International Financial Management Terms & Definitions - Chapter 3

The current account balance, which is the difference between a country's exports and imports, is a component of the country's GNP. Other components of GNP include

consumption and investment and government expenditure.

consumption and government expenditure and net exports.

consumption and net exports and government expenditure.

consumption less imports.

consumption and investment and government expenditure.

If a country is grappling with a major balance-of-payment difficulty, it may not be able to expand imports from the outside world. Instead, the country may be tempted to

impose measures to restrict imports but encourage capital outflows.

impose measures to discourage capital outflows but encourage imports.

impose measures to restrict imports and discourage capital outflows.

none of the options

impose measures to restrict imports and discourage capital outflows.

Generally speaking, any transaction that results in a receipt from foreigners

will be recorded as a debit, with a negative sign, in the U.S. balance of payments.

will be recorded as a debit, with a positive sign, in the U.S. balance of payments.

will be recorded as a credit, with a negative sign, in the U.S. balance of payments.

will be recorded as a credit, with a positive sign, in the U.S. balance of payments.

will be recorded as a credit, with a positive sign, in the U.S. balance of payments.

Generally speaking, any transaction that results in a payment to foreigners

will be recorded as a debit, with a negative sign, in the U.S. balance of payments.

will be recorded as a debit, with a positive sign, in the U.S. balance of payments.

will be recorded as a credit, with a negative sign, in the U.S. balance of payments.

will be recorded as a credit, with a positive sign, in the U.S. balance of payments.

will be recorded as a debit, with a negative sign, in the U.S. balance of payments.

The balance of payments records

only international trade, (exports and imports).

only cross-border investments (FDI and portfolio investment).

international trade, (exports and imports) and cross-border investments.

none of the options

international trade, (exports and imports) and cross-border investments.

Credit entries in the U.S. balance of payments

result from foreign sales of U.S. goods and services, but not goodwill, financial claims, and real assets.

give rise to the demand for dollars.

give rise to the supply of dollars.

result from foreign sales of U.S. goods and services, goodwill, financial claims, and real assets, and give rise to the demand for dollars.

result from foreign sales of U.S. goods and services, goodwill, financial claims, and real assets, and give rise to the demand for dollars.

A country experiencing a significant balance-of-payments surplus would be likely to

expand imports, offering marketing opportunities for domestic enterprises.

encourage foreign exchange liberalization.

expand exports, offering international marketing opportunities for domestic enterprises.

expand imports, offering marketing opportunities for foreign enterprises, and encourage imposing foreign exchange restrictions.

expand imports, offering marketing opportunities for foreign enterprises, and encourage imposing foreign exchange restrictions.

Suppose the McDonalds Corporation imports Canadian beef, paying for it by transferring the funds to a New York bank account kept by the Canadian beef producer.

Payment by McDonalds will be recorded as a debit.

The deposit of the funds by the seller will be recorded as a debit.

Payment by McDonalds will be recorded as a credit.

The deposit of the funds by the buyer will be credit.

Payment by McDonalds will be recorded as a debit.

Since the balance of payments is presented as a system of double-entry bookkeeping,

every credit in the account is balanced by a double-matching debit.

every debit in the account is balanced by a double-matching credit.

every credit in the account is balanced by a matching debit and every debit in the account is balanced by a matching credit.

none of the options

every credit in the account is balanced by a matching debit and every debit in the account is balanced by a matching credit.

Suppose the InBev Corporation (a non-U.S. MNC) buys the Anheuser-Busch Corporation, paying the U.S. shareholders cash.

Payment by InBev will be recorded as a debit.

The deposit of the funds by the sellers will be recorded as a debit.

Payment by InBev will be recorded as a credit.

The deposit of the funds by the buyer will be credit.

Payment by InBev will be recorded as a credit.

The current account includes

the export and import of goods and services.

all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses.

all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs).

capital transfers and the cross-border acquisition and disposal of nonproduced non¬financial assets such as natural resources and marketing assets

the export and import of goods and services.

