Multiple Choice Tutorial

Chapter 20
International Finance

1. The exchange rate is the

a. total yearly amount of money changed from
one countrys currency to another countrys
currency
b. total monetary value of exports minus
imports
c. amount of countrys currency which can
exchanged for one ounce of gold
d. price of one countrys currency in terms of
another countrys currency

D. If one American dollar is worth two French

francs, the exchange rate is two to one.
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2. The balance of payments summarizes the

transactions that occur during a given time
period between
a. the government of one country and the
government of another country
b. the national government and local
governments in the same country
c. individuals, firms, and government of one
country and individuals, firms, and
governments throughout the rest of the
world
C. The balance of payments is the measure of
all money coming into a country as compared
to the total flow of money out of the country.
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3. Which of the following is not included in the

balance of payments?
a. final consumer goods exported to another
country.
b. tourism on the part of people from other
countries.
c. financial transactions such as U.S. firms
purchasing foreign assets to achieve a higher
rate of return.
d. increased money supply by the Federal
Reserve in the United States.
D. The balance of payments involves the flow
of money in and out of the country. The Fed
increasing the money supply has nothing to
do with international trade.
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4. The balance of payments is a

a. flow variable measuring only transactions
which involve payments of money
b. flow variable measuring all economic
transactions, even if no exchange of money
occurs
c. flow variable which is in equilibrium only
when exports equal imports
B. The balance of payments measures all
money flows, not just those dealing with
imports and exports. If the total amount of
dollar transactions was equal in terms of a
countrys debits and credits, no money need
change hands.
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5. The value of a countrys exports is listed in

its balance of payments account as a(an)
a. credit
b. debit
c. payment
d. investment

A. An export is considered a credit because

exported goods and services bring money
into a country.

6. The merchandise trade balance

a. reflects trade in intangibles such as
insurance and tourism
b. includes personal gifts to friends abroad
c. records the flow of financial assets such as
stocks and bonds
d. equals the value of tangible products
exported minus the value of tangible
products imported

D. Whereas the balance of trade involves the

flow of money in and out of a country via
trade, the merchandise trade balance
measures the actual products imported
and exported.
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7. In the balance of payments, services

a. are not counted
b. include only tangible products
c. are always included as a credit
d. include income earned from foreign
investments

D. The income earned on foreign investments

do not represent the exchange of a tangible
product, therefore, it is considered a service.
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8. Net exports refers to

a. total exports minus total imports
b. total imports minus total exports
c. exports of merchandise minus imports of
merchandise
d. total exports of capital minus depreciation

A. Exports and imports measure goods and

services, not just goods. If exports are greater
than imports, a country has positive net
exports. More money is entering a country
than leaving a country via trade.
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9. Which of the following is not considered a

unilateral transfer?
a. foreign aid from one government to
another
b. income earned from foreign investments
c. personal gifts to friends in foreign countries
d. donations to foreign countries from nongovernment domestic charities

B. A unilateral transfer occurs when there is an

actual exchange of a good or service between
two countries. This is not happening when
income is made from a foreign investment.
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10. United States net unilateral transfers have

been
a. positive every year since 1950
b. negative every year since 1950
c. positive every year since 1950 except 1991,
during the Persian Gulf War
d. negative every year since 1950 except 1991,
during the Persian Gulf War

D. Unilateral trade transfers involves the gifts

and grants received from abroad by residents
of a country minus the unilateral trade
transfers residents send abroad.
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11. When net unilateral transfers are added to

the net exports of goods and services, the
result is called the
a. merchandise trade balance
b. official reserve transactions account
c. balance of payments
d. balance on current account

D. Exports and imports involves the

exchanging of money for goods and services.
A unilateral trade transfer does not involve
money, the goods are simply given to without
receiving money in turn. Both together are
called the balance on current account.
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12. The capital account records international

transaction involving
a. all of the following
b. intangible commodities like transportation
and tourism
c. the flow of financial assets such as
borrowing or lending
d. unilateral transfers

C. Financial capital is the money used to

purchase capital, (buildings, machines and
tools). Because all money invested in capital
has to come from savings, capital accounts
refer to financial assets.
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13. In the balance of payments, a net inflow of

capital shows up as a
a. surplus in the capital account
b. deficit in the capital account
c. surplus in the current account
d. deficit in the current account

A. Capital in this sense means financial capital.

When more money enters a country then
leaves the country, there is a surplus in the
capital account.
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14. The worlds largest net debtor nation is

a. Russia
b. China
c. Brazil
d. The United States
D. The United States used to be the worlds
largest creditor nation, that is, foreigners
owed us more then we owed them. However,
in recent years we have become the worlds
largest debtor nation, which means that
overall, we owe foreigners more than they
owe us. This is due to a large increase in our
national debt, of which about 17% is owned
by foreigners.
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15. The net amount of gold, major currencies, and

