If the country has high trade deficits
if the countryâ€™s interest rate if relatively high compared to the other countries
in the county's currency is depreciated
if the country is experiencing high level of inflation

A clean floating exchange rate policy is a government policy to _____.

set exchange rates purely on the basis of supply and demand
allow a currencyâ€™s value to fluctuate according to the foreign exchange rate
allow selective government intervention in determining the exchange rate
link the exchange rate of a currency to the gold standard

which of the following is one of the main reasons the gold standard was abandoned?

The increased flow of god from the US into foreign central banks
the competitive devaluation of currencies during the Great Depression
the strengthening of the US dollar due to the rise in productivity levels in the US
the US unilaterally announced that the dollar would not be convertible to gold

between 1870 and 1914, the value of most major currencies was maintained by fixing their prices in terms of _____>

dollar
yuan
gold
diamonds

which of the following methods is directly derived from the theory of PPP?

floating exchange rate
fixed exchange rate
stoc market index
Big Mac index

Which of the following is the funding source for the IMF?

memver country quota
FDI
Subsidary investing
currency trading

Which of the following resulted in the abandoning of the Bretton Woods system in 1970?

the inflation rates in the US and other developed countries were low
the US was not running a trade deficit
Most countries wanted to return to the gold standard system
the dollar became inconvertible into gold

Which of the following is an advantage of a strong US dollar?

US tourists will find it more expensive when traveling abroad
US exporters will find it easier to compete with price abroad
US firms will experience less competitive pressure to keep prices low
US importers will find it easier to compete with low cost importers

The ___________ theory viewed international trade as a zero sum gain

mercantilism
national comparative advantage of industries
comparative advantage
strategic trade

the ________ principle advocated that governments should actively protect domestic industries form imports and vigorously promote exports

protectionism
absolute advantage
factor endowment
comparative advantage

Protectionism is similar to mercantilism as they both advocated _____.

dividing the nations of the world into three categories based on its innovation capabilities
specializing in economic activities in which a nation can have an absolute advantage
developing comparative advantages based on a nation's locally abundant factors
government involvement in international trade

in which of the following ways is the theory of comparative advantage linked to the Hecksher-Ohlin Theory?

extent to which government influences international trade
dynamic changes in the patterns of trade over time
Dependency on a nationâ€™s locally abundant factors
Sustainability of wealth in the short run

Which of the following is a modern trade theory?

National competitive advantage
comparative advantage
Absolute advantage
mercantilism

Which of the following describes resource mobility as assumed by the classical theories of international trade

it is the assertion that all resources of a nation should be directly controlled by the governmnent
It is the assumption that a resource used in the production for one industry can be shifted ans put to use in another industry
it is the notion that countries should share their resources freely with other countries
it is the expectation that all resource based transactions will have no foreign exchange complications

Which of the following statements best describes an FDI

assigning firm activities to foreign firms in neighboring countries
Setting up subsidiaries in foreign locations to do in-house work
outsourcing an in-house activity to another domestic firm
Turning over an organizational activity to an outside supplier to perform on the behalf of the firm

Which of the following is true of the absolute advantage theory of international trade?

it advocates extensive government intervention in international trade
It emphasizes relative advantage in one economic activity thst one nation enjoys in comparison with other nations
it divides the countries of the world into three categories based on innovation
it was the first theory to advocate free trade

Which of the following is NOT part of the current account?

Dividends received on a foreign investment
Purchase of a plane ticket on a foreign airline
Shipment of food aid to a poor country
Purchase of a foreign bond

Which of the following is FALSE?

In 2002, the United States imported more goods and services from foreign suppliers than it exported to foreign purchasers.
Services are almost one-third of total exports and are a growing part of U.S. and world trade.
The U.S. trade balance in services is in deficit.
With the exception of the Gulf War period in 1991, the U.S. current account has been in deficit since the 1980s.

Which of the following transactions would be recorded in the current account?

A person living in the United States sends money home to her family in Cuba
U.S. investors purchase bonds from Germany.
The Fed increases its holdings of yen.
The U.S. transfers a military base to another country.