A country with a current account surplus

acquires IOUs from foreigners, thereby increasing its net foreign wealth.

must borrow from foreigners or draw down on its previously accumulated foreign wealth.

will experience a reduction in the country's net foreign wealth.

must borrow from foreigners or draw down on its previously accumulated foreign wealth and will experience a reduction in the country's net foreign wealth.

acquires IOUs from foreigners, thereby increasing its net foreign wealth.

The capital account includes

the export and import of goods and services.

capital transfers and acquisitions and disposals of non-produced, nonfinancial assets between U.S. residents and foreigners.

all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs).

goods trade, services, primary income, and secondary income

capital transfers and acquisitions and disposals of non-produced, nonfinancial assets between U.S. residents and foreigners.

The official reserve account includes

the export and import of goods and services.

all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses.

all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs).

capital transfers and the cross-border acquisition and disposal of nonproduced non¬financial assets such as natural resources and marketing assets

all purchases and sales of international reserve assets such as dollars, foreign exchanges, gold, and special drawing rights (SDRs).

A country's international transactions can be grouped into the following three main types:

current account, medium term account, and long term capital account.

current account, long term capital account, and official reserve account.

current account, capital account, financial account and official reserve account.

capital account, official reserve account, trade account.

current account, capital account, financial account and official reserve account.

Invisible trade refers to

services that avoid tax payments.

the underground economy.

trades in legal, consulting, and engineering services.

the export and import of tangible goods.

trades in legal, consulting, and engineering services.

A country that gives foreign aid to another country can be viewed as

importing goodwill from the latter.

exporting goodwill to the latter.

importing services to the latter.

exporting services to the latter.

importing goodwill from the latter.

In 2012, the United States had a current account deficit. The current account deficit implies that the United States

had a surplus on legal consulting and engineering services.

produced more output than it consumed.

consumed more output than it produced.

had a financial account surplus

consumed more output than it produced.

The current account is divided into four finer categories:

goods trade, services, primary income, and statistical discrepancy.

goods trade, services, primary income, and secondary income

goods trade, services, foreign direct investment, and portfolio investment.

goods trade, services, factor income, and direct investment.

goods trade, services, primary income, and secondary income

Primary income

consists largely of payments and receipts of interest, dividends, and other income on foreign investments.

involve "unrequited payments" such as foreign aid and gifts.

do not generally involve commercial entities.

includes payments and receipts for legal, consulting, financial and engineering services.

consists largely of payments and receipts of interest, dividends, and other income on foreign investments.

The "J-curve effect" shows

the initial deterioration and the eventual improvement of a country's trade balance following a currency depreciation.

the initial improvement and the eventual depreciation of a country's trade balance following a currency depreciation.

the trade balance's lack of responsiveness to the exchanges rate changes.

none of the options

the initial deterioration and the eventual improvement of a country's trade balance following a currency depreciation.

A currency depreciation will begin to improve the trade balance immediately

if the demand for imports and exports are inelastic.

if the demand for imports and exports are elastic.

if imports decrease and exports decrease.

if imports and exports increase

if the demand for imports and exports are elastic.

When a country's currency depreciates against the currencies of major trading partners,

the country's exports tend to rise and imports fall.

the country's exports tend to fall and imports rise.

the country's exports tend to rise and imports rise.

the country's exports tend to fall and imports fall.

the country's exports tend to rise and imports fall.

A depreciation will begin to improve the trade balance immediately if

imports and exports are responsive to the exchange rate changes.

imports and exports are inelastic to the exchange rate changes.

consumers exhibit brand loyalty and price inelasticity.

imports and exports are inelastic to the exchange rate changes and consumers exhibit brand loyalty and price inelasticity.

imports and exports are responsive to the exchange rate changes.

