Arnold Quiz: International Finance

Quiz
International Finance

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1. A periodic statement, usually annual, of the money value of all transactions between residents of one country and residents of all other countries is called a country's: a. balance of payments.
b. balance sheet.
c. capital account.
d. current account.
e. income statement.

2. Which of the following statements provides a correct description of a country's balance of payments?: a. It is a periodic statement that provides information about a nation's exports and imports of goods and services, domestic residents' earnings on assets located abroad, foreigners' earnings on domestic assets, gifts to and from foreign countries, and official transactions by governments and central banks.
b. In the balance of payments, any transaction that supplies the country's currency in the foreign exchange market is recorded as a credit (+).
c. In the balance of payments, any transaction that creates a demand for the country's currency in the foreign exchange market is recorded as a debit (-).
d. The balance of payments is divided into two main account: assets and liabilities.
e. All of the above statements are correct.

3. Which of the following statements provides a correct description of a country's balance of payments?: a. The current account includes all payments related to the purchase and sale of goods and services.
b. The current account is concerned with exports of goods and services, imports of goods and services, and net unilateral transfers abroad.
c. The capital account includes all payments related to the purchase and sale of assets and to borrowing and lending activities.
d. The capital account is concerned with the outflow of U.S. (financial) capital and the inflow of foreign (financial) capital.
e. All of the above statements are correct.

4. Which of the following statements provides a correct description of a country's balance of payments?: a. The official reserve account includes transactions by governments and central banks of various countries.
b. The difference between the exports and imports of goods and services is called the total balance of payments.
c. If credits are greater than debits in the balance of payments as a whole, a nation has a trade surplus.
d. If debits are greater than credits in the balance of payments as a whole, a nation has a trade deficit.
e. All of the above statements are correct.

5. Which of the following does not constitute a credit in the U.S. balance of payments?: a. An American company sells a computer to Russia.
b. A German firm buys insurance from an American company.
c. French citizens fly from Munich to Paris on a U.S. airline.
d. Americans go to dinner at a Paris restaurant.
e. A German tourist gets a haircut in Miami.

6. Which of the following does not constitute a credit in the U.S. balance of payments?: a. Americans receive interest on Norwegian bonds they own.
b. Americans receive dividends on German stocks they own.
c. The U.S. government sends a relief check to a foreign government dealing with earthquakes.
d. The German government sends scholarship funds to American students.
e. A German bank buys U.S. Treasury bills.

7. Which of the following does not constitute a credit in the U.S. balance of payments?: a. German tourists buy land in Vermont.
b. An naturalized American sends a birthday check to his mother in Italy.
c. A German bank makes a loan to IBM.
d. Mitsubishi buys a factory in Ohio.
e. Japanese tourists board a U.S. cruise ship to Hawaii.

8. Which of the following constitutes a credit in the U.S. balance of payments?: a. The U.S. government acquires official reserves in the form of gold and foreign currencies.
b. American households buy Japanese cars.
c. A French bank makes a loan to Chrysler.
d. Americans buy land in Russia.
e. Americans make loans to their foreign relatives.

9. Which of the following constitutes a credit in the U.S. balance of payments?: a. AT&T sends dividends to Japanese stockholders.
b. Toyota repatriates profits earned by its U.S. operations.
c. The U.S. government loses some of its official reserves to foreigners.
d. Americans fly Lufthansa from Philadelphia to Frankfurt.
e. The U.S. government sends a military aid check to Israel.

10. Which of the following constitutes an inflow of foreign capital in the U.S. balance of payments?: a. Americans buy German stock certificates.
b. Americans make a loan to Volkswagen.
c. Americans buy an Italian film studio.
d. Americans buy French vineyards.
e. American banks sell U.S. mortgages to British banks.

11. Which of the following statements is a correct description of the foreign exchange market in which the currencies of different countries are exchanged?: a. In this market, the U.S. demand for foreign goods, services, and assets translates into a demand for foreign currencies and, simultaneously, a supply of U.S. dollars.
b. In this market, the foreign demand for U.S. goods, services, and assets translates into a supply of foreign currencies and, simultaneously, a demand for U.S. dollars.
c. Under flexible exchange rates, the foreign exchange market will equilibrate at an exchange rate at which the quantity demanded equals the quantity supplied of a currency.
d. If the price of a nation's currency, expressed as so many units of a foreign currency, increases, the nation's currency is said to have appreciated.
e. All of the above statements are correct.

12. Which of the following statements is a correct description of the foreign exchange market in which the currencies of different countries are exchanged?: a. If the exchange rate changes from $1.50 / Ł1 to $1.20 / Ł, the British pound has depreciated.
b. If the exchange rate changes from $1.50 / Ł1 to $1.20 / Ł, the British pound has appreciated.
c. If the exchange rate changes from $1.50 / Ł1 to $1.20 / Ł, the U.S. dollar has depreciated.
d. If the exchange rate changes from $1.50 / Ł1 to $1.80 / Ł, the U.S. dollar has appreciated.
e. Both (a) and (d).

13. Which of the following statements is a correct description of the foreign exchange market in which the currencies of different countries are exchanged?: a. Ceteris paribus, a rise in U.S. national income, relative to foreign national incomes, will lead to higher demand for foreign currencies and an appreciation of the dollar.
b. Ceteris paribus, a rise in U.S. national income, relative to national incomes abroad, will lead to higher demand for foreign currencies and a depreciation of the dollar.
c. Ceteris paribus, a fall in foreign price levels, relative to the U.S. price level, will lead to a higher demand for foreign currencies and an appreciation of the dollar.
d. Ceteris paribus, a rise in the U.S. real interest rate, relative to the real interest rate abroad, will lead to higher supply of foreign currencies and a depreciation of the dollar.
e. None of the above.

