more than 160 countries around the world. The other options, WTO, World Bank, EU, and NAFTA, do not have a specific mandate to collect such statistics.

Question 13

__________ is the net balance of capital that flows in and out of the United States not reaching the 10 percent ownership threshold.

Accepted Answer

Portfolio investment refers to investments in securities and financial assets that do not reach the 10 percent ownership threshold, distinguishing it from direct investment.

Question 14

The period between 1945 and 1971,also known as the __________ era,saw a great expansion of international trade in goods and services.

Accepted Answer

The period between 1945 and 1971 is commonly referred to as the "Bretton Woods era" as it was during this time that the system established at the Bretton Woods Conference in 1944 was in place. This system, named after the New Hampshire town where it was agreed upon, regulated international monetary and financial relations and facilitated global trade.

Question 15

Which account ensures that the BOP actually balances?

Accepted Answer

The net errors and omissions account is used to ensure that the BOP actually balances. It reflects the adjustments made to ensure that the sum of all transactions in the capital account and the current account equals the change in a country's official reserves. If the BOP does not balance, the difference is recorded in the net errors and omissions account to ensure that the BOP equation holds true.

Question 16

In almost all cases,a country's current account and financial account:

Accepted Answer

The current account and financial account in a country's balance of payments typically have an inverse relationship. When a country has a surplus in its current account, it means it is exporting more than it is importing, and thus, it is a net lender to the rest of the world. This surplus is balanced by a deficit in the financial account, where the country invests more abroad than foreign entities invest in the country. Conversely, a current account deficit, where a country imports more than it exports, is financed by a surplus in the financial account, indicating more foreign investment into the country than its investments abroad.

Question 17

Financial instruments that are linked to a specific instrument,indicator,or commodity are called:

Accepted Answer

Financial derivatives are financial instruments that are linked to a specific instrument, indicator, or commodity. Examples of financial derivatives include options, futures, swaps, and forwards. These instruments derive their value from underlying assets, and are often used for hedging or speculative purposes.

Question 18

____________ refers to how a firm is managed and operated.

Accepted Answer

Corporate governance refers to the set of processes, principles, and values that guide how a company is managed and controlled. This includes the roles and responsibilities of the board of directors, executive management, shareholders, and other stakeholders. It also involves ensuring transparency, accountability, and fairness in all business transactions and decision-making processes.

Question 19

Edita lives in a country that is experiencing rapidly expanding current account deficits. Which of the following is likely also happening simultaneously as a result of the inverse relationship between current and financial accounts?

Accepted Answer

When a country has a current account deficit, it often means that it is importing more than it is exporting, which is typically financed by capital inflows, leading to a surplus in the financial account.

Question 20

The _________ category of the financial account consists of various short-term and long-term trade credits,cross-border loans,currency and bank deposits,and other accounts receivable and payable related to cross-border trade.

Accepted Answer

The "other investment" category includes various cross-border trade-related transactions such as short-term and long-term trade credits, cross-border loans, currency and bank deposits, and other accounts receivable and payable related to cross-border trade. The other options are not related to cross-border trade transactions. Direct investment involves acquiring a lasting interest in an enterprise in another country. Portfolio investment includes transactions of stocks, bonds, and other financial instruments. Financial derivatives include various financial contracts such as options, futures, and swaps. Goods trade involves the physical movement of goods across borders.

Quiz 4: The Balance of Payments