SDRs (Special Drawing Rights) that shift among
central banks to settle international
transactions is known as the
a. net foreign investment
b. capital account balance
c. currency appreciation
d. official reserve transactions account
D. The IMF (International Monetary Fund)
now issues paper substitutes for gold called
Special Drawing Rights (SDRs) which
function as international reserves. The value
of a unit of SDR is a weighed average of the
values of the major national currencies.
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16. The statistical discrepancy

a. is always positive
b. is always negative
c. must be reduced to zero and eliminated
from the balance of payments before the
records become official
d. is a residual factor which indicates the net
error in the balance of payments data
D. Regardless of how sophisticated we become
in doing statistical analysis, there will always
be errors made. Therefore, it is necessary to
factor into the equation an estimate of that
perceived error.
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17. If a country runs a deficit in its current

account, it is because
a. exports exceed imports
b. imports exceed exports
c. net unilateral transfers are negative
d. foreign currency received from exports
and transfers is less than the foreign
exchange needed to pay for imports and to
make unilateral transfers
D. Current account includes all transactions in
currently produced goods and services plus
net unilateral transfers. It can be negative,
reflecting a current account deficit; positive,
reflecting a current account surplus; or zero.
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18. Exchange rates

a. are always fixed
b. fluctuate to equate the quantity of foreign
exchange demanded with the quantity
supplied
c. fluctuate to equate imports and exports
d. fluctuate to equate rates of interest in
various countries
B. The value of a major countrys currency is
determined by the supply and demand of
that currency on the world market. If the
demand is greater than the quantity supplied,
the value will increase; if the demand is less
than the quantity supplied, the value of the
currency will decline on the world market. 19

19. If the U.S. dollar appreciates relative to the

British pound,
a. it will take fewer dollars to purchase a
pound
b. it will take more dollars to purchase a
pound
c. it is called a weakening of the dollar
A. The term appreciate means that something
becomes more valuable; the term depreciate,
means something is worth less than
previously. If the dollar becomes more
valuable in relation to the British pound, it
will take fewer dollars when exchanging
these two currencies.
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20. If the U.S. dollar depreciated relative to the

British pound,
a. British products are cheaper to import to
the U.S.
b. British products are more expensive to
import to the U.S.
c. the price of imported British products does
not change
B. If it takes more dollars to exchange for British
pounds than used to be the case, British
products will become more expensive to
Americans because when exchanging dollars for
pounds, fewer dollars will be received. This is
because a countrys products can only be
bought with that countrys currency.
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21. Which of the following is a reason that

residents of other countries desire to acquire
dollars?
a. foreigners need dollars to purchase U.S.
goods and services
b. dollars can be used as a safe way of storing
value when the foreigners own currency is
unstable
c. dollars are often accepted as an
international medium of exchange
d. all of the above
D. Dollars are needed to buy goods and
services in America, the dollar is more stable
than most currencies, and the dollar is a
standard currency for international trade.22

22. Assume the United States has only one

trading partner. The U.S. demand curve for
foreign currency is drawn while holding
constant all of the following factors except
a. incomes of U.S. consumers
b. the exchange rate
c. the expected rate of inflation in the U.S.
d. the foreign prices of foreign goods

B. A countys exchange rate is the price of one

countrys currency measured in terms of
another countrys currency. If it takes six
French francs to equal one American dollar,
then the exchange rate between the two
currencies is one to six.
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23. Other things constant, as the dollar-perpound exchange rate increases,

a. the price of U.S. bonds increases in Britain
b. it takes fewer dollars to purchase one
pound
c. the amount of U.S. bonds demanded by
those in Great Britain increases
C. Pound is the name of the British currency
just as dollar is the name of the U.S.
currency. When the value of the pound
increases in relation to the value of the dollar,
American goods and services become less
expensive to the British. One example of a
good becoming less expensive is the price of
an American bond bought by a Brit.
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24. An increase in U.S. income which increases

American demand for all normal goods
(including imports from Britain) will shift
a. the U.S. demand curve for foreign
exchange to the right, causing an increase in
the dollar-per-pound exchange rate
b. the U.S. demand curve for foreign
exchange to the left, causing a decrease in
the dollar-per-pound exchange rate
c. the U.S. supply curve for foreign exchange
to the right, causing a decrease in the dollarper-pound exchange rate
A. In order to buy more goods from Britain,
Americans must exchange their dollars for
British pounds. As the demand for pounds 25
increases, its value increases.