14. Which of the following event will, ceteris paribus, lead to a depreciation of the dollar?: a. A decline in U.S. national income, relative to foreign national incomes.
b. A decline in the U.S. price level, relative to foreign price levels.
c. A rise in the U.S. real interest rate, relative to the real interest rate abroad.
d. A combination of (a) and (b).
e. None of the above.

15. According to the purchasing power parity theory,: a. exchange rates between any two currencies will adjust to reflect changes in the relative income levels of the two countries.
b. exchange rates between any two currencies will adjust to reflect changes in the relative price levels of the two countries.
c. changes in the relative income levels of two countries will affect the exchange rate in such a way that one unit of the country's currency will continue to buy the same amount of foreign goods as it did before the change in the relative income levels.
d. changes in relative real interest rate levels of two countries will affect the exchange rate in such a way that one unit of the country's currency will continue to buy the same amount of foreign goods as it did before the change in relative real interest rate levels.
e. all of the above hold.

16. Consider Figure 33.1. It depicts the foreign-exchange market for Japanese yen. Given the demand and supply lines shown there, which of the following statements is correct?: a. Ceteris paribus, a fall in the Japanese national income would shift the supply line to the left and appreciate the yen.
b. Ceteris paribus, a rise in the U.S. price level would shift the demand line to the right and, perhaps, the supply line to the left, and appreciate the yen.
c. Ceteris paribus, a rise in the Japanese real interest rate would shift the demand line to the right and, perhaps, the supply line to the left, and appreciate the yen.
d. All of the above statements are correct.
e. Ceteris paribus, a rise in the U.S. real interest rate, combined with a fall in the U.S. national income, would shift the supply line to the right, the demand line to the left, and appreciate the yen.

17. Consider Figure 33.1. It depicts the foreign-exchange market for Japanese yen. Given the demand and supply lines shown there, which of the following statements is correct?: a. If the U.S. and Japanese governments fix the exchange rate at R#1, a surplus of yen equal to DF emerges.
b. If the U.S. and Japanese governments fix the exchange rate at R#1, the dollar is undervalued at exchange rate 0A.
c. If the U.S. and Japanese governments fix the exchange rate at R#1, the yen is overvalued at exchange rate 0A.
d. All of the above statements are correct.
e. If the U.S. and Japanese governments fix the exchange rate at R#1, a shortage of dollars equal to DF emerges.

18. Consider Figure 33.1. It depicts the foreign-exchange market for Japanese yen. Given the demand and supply lines shown there, which of the following statements is correct?: a. If the U.S. and Japanese governments fix the exchange rate at R#2, a surplus of yen equal to GH emerges.
b. If the U.S. and Japanese governments fix the exchange rate at R#2, the dollar is overvalued at exchange rate 0C.
c. If the U.S. and Japanese governments fix the exchange rate at R#2, the yen is overvalued at exchange rate 0C.
d. All of the above statements are correct.
e. If the U.S. and Japanese governments fix the exchange rate at R#2, a surplus of dollars equal to GH emerges.

19. Consider Figure 33.1. It depicts the foreign-exchange market for Japanese yen. Given the demand and supply lines shown there, which of the following statements is correct?: a. If the U.S. and Japanese governments fix the exchange rate at R#2, the dollar is overvalued at exchange rate 0C, but the implied yen shortage problem might be solved by both governments buying yen.
b. If the U.S. and Japanese governments fix the exchange rate at R#2, the dollar is overvalued at exchange rate 0C, but the implied yen shortage problem might be solved by both governments agreeing to devalue the yen.
c. If the U.S. and Japanese governments fix the exchange rate at R#2, the dollar is overvalued at exchange rate 0C, but the implied yen shortage problem might be solved by the Fed tightening monetary policy.
d. If the U.S. and Japanese governments fix the exchange rate at R#2, the dollar is overvalued at exchange rate 0C, but the implied yen shortage problem might be solved by the U.S. dismantling tariffs and quotas.
e. All of the above statements are correct.

20. Consider the following statements about international finance. One of them is false. Which one is it?: a. To have an international gold standard, nations must do the following: 1) define their currencies in terms of gold; 2) stand ready and willing to convert gold into paper money and paper money into gold at a specified rate; and 3) link their money supplies to the holdings of gold, which thereby subjects domestic monetary policy to international instead of domestic considerations.
b. Today's international monetary system is a managed flexible exchange rate system, also called managed float. While exchange rates are freely flexible for the most part, nations do periodically intervene to adjust them.
c. Proponents of the managed float believe it to offer several advantages: 1) it allows nations to pursue independent monetary policies; 2) it solves trade problems without trade restrictions; and 3) it is flexible and, therefore, can easily adjust to shocks.
d. Opponents of the managed float believe it to have several disadvantages: 1) it stifles the use of fiscal policy to meet domestic economic goals; 2) it increases the chance that exchange rates diverge greatly from their equilibrium rates, creating persistent balance-of-payments problems; and 3) over time, it leads to increased foreign control of American businesses.
e. The International Monetary Fund (IMF) is an organization created at Bretton Woods, NH, in 1944 to oversee the international monetary system. It holds currency reserves for member nations and makes loans to central banks, some in the form of Special Drawing Right (SDR), which are nothing but bookkeeping entries but can be used, like gold and currencies, to settle international accounts.