Which of the following transactions would be recorded in the capital account?

U.S. investors purchase bonds from Germany.
The Fed increases its holdings of yen.
The U.S. transfers a military base to another country.
A U.S. firm sells a machine to a business in another country.

Which of the following transactions would be recorded in the financial account?

U.S. investors purchase bonds from Germany.
A person living in the United States sends money home to her family in Cuba.
The Fed increases its holdings of yen.
The U.S. transfers a military base to another country.

If there is a trade deficit, which of the following is true?

The current account balance could be positive, negative, or zero.
There will be a current account deficit.
There will be a current account surplus.
There will be a financial account surplus.

Which of the following transactions would be recorded as a CREDIT in the current account?

A U.S. citizen purchases goods from Ireland.
A U.S. company pays dividends on its stock. Some of the dividends go to foreign owners of the stock.
The U.S. sells wheat to Mexico.
A person living in the United States sends money home to her family in Cuba.

Purchases of stocks and bonds are recorded in the capital account.

True
False

If the trade balance is negative, the current account balance will be negative

True
False

Which of the following is an example of a financial derivative?

An option to purchase stock in the future
A share of stock in Microsoft
A U.S. government bond
Monetary gold

All of the following are true about foreign direct investment (FDI) and portfolio investment except

increases in the flow of portfolio investments increase the likelihood of financial crisis.
both portfolio investments and FDI are the same in that they both give their holders a claim on the future output of the foreign economy.
FDI is relatively illiquid compared to portfolio investment.
FDI changes very little from year to year.

Which of the following is an example of foreign direct investment?

Toyota builds an automobile plant in Ohio.
The Bank of Japan buys dollars.
A citizen of Japan buys stock in Microsoft.
A citizen of Japan buys a U.S. government bond.

Which of the following is an example of portfolio investment?

Toyota builds an automobile plant in Ohio.
The Bank of Japan buys dollars.
A citizen of Japan buys stock in Microsoft.
A citizen of Japan buys an option to purchase Microsoft stock in the future.

Which of the following is an example of a change in reserve assets?

Toyota builds an automobile plant in Ohio.
The Bank of Japan buys dollars.
A citizen of Japan buys stock in Microsoft.
A citizen of Japan buys a U.S. government bond.

Which of the following is NOT an official reserve asset for the United States?

Monetary gold
British pounds
SDRs from the IMF
Mexican pesos

Looking at the financial account data, it is possible to determine the total amount of official reserves available to a nation.

True
False

Direct foreign investment items have more liquidity than foreign portfolio investment items.

True
False

In most of the financial crises of the last decade, there were large and sudden financial outflows as both home and foreign investors tried to avoid t...

True
False

A sudden stop will be easier to navigate if the country borrows internationally in foreign currencies and lend locally in its domestic currency.

True
False

A sudden stop refers to a rapid slowing of capital inflows.

True
False

The free movement of financial capital is desirable for all countries.

True
False

Capital inflows are desirable because they increase investment in a country.

True
False

All financial account transactions are linked to current account transactions, since the current and financial accounts are mirror images of each othe...

True
False

Which of the following is NOT true about this national income equation: ( S + ( T - G ) = I + CA ) ?

For the current account, CA, to improve, we may have to invest less than otherwise would be the case.
For the current account, CA, to improve, we may have to save less to maintain the same amount of investment that includes foreign saving.
For the current account, CA, to improve, the government may have to run budget surplus.
A reduction in the trade deficit with one country will simply show up as an increase in a trade

Which of the following is NOT true about the national income identity given by the equation: S + (T - G) = I + CA?

If CA is positive, national saving finances the purchase of our goods by foreign users.
If CA is negative, our investment is less than our national savings.
A negative CA may imply that foreigners have confidence in the U.S. economy.
If CA is negative and large, a country risks foreigners owning a large piece of its assets.

During the 1990s, which of the following did NOT occur?

Private savings fell.
Investment rose.
The United States received capital inflows.
Private savings was greater than investment for most of the 1990s.

National savings is important for all of the following reasons EXCEPT

it can be used to consume additional foreign goods.
it can be used to fund private investment.
it can be used to fund government investment.
it can be used to fund foreign investment.