25. The U.S. dollar will appreciate when

a. there is a decrease in the U.S. quantity
demanded of foreign exchange
b. there is a decrease in the U.S. quantity
supplied of foreign exchange
c. the U.S. central bank sells dollars to
purchase foreign currency

A. The value of the American dollar on the world

market is determined by the same demand and
supply forces that determine the value of
anything in the market. In a free market, a
lower quantity of a product translates into a
higher price for that product.
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26. An arbitrageur in foreign exchange is a

person who
a. earns illegal profit by manipulating foreign
exchange
b. causes differences in exchange rates in
different geographic markets
c. simultaneously buys large amounts of a
currency in one market and sell it in another
market
C. If you buy one currency with another currency
and the value of the currency you bought
increases relative to the one you sold, the
difference is a net gain for you. If you do this
professionally, you are called an arbitrageur.
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27. A speculator in foreign exchange is a

person who
a. buys foreign currency, hoping to profit by
selling it a a higher exchange rate at some
later date
b. earns illegal profit by manipulation
foreign exchange
c. causes differences in exchange rates in
different geographic markets
A. If a person buys a French franc with
American dollars, for example, and then
buys American dollars with the French
francs at a time when the value of the Franc
has increased in relation to the dollar, the
person profits from the change in currency28

28. The Purchasing Power Parity (PPP) theory is

a good predictor of
a. all of the following:
b. the long-run tendencies between changes in
the price level and the exchange rate of two
countries
c. interest rate differentials between two
countries when there are strong barriers
preventing trade between the two countries
B. The purchasing power parity theory
recognizes that exchange rates between two
countries will adjust in the long run to reflect
price level differences between two countries.
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29. According to the Purchasing Power Parity

(PPP) theory,
a. Exchange rates between two national
currencies will adjust daily to reflect price
level differences in the two countries
b. In the long run, inflation rates in different
countries will equalize around the world
c. In the long run, the exchange rates between
two national currencies will reflect pricelevel differences in the two countries
C. If inflation in France is more than the
inflation rate in the U.S., then the value of the
French franc will decline in relation to the
value of the dollar on the international
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market.

30. According to many studies of internationally

traded goods, the U.S. dollar is often
a. undervalued relative to the currencies of
Canada and Mexico, and overvalued
compared to the yen and the mark
b. overvalued relative to the currencies of
Canada and Mexico, and undervalued
compared to the yen and the mark
c. overvalued relative to all other currencies
B. The dollar may be undervalued in relation
to the yen, the franc, and the mark, and the
pound, but many other currencies are
undervalued relative to the dollar, such as
currencies from Australia, Canada, Mexico,
and most of the emerging-market and
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developing economies.

31. A floating exchange rate

a. is determined by the national governments
involved
b. remains extremely stable over long periods of
time
c. is determined by the actions of central banks
d. is allowed to vary according to market forces.

D. The word float means that a countrys

currency is allowed to fluctuate according to
market forces. This is compared to a fixed
exchange rate; the situation where the
government will try to determine the value of
its currency.
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32. A fixed exchange rate is enforced by

a. national governments, who establish
appropriate trade barriers for each country
with whom they trade
b. national governments, who manipulate
gold reserves appropriately
c. central banks, who buy and sell appropriate
currencies
C. A countrys central bank can increase the
value of its currency on the world market by
buying the currency, it can decrease the value
on the world market by selling the currency.
Buying and selling involves exchanging one
currency for the other.
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33. Devaluation of a domestic currency

a. is also called revaluation
b. refers to an increase in the floating
exchange rate
c. refers to an decrease in the floating
exchange rate
d. refers to an increase in the fixed exchange
rate
D. When there is an increase in the exchange
rate of a countrys currency it means that
more of that countrys currency is needed
when exchanging for another countrys
currency. A country cannot devalue its
currency if it is a floating currency.
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34. The international financial system

operated under a gold standard
a. from the 1500s through the present
b. from 1879 through the present
c. from 1879 to 1914
d. from 1914 to 1939
C. The gold standard is an arrangement
whereby the currencies of most countries are
convertible into gold at a fixed rate. For
example, the U.S. dollar could be redeemed
at the U.S. Treasury for one-twentieth of an
ounce of gold. The British pound could be
redeemed at the British treasury for onefourth of an ounce of gold. Therefore, one
pound exchanged for five dollars.
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35. Under a gold standard,

a. a nations currency can be traded for gold
at a fixed rate
b. a nations central bank or monetary
authority has absolute control over its
money supply
c. new discoveries of gold have no effect on
money supply or prices

A. The idea was that if each country knew

what its currency was worth in relation to
gold, then each country would know what its
currency was worth to one another. In turn,
this would facilitate international trade.
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36. The Bretton Woods accord

a. of 1879 created the gold standard as the
basis of international finance
b. of 1914 formulated a new international
monetary system after the collapse of the
gold standard
c. of 1944 formulated a new international
monetary system after the collapse of the
gold standard
C. The new international monetary system was
the where all exchange rates were fixed in
relation to the American dollar. The U.S. stood
ready to convert foreign holding of dollars into
gold at a fixed rate of $35 an ounce.
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37. The current system of international finance

is a
a. gold standard
b. fixed exchange rate system
c. floating exchange rate system
d. managed float exchange rate system

D. The value on the international market of

major currencies are basically determined by
market forces. However, there are things a
country can do to influence the demand or
supply of the currency, thus influencing the
value of the currency on the world market.
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END
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