In the short run, a currency depreciation can make a trade balance worse if

there is no domestic producer of an import.

there is no domestic buyer for an import.

there is no export market for a country's output.

none of the options

there is no domestic producer of an import.

In the long run, both exports and imports tend to be

unresponsive to changes in exchange rates.

responsive to changes in exchange rates.

negative influences on the trade balance.

of no influence to the trade balance.

responsive to changes in exchange rates.

The difference between Foreign Direct Investment and Portfolio Investment is that

Portfolio Investment mostly represents the sale and purchase of foreign financial assets such as stocks and bonds that do not involve a transfer of control.

Foreign Direct Investment mostly represents the sale and purchase of foreign financial assets such as stocks whereas Portfolio Investment mostly involves the sales and purchase of foreign bonds.

Portfolio Investment takes place as firms attempt to take advantage of various market imperfections.

all of the options

Portfolio Investment mostly represents the sale and purchase of foreign financial assets such as stocks and bonds that do not involve a transfer of control

International portfolio investments have boomed in recent years, as a result of

a depreciating U.S. dollar.

increased gasoline and other commodity prices.

the general relaxation of capital controls and regulation in many countries.

none of the options

the general relaxation of capital controls and regulation in many countries.

If the interest rate rises in the U.S. while other variables remain constant

capital inflows into the U.S. will increase.

capital inflows into the U.S. may not materialize.

capital will flow out of the U.S.

none of the options

capital inflows into the U.S. will increase.

The financial account measures

the sum of U.S. sales of assets to foreigners and U.S. purchases of foreign assets.

the difference between U.S. sales of assets to foreigners and U.S. purchases of foreign assets.

the difference between U.S. sales of manufactured goods to foreigners and U.S. purchases of foreign products.

none of the options

the difference between U.S. sales of assets to foreigners and U.S. purchases of foreign assets.

When Honda, a Japanese auto maker, built a factory in Ohio,

it was engaged in foreign direct investment.

it was engaged in portfolio investment.

it was engaged in a cross-border acquisition.

none of the options.

it was engaged in foreign direct investment.

Government controlled investment funds, known as sovereign wealth funds,

are playing a less-important role in international finance following the end of the fixed exchange rate era.

are mostly domiciled in Asian and Middle Eastern countries.

do not play a positive role in stabilizing the global banking system

none of the options

are mostly domiciled in Asian and Middle Eastern countries.

Foreign direct investment (FDI) occurs

when an investor acquires a measure of control of a foreign business.

when there is an acquisition, by a foreign entity in the U.S., of 10 percent or more of the voting shares of a business.

with sales and purchases of foreign stocks and bonds that do not involve a transfer of control.

when an investor acquires a measure of control of a foreign business, and when there is an acquisition, by a foreign entity in the U.S., of 10 percent or more of the voting shares of a business.

when an investor acquires a measure of control of a foreign business, and when there is an acquisition, by a foreign entity in the U.S., of 10 percent or more of the voting shares of a business.

The financial account may be divided into three categories—

cross-border mergers and acquisitions, portfolio investment, and other investment.

direct investment, portfolio investment, and cross-border mergers and acquisitions.

direct investment, mergers and acquisitions, and other investment.

direct investment, portfolio investment, and other investment.

direct investment, portfolio investment, and other investment.

When Nestlé, a Swiss firm, bought the American firm Carnation, it was engaged in foreign direct investment. If Nestlé had only bought a non-controlling number of shares of the firm,

Nestlé would have been engaged in portfolio investment.

Nestlé would have been engaged in a cross-border acquisition.

it would depend if they bought the shares from an American or a Canadian.

none of the options

Nestlé would have been engaged in portfolio investment.

Transactions in currency, bank deposits and so forth

tend to be insensitive to both changes in relative interest rates and the anticipated change in exchange rate.

tend to be sensitive to both changes in relative interest rates and the anticipated change in exchange rate.

tend to be sensitive to changes in relative interest rates but insensitive to the anticipated change in exchange rate.

tend to be insensitive to changes in relative interest rates but sensitive to the anticipated change in exchange rate.

tend to be sensitive to both changes in relative interest rates and the anticipated change in exchange rate.

