QUESTION 1

The U.S. has had a deficit on the current account for nearly 37 years and this has transformed the U.S. from a net creditor nation to an international net debtor nation. What conclusions or assessments have been drawn about this trend and its economic consequences?

International trade economists on the whole are not necessarily alarmed by this trend, but increasingly some economists appear worried about the likelihood of negative consequences.

There is no doubt that the U.S. has suffered measurable negative effects.

A positive aspect is that U.S. exceptionalism appears to be at work since the income received on U.S. assets abroad exceeds the income the U.S. pays on its liabilities to foreigners.

All of the above.

Only a and c.

QUESTION 2

Indicate if you agree or disagree with the following statement and why:

“For a country that has a surplus in its current account (like China) and wants to reduce this surplus, one way to do so would be to encourage its people to save more and spend less.”

Agree; a shift to more saving would decrease the surplus.

Agree; a shift to more saving would increase the surplus.

Disagree; a shift to more saving would decrease the surplus.

Disagree; a shift to more saving would increase the surplus.

None of the above.

QUESTION 3

Suppose that Haiti received $300 million in clothing, tents and medicines from country X following the devastating 2010 earthquake. Which below correctly shows how this transaction would have been reflected Haiti’s balance of payments account?

Xg = +$300 million; FA = -$300 million.

Mg = -$300 million; FA = +$300 million.

Mg = -$300 million; NUT = +$300 million.

Xg = +$300 million; NUT = -$300 million.

Mg= +$300 million; Statistical discrepancy = -$300 million.

QUESTION 4

The current account balance is equal to which of the following?

The difference between domestic product and domestic expenditure.

The difference between national saving and domestic investment.

Net foreign investment.

All of the above.

Only a and b.

QUESTION 5

Use the table on top to answer this question. The table represents the U.S. balance of
payments. U.S. citizen buys 6 shares of Land Rover stock for $500. Where and with what sign is the first part of this transaction recorded in the U.S. balance of payments?

Cell C, +$500

Cell C, -$500

Cell D, +$500

Cell D, -$500

Cell E, +$500

QUESTION 6

Use the table on top to answer this question. The table represents the U.S. balance of payments. Boeing exports several airplanes to Singapore Airlines for $400 million. Where and with what sign is the first part of this transaction recorded in the U.S. balance of payments?

Cell A, -$400 million

Cell A, +$400 million

Cell C, -$400 million

Cell C, +$400 million

Cell D, -$400 million

QUESTION 7

Use the table below to answer this question. The table represents the U.S. balance of payments. A U.S. citizen receives a $1,000 dividend check from Nissan of Japan. The U.S. citizen has held Nissan stock for years. Where and with what sign is the first part of this transaction recorded?

Cell B, +$1,000

Cell B, -$1,000

Cell C, +$1,000

Cell C, -$1,000

Cell D, -$1,000

QUESTION 8

Which diagram in Figure 1 depicts a nation that borrowed prudently on international capital markets and the return on its investment is more than sufficient to service the foreign debt.

Diagram A

Diagram B

Diagram C

Diagram D

None of the above.

QUESTION 9

Suppose a nation’s current account balance is in surplus and its financial account is deficit. This is interpretted as

a real capital inflow and a financial capital inflow

a real capital outflow and a financial capital inflow

a real capital inflow and a financial capital ouflow

a real capital outflow and a financial capital outflow

All of the above.

QUESTION 10

A CFO in New York is trying to decide whether to place funds in a CD in a French bank or a CD in an American bank. The funds won’t be needed by the company for 180 days, but the CFO does not want to incur any risk. The CFO checks the internet and finds the following information: current spot exchange rate is $1.00/euro; 180-day forward rate is $1.20/euro; the interest rate on 180-day euro-denominated CD at Société Générale is 6%; and, the interest rate on 180-day U.S. dollar-denominated CD at Chase is 20%.

She should place the funds in the U.S. bank’s CD since the interest rate is 20% versus 6%.

She should place the funds in the French bank’s CD, but wait until the CD matures to convert the euros back into dollars at the spot exchange rate.

She should place the funds in the French bank’s CD, but also at the same time sell the euro proceeds and principal in the forward market.

She should place the funds in the U.S. stock market since expected returns are always higher.

She should place the funds in the French stock market.

QUESTION 11

Based on the information listed below, one can conclude that uncovered interest rate parity holds. Data: current spot exchange rate is $1.00/euro; the spot exchange rate expected in 180 days is $1.05/euro; the interest rate on 180-day euro-denominated CD at SociétéGénérale is 2%; and, the interest rate on 180-day U.S. dollar-denominated CD at Chase is 7%. (Use the approximation formula.)

True

False

QUESTION 12

When tested empirically, which parity condition holds nearly perfectly?

Uncovered interest rate parity.

Covered interest rate parity.

Absolute purchasing power parity.

All of the above.

Only b and c.