Which of these activities is included in the GDP?

Cooking at home
Bicycle manufacturing
All household production
Gardening

Global capital flows have completely broken the link between domestic savings and domestic investment.

True
False

An increase in government budget deficits will necessarily be associated with a worsening of the current account balance.

True
False

Which of the following is an example of external debt for the United States?

A purchase of Apple stock by a person in Canada
A loan made in yen to a company in the United States
A loan made by Citibank to the government of Mexico
A purchase of U.S. Treasury bills by the Bank of Japan

Debt service

is rarely an issue for high-income countries.
always makes a country worse off for having borrowed.
is a problem when the amount of debt is small relative to the size of the economy.
tends to benefit low- and middle-income countries at the expense of high-income countries.

Unsustainable debt may occur for all of the following reasons except

when countries are dependent on one or two key export commodities, and there is a sudden drop in the price of those commodities.
when natural disasters occur.
when civil conflicts are resolved and a peace dividend occurs.
when there are corrupt politicians and practices.

Which of the following is NOT a problem with excessive debt?

It worsens the central government's budget position by adding large debt service payments to other budget items.
It reduces the quantity of resources available to invest in economic development.
If debt service is substantial, schools, health clinics, roads, ports, other infrastructure, and social needs are less likely to be addressed.
It can reduce the chance of a crisis.

Which of the following is FALSE about the Highly Indebted Poor Countries initiative?

Most of the countries included are in sub-Saharan Africa.
Countries qualify for debt relief partly based on their level of poverty.
Countries do not have to have established a past track record of economic reform in order to qualify as long as they make future commitments.
External debt levels must be high relative to exports in order to qualify.

Critics of debt relief make all of the following arguments except

it would be wasted money since the conditions that caused the debt would be likely to persist.
debt relief can quickly fuel a new round of borrowing that simply restores debt to prior levels.
debt relief will encourage other nations to borrow excessively with the hope that their debts may be forgiven in the future.
the cost of debt relief to the most severely indebted countries is too large for the high income countries to afford.

Which of the following is FALSE?

Current account deficits must be financed through inflows of capital.
Loans from abroad add to a country's stock of external debt and generate debt service.
Borrowed funds are always used in a manner that contributes to the expansion of the countryâ€™s productive capability.
Debt service can become an unsustainable burden that holds back development.

External debt is not usually a problem for high-income countries for which of the following reasons?

High-income countries take out loans denominated in their own currency.
High-income countries do not need to borrow.
High-income countries are too large to default on loans.
High-income countries use loans to build infrastructure and create economic growth.

Suppose that Mexico has external debt, and the value of the country's currency, the peso, falls. Which of the following is true?

The peso value of the loans will decrease as well.
Mexico will find it easier to pay off its external debt.
Mexico will declare bankruptcy.
The cost of debt service will be higher.

For countries such as the United States and the United Kingdom, it is important to have trade surpluses in order to service their external debts.

True
False

Ultimate solutions to the problems of unsustainable debt must take into account the incentives for lenders to make loans.

True
False

It is important to compare debt levels of low- and middle-income countries to exports because countries must earn foreign exchange in order to service...

True
False

Total debt is more important in figuring out the ability of a country to service its debt than are debt to GDP and debt to export ratios.

True
False

There are debt relief programs currently available for highly indebted poor countries.

True
False

An example of odious debt would be debts on the part of a nation that were incurred by a dictator for the well-being of his family.

True
False

Between 1972 and 1999, the majority of loans to HIPC countries went to regimes considered "not free," and between 1985 and 1995, to places that were c...

True
False

Borrowing money from other countries is rarely a good idea.

True
False

Borrowing from other countries always leads to economic growth.

True
False

Technology transfer...

is not encouraged by low-income countries.
is not beneficial to high-income countries.
is a consequence of direct investment.
is a consequence of all foreign investment.

Which of the following is an example of direct foreign investment?

A U.S. citizen buys stock in a Mexican company.
The Bank of China buys U.S. Treasury bonds.
Apple builds a plant in Ireland.
A company in England buys inputs to production from a German company.

