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Exam 3: The Balance of Payments

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Question 31

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Which of the following would NOT be considered a typical BOP transaction?

A) Toyota U.S.A. is a U.S. distributor of automobiles manufactured in Japan by its parent company.
B) The U.S. subsidiary of European financial giant, Credit Suisse, pays dividends to its parent in Zurich.
C) A U.S. tourist purchases gifts at a museum in London.
D) All are examples of BOP transactions.

E) B) and C)
F) A) and D)

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Question 32

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Consider the following: A foreign automobile company builds a manufacturing plant in Tennessee and European investors buy U.S. Treasury Bonds.

A) Both activities would be considered direct investment.
B) Both activities would be considered portfolio investment.
C) The auto manufacturer in engaging in portfolio investment, and the European investors are engaged in direct investing.
D) The auto manufacturer in engaging in direct investment, and the European investors are engaged in portfolio investing.

E) A) and B)
F) A) and C)

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Question 33

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The two major concerns about foreign direct investment are:

Very often governments seek to alter the market's valuation of their currency by influencing relative interest rates, thus influencing the economic fundamentals of exchange rate determination rather than through direct intervention in the foreign exchange markets. Describe how this strategy works. Describe the case of the U.S. or China where the opposite effect, to the suggest here, have occurred.

Under a fixed exchange rate system, the government bears the responsibility to ensure that the BOP is near zero. If the sum of the current and capital accounts do not approximate zero, the government is expected to intervene in the foreign exchange market by buying or selling official foreign exchange reserves. If the sum of the first two accounts is LESS THAN ZERO, a ________ demand for the domestic currency exists in the world. To preserve the fixed exchange rate, the government must then intervene in the foreign exchange market and ________ domestic currency for foreign currencies or gold so as to bring the BOP back near zero.

The ________ of the balance of payments measures all international economic transactions of financial assets.

Portfolio investment is capital invested in activities that are ________ rather than made for ________.

Significant amounts of United States Treasury issues are purchased by foreign investors; therefore, the U.S. must earn foreign currency to repay this debt.

Which of the following international transactions would NOT be counted as a balance of payments (BOP) transaction?

In the United States and most developed countries, the current account and the combined financial/capital accounts tend to be inversely related in that when one is positive, the other tends to be negative.

Which of the following is NOT a major subaccount of the Balance of Payments?

Expenditures by U.S. tourists in foreign countries for foreign goods or services are factored into BOP calculations.

The transition to floating exchange rate regimes in the 1970s (described in Chapter .3) changed the focus from the total BOP to its various subaccount like the current and financial account balances.

Which of the following is NOT a part of the Current Account of BOP?

China is currently experiencing a surplus in its current account and its capital/financial accounts. Which of the following is NOT a contributing factor for this unusual situation?

Under an international regime of fixed exchange rates, countries with a BOP ________ should consider ________ their currency while countries with a BOP ________ should consider ________ their currency.

Changes in the BOP may predict the imposition or removal of foreign exchange controls.

The largest single component of the United States current account is:

Anaconda Copper Inc. created a subsidiary in Chile last year to mine copper ore. The proportion of net income paid back to the parent company as a dividend would be recorded in the current account subcategory of:

The balance of payments as applied to a course in international finance may be defined as: