Week 9: Open economy Balance of Payments (MCQs)

The balance of payments is an accounting identity, which says that capital _______ from one country must equal capital ________ to another country.

a. depreciation; appreciation

b. investments; investments

c. outflows; inflows

d. assets; liabilities

c. outflows; inflows

Which of the following is something a country does with the pound they get from selling products to the UK:

a. buy UK gilts (i.e. British government bonds)

b. invest in UK companies

c. buy UK goods and services

d. all of the above

d. all of the above

The current account balance is a measure that includes:

a. the trade balance

b. other financial transactions between a country and the rest of the world

c. both

c. both

A trade deficit means that, as a country, we __________ more than we ___________.

a. produce; consume

b. import; export

c. export; import

d. contract; expand

b. import; export

A trade deficit implies that there exists a corresponding __________________.

a. import deficit

b. export surplus

c. capital + financial accounts deficit

d. capital + financial accounts surplus

d. capital + financial accounts surplus

Explanation: When a country has a trade deficit, it means that it is importing more goods and services than it is exporting. To finance this deficit, the country typically needs to attract capital from abroad, leading to a surplus in the capital and financial accounts.

Extra challenge:

One problem with running consistent trade deficits is that low domestic savings rates could lead to _____________________ in the long run.

a. monetary deflation

b. increased unemployment

c. erosion of domestic assets

d. over accumulation of domestic assets

c. erosion of domestic assets

Explanation: Consistent trade deficits mean the country is borrowing from abroad to finance its excess of imports over exports. If domestic savings rates are low, the country may increasingly rely on foreign investment, potentially leading to the sale of domestic assets to foreign investors over time.