If the current account balance of a country is positive, the country's international investment position

is positive.
is zero.
is negative.
could be positive, negative, or zero.

For the United States, U.S. direct foreign investment abroad is more significant than foreign investment in U.S. securities and currency.

True
False

Capital inflows that take the form of direct investment may be particularly beneficial if they bring new technologies, new management techniques, and ...

True
False

Technology transfer comes only from nations importing new capital goods in the current account.

True
False

The United States international investment position is negative.

True
False

Suppose the dollar is subject to a floating exchange rate system and that R is the number of dollars per unit of foreign exchange. If R increases, the...

depreciates.
appreciates.
is devalued.
is revalued.

the spot market for foreign exchange.

interest rate arbitrage.
the J-curve.
the forward market for foreign exchange.

Covered interest arbitrage involves both

the purchase of a foreign asset and a forward contract in the market for foreign exchange.
the purchase of a domestic asset and a spot contract in the market for foreign exchange.
the sale of a foreign asset and the purchase of a forward contract in the market for foreign exchange.
the sale of domestic stocks and the purchase of foreign bonds.

Which of the following institutions is the most important participant in foreign currency markets?

A retail customer
A commercial bank
A foreign exchange broker
A central bank

The spot rate

is the rate at which foreign currencies will be exchanged a specified number of days in the future.
is the rate at which foreign currencies will be exchanged in the present.
is the rate at which a government sets the exchange rate.
is the preferred rate at which one central bank exchanges currency with another central bank.

A forward exchange market contract

obligates the owner to make a trade at a specified exchange rate a fixed number of days in the future.
obligates the owner to purchase a foreign good a fixed number of days in the future.
increases the risks of doing business with a foreign country.
is most commonly used by interest rate arbitrageurs.

If Juana contracts to buy U.S. office equipment in U.S. dollars and her domestic currency depreciates against the U.S. dollar between the time the con...

she will wind up paying less for the equipment because she stayed in the spot market.
the amount she pays for the equipment will be unchanged because she stayed in the spot market.
she will wind up paying more for the equipment because she stayed in the spot market.
the price in the contract will be amended higher.

If the Costa Rican colÃ³n is expected to depreciate in the future,

it will temporarily appreciate as people move to take advantage based on this expectation.
exchange rate speculators will purchase more cÃ³lones now.
exchange rate speculators will wait and see what the future exchange rate becomes.
exchange rate speculators will sell their cÃ³lones now.

The use of forward contracts and options to reduce the exchange rate risk on future foreign exchange transactions is

arbitrage
speculation
hedging
devaluation

Suppose that the U.S. Open ticket costs $100 and the British Open ticket costs Â£50 and the exchange rate is $1.43. How much does the British Open t...

$71.50
$143.00
$34.96
$69.93

All else equal and given the current system of exchange rates, if the United States enters a period of exceptionally strong growth,

the pressure on the dollar is to revalue.
the pressure on the dollar is to devalue.
the pressure on the dollar is to depreciate.
the pressure on the dollar is to appreciate.

All else equal, if Canada raises its interest rates,

the dollar depreciates.
the U.S. demand for Canadian dollars decreases.
the Canadian supply of Canadian dollars increases.
the Canadian dollar will depreciate.

An American firm that buys foreign exchange because its managers expect the dollar to depreciate is

increasing the supply of foreign exchange.
decreasing the demand for foreign exchange.
speculating
hedging

Which of the following is a FALSE statement concerning purchasing power parity?

Purchasing power parity states that dollars will tend to exchange for pounds at a rate that maintains a constant purchasing power of a given quantity of a currency.
It is rare to see deviations from the purchasing power parity value of currencies.
Over the long run, purchasing power parity exerts influence over exchange rates.
An overvalued dollar buys more in Britain than it does in the United States.

An increase in the U.S. demand for the Mexican peso causes all of the following EXCEPT

an increase in the U.S. dollar price of a Mexican peso.
the Mexican peso to appreciate.
the U.S. dollar to depreciate.
Mexican goods to be cheaper.

Categories

International Economics MCQs