Section A (Multiple Choice Questions) : Ractice Ectures

International Finance University of Surrey 2021/22
PRACTICE
LECTURES 1 & 2
Lecture 1
Section A [Multiple Choice Questions]
1. The sum of all of the debit items in the balance of payments:

a. equals the overall balance.
b. equals the sum of all credit items.
c. equals ‘compensating’ transactions.
d. equals the errors and omissions.
2. An increase in a nation’s financial liabilities to foreign residents is a:

a. reserve inflow.
b. reserve outflow.
c. capital imports.
d. capital exports.
3. In a country’s balance of payments, which of the following items will be recorded as a debit
entry?
a. Domestic bank balances owned by foreigners are reduced
b. Foreign bank balances owned by domestic residents are reduced
c. Assets owned by domestic residents are sold to nonresidents
d. Securities are sold by domestic residents to nonresidents
4. Which of the following transactions is recorded in the financial account?

a. Ford Motor Company of the United States provides part of the financing for a new
automobile factory in China.
b. A Chinese businessman imports Ford automobiles from the United States.
c. A U.S. tourist spends money on a trip to China.
d. The New York Yankees are paid $10 million by the Chinese to play an exhibition
game in Beijing, China.
5. A nation is called a creditor if:

a. it provided financial assets to other countries.
b. its net stock of foreign assets is positive.
c. its current account is in surplus during a time period.
d. its current account is in deficit during a time period.
Section B [True or False?]
6. Capital inflows are debits and capital outflows are credits. [T/F]
7. A country’s nonofficial financial account balance equals its net foreign investment. [T/F]
8. The current account balance is equal to the difference between domestic product and
national expenditure. [T/F]
Section C [Open-ended question]
Explain the three different viewpoints (meanings) of the current account balance. Discuss the
macroeconomic interpretations of a current account deficit.
Lecture 2
Section A [Multiple Choice Questions]
1. A country’s demand for foreign currency is derived from:

a. international transactions entering the debit side of its balance of payments accounts.
b. international transactions entering the credit column of its balance of payments accounts.
c. the government’s attempt to revalue domestic currency.
d. an increase in foreign capital inflows in the domestic country.
2. A decrease in German residents’ willingness to invest in dollar-denominated assets will shift

the demand curve for:
a. Euros to the right.
b. Euros to the left.
c. Dollars to the right.
d. Dollars to the left.
3. As the value of the yen falls relative to the U.S. dollar in the foreign exchange market:
a. Japanese goods become more expensive to the U.S. consumers.
b. the supply of dollars will fall.
c. the demand for Japanese goods will increase in the U.S. market.
d. U.S. goods become less expensive to Japanese consumers.
The figure given above illustrates the market for British pounds. D £ and S£ are the demand and
supply curves of the British pounds respectively.
4. In the figure above, if the British government wants to peg the dollar per pound exchange
rate at $2.50 per pound, what action would British monetary authorities have to undertake?
a. Sell 1 million pounds and buy 2.5 million dollars
b. Buy 1 million pounds and sell 1 million dollars
c. Buy 1 million pounds and sell 2.5 million dollars
d. Buy 6 million pounds and sell 12 million dollars
5. Which of the following groups is most likely to benefit from a strengthening of the U.S.
dollar against other major currencies?
a. U.S. exporters
b. The U.S. government
c. U.S. consumers
d. Foreign consumers
Section B [True or False?]
6. French imports of goods and services will create a demand for foreign currency and a supply
of euros. [T/F]
7. In the floating exchange-rate system, government officials must intervene in the foreign
exchange market to keep the exchange rate from fluctuating. [T/F]
8. Triangular arbitrage does not cause the cross rate between two foreign currencies to be
consistent with the dollar exchange rates of these two currencies. [T/F]
Section C [Open-ended question]
Suppose $1 = 0.85 euros in New York, 1 euro = 150 yen in Paris, and 1 yen = $0.008 in Tokyo.
a. If you begin by holding $1, how could you profit from these exchange rates? What is
your arbitrage profit per dollar initially traded?
b. Identify the forces at work that will make the exchange rates consistent with each other
in this situation. That is, what forces will lead to a situation in which no profitable
arbitrage is possible?

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International Finance University of Surrey 2021/22

1. The sum of all of the debit items in the balance of payments:

2. An increase in a nation’s financial liabilities to foreign residents is a:

4. Which of the following transactions is recorded in the financial account?

5. A nation is called a creditor if:

Section B [True or False?]

Section C [Open-ended question]

1. A country’s demand for foreign currency is derived from:

2. A decrease in German residents’ willingness to invest in dollar-denominated assets will shift

Section B [True or False?]

Section C [Open-ended question]

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