Question 1

The current account includes

Accepted Answer

The current account refers to the balance of trade in goods and services, including all imports and exports. Choices B and C refer to the capital account, which tracks the purchase and sale of assets and international reserve assets respectively.

Question 2

A country's international transactions can be grouped into the following three main types:

Accepted Answer

The three main types of a country's international transactions are the current account, which includes trade in goods and services, income flows, and unilateral transfers; the capital account, which includes medium- and long-term capital flows; and the official reserve account, which includes changes in a country's official reserve assets, such as gold and foreign currencies. The medium-term account and long-term capital account mentioned in option A are not commonly used categories in international transactions, while option B fails to mention the capital account. Option D lists only two types of accounts and omits the current account.

Question 3

Over half of all dollar bills in circulation are held outside American's borders.

Accepted Answer

According to the Federal Reserve, as of January 2021, approximately 58% of all U.S. paper currency in circulation was held outside of the United States.

Question 4

The capital account includes

Accepted Answer

The capital account refers to the inflow and outflow of capital or assets, and includes all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses. The export and import of goods and services are included in the current account. The purchases and sales of international reserve assets such as dollars, foreign exchange, gold, and special drawing rights are also included in the capital account. However, since this question asks for the best choice, the correct answer is B.

Question 5

Generally speaking, any transaction that results in a payment to foreigners

Accepted Answer

Transactions resulting in payments to foreigners are recorded as debits in the U.S. balance of payments, reflecting an outflow of funds from the country. These are typically marked with a negative sign to indicate a reduction in the country's financial resources.

Question 6

The balance of payments records

Accepted Answer

The balance of payments records not only international trade, but also cross-border investments. It includes the current account, which records exports and imports of goods and services, as well as the capital account, which records cross-border investment flows such as foreign direct investment and portfolio investment. Therefore, option C is the best choice.

Question 7

The official reserve account includes

Accepted Answer

The official reserve account is a component of a country's balance of payments that includes all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs). Option A refers to the current account, while option B pertains to the capital account. Therefore, only option C is a correct description of the official reserve account.

Question 8

Credit entries in the U.S. balance of payments

Accepted Answer

Credit entries result from foreign sales of U.S. goods and services, which create a demand for dollars as foreign buyers need to exchange their currency for dollars to complete the purchase.

Question 9

If the United States imports more than it exports, then

Accepted Answer

When the United States imports more than it exports, it means there is an excess supply of dollars in the foreign markets. This excess supply of dollars can lead to a decrease in the demand for the U.S. dollar, which in turn can lead to a depreciation of the U.S. dollar relative to other currencies. Therefore, both options A and B are correct, and the answer is C.

Question 10

Suppose the InBev Corporation (a non-U.S. MNC) buys the Anheuser-Busch Corporation, paying the U.S. shareholders cash.

Accepted Answer

Payment by InBev will be recorded as a credit because it represents an increase in the liabilities of InBev to pay off the shareholders of Anheuser-Busch. The deposit of the funds by the sellers will be recorded as a debit on their accounts, but this is not relevant to the accounting treatment for InBev's payment.

Question 11

A country experiencing a significant balance-of-payments surplus would be likely to

Accepted Answer

A country with a balance-of-payments surplus has more foreign currency, allowing it to expand imports and refrain from imposing foreign exchange restrictions.

Question 12

If the United States imports more than it exports, then this means that

Accepted Answer

When the U.S. imports more than it exports, it means more dollars are being supplied to buy foreign goods, leading to an excess supply of dollars in the foreign exchange market.

Question 13

The current account balance, which is the difference between a country's exports and imports, is a component of the country's GNP. Other components of GNP include

Accepted Answer

Components of Gross National Product (GNP) include consumption, investment, government expenditure, and net exports. The current account balance, which is part of net exports, does not exclude the other components from being part of GNP.

Question 14

Since the balance of payments is presented as a system of double-entry bookkeeping,

Accepted Answer

The balance of payments is a system of double-entry bookkeeping where every credit entry in the account is balanced by a corresponding debit entry. This is why both options A and B are true.

Question 15

If a country is grappling with a major balance-of-payment difficulty, it may not be able to expand imports from the outside world. Instead, the country may be tempted to

Accepted Answer

If a country is facing a major balance-of-payment difficulty, it may not have the necessary funds to expand imports from other countries. In such a situation, the country may be tempted to impose measures to restrict imports to conserve its foreign exchange reserves. Similarly, the country may also try to discourage capital outflows, which can further deplete its foreign exchange reserves. Therefore, both options - imposing measures to restrict imports and discourage capital outflows - may be tempting for a country grappling with a balance-of-payment difficulty.

Question 16

A country with a current account surplus

Accepted Answer

A country with a current account surplus means it is exporting more goods and services than it is importing. This leads to an inflow of foreign currency, which the country can use to acquire IOUs (such as bonds or stocks) from foreigners. This increases the country's net foreign wealth.

Question 17

If Japan exports more than it imports, then

Accepted Answer

When Japan exports more than it imports, there is a higher demand for yen to pay for Japanese goods, leading to an appreciation of the yen against other currencies.

Question 18

Generally speaking, any transaction that results in a receipt from foreigners

Accepted Answer

Any transaction resulting in a receipt from foreigners represents an inflow of funds to the U.S., which is a "credit" in the balance of payments accounting. Furthermore, a receipt from foreigners represents an export of goods, services or capital, and as such it is recorded as a credit, with a positive sign, in the U.S. balance of payments. Therefore, the best choice is D.

Question 19

Balance of payments

Accepted Answer

A) The balance of payments measures all international transactions of a country over a certain period of time and uses a double-entry bookkeeping system to ensure accuracy.
B) The balance of payments provides information on the demand and supply of a country's currency, indicating its strength or weakness in the international market.
C) By evaluating the balance of payments, we can assess a country's economic competitiveness in the global market.

Therefore, all options (A, B, and C) are correct, making D the best choice.

Question 20

Suppose the McDonalds Corporation imports Canadian beef, paying for it by transferring the funds to a New York bank account kept by the Canadian beef producer.

Accepted Answer

BIn international trade and balance of payments accounting, a payment made by an importer (in this case, McDonald's) to a foreign entity (the Canadian beef producer) is recorded as a debit in the importing country's (the United States) accounts. This is because the payment represents an outflow of funds from the country. Conversely, the receipt of funds by the seller (the Canadian beef producer) and the deposit of these funds into a bank account (even if it is in New York) represent an inflow of funds to the seller's country (Canada) and would be recorded as a credit in Canada's accounts. However, the question's focus seems to be on the U.S. perspective, and the deposit detail might be misleading. The key point is that from the U.S. perspective, McDonald's payment is a debit (an outflow), and from the banking perspective, deposits are generally recorded as credits in the depositor's account, but this is not directly relevant to the balance of payments context the question implies.

Quiz 3: Balance of Payments