Since security returns tend to have low correlations among countries,

investors can reduce risk more effectively if they diversify their portfolio holdings internationally rather than purely domestically.

investors who have a domestically diversified portfolio, with exposures across industry types will not gain much from diversifying abroad.

investors who diversify internationally will likely underperform investors who keep all their investments in one country.

none of the options

investors can reduce risk more effectively if they diversify their portfolio holdings internationally rather than purely domestically.

The world's largest debtor nation and creditor nation, respectively, are

Japan and the U.S.

The U.S. and Japan.

The U.S. and Canada.

Great Britain and Mexico.

The U.S. and Japan.

Which of the following is significant because it indicates a country's international payment gap that must be accommodated with a government's official reserve transactions?

The current account

The capital account

The statistical discrepancies

The official settlement balance

The official settlement balance

The United States is considered

a net creditor nation.

a net debtor nation.

neither a creditor nor debtor nation.

simultaneously a creditor and debtor nation.

a net debtor nation.

The central bank of the United States is

the New York Fed.

the Federal Reserve System.

the EXIM bank.

none of the options—the U.S. does not have a central bank.

the Federal Reserve System.

When a country must make a net payment to foreigners because of a balance-of-payments deficit, the central bank of the country

should do nothing.

can only run down its official reserve assets (e.g., gold, foreign exchanges, and SDRs).

can only borrow anew from foreign central banks.

can either run down its official reserve assets (e.g., gold, foreign exchanges, and SDRs) or borrow anew from foreign central banks.

can either run down its official reserve assets (e.g., gold, foreign exchanges, and SDRs) or borrow anew from foreign central banks.

Currently, international reserve assets are comprised of

gold, platinum, foreign exchanges, and special drawing rights (SDRs).

gold, foreign exchanges, special drawing rights (SDRs), and reserve positions in the International Monetary Fund (IMF).

gold, diamonds, foreign exchanges, and special drawing rights (SDRs).

reserve positions in the International Monetary Fund (IMF), only.

gold, foreign exchanges, special drawing rights (SDRs), and reserve positions in the International Monetary Fund (IMF).

International reserve assets include "foreign exchanges". These are

Special Drawing Rights (SDRs) at the IMF.

reserve positions in the International Monetary Fund (IMF).

foreign currencies held by a country's central bank.

none of the options

foreign currencies held by a country's central bank.

The most important international reserve asset, comprising 94 percent of the total reserve assets held by IMF member countries is

gold.

foreign exchanges.

special Drawing Rights (SDRs).

reserve positions in the International Monetary Fund (IMF).

foreign exchanges.

The vast majority of the foreign exchange reserves held by central banks are denominated in

local currencies.

U.S. dollars.

Japanese Yen.

Euro.

U.S. dollars.

Which of the following would not count as a foreign exchange reserve held by a central bank?

The local currency

U.S. dollar

Euro

None of the above

The local currency

When the balance-of-payments accounts are recorded correctly, the combined balance of the current account, the capital account, the financial account and the reserves account must be

equal in magnitude to the country's national debt.

zero.

equal in magnitude to the trade deficit or surplus.

none of the options

zero.

If the central banks of the world chose to diversify their foreign exchange reserves away from the dollar and into the euro,

this would have the result of a strengthening of the value of the dollar.

could further diminish the position of the U.S. dollar as the dominant reserve currency

this would not have much impact, as the information would be lost in the day-to-day volatility of exchange rates.

none of the options

could further diminish the position of the U.S. dollar as the dominant reserve currency

As of 2018, gold accounted for

90 percent of the total reserve assets held by IMF member countries.

70 percent of the total reserve assets held by IMF member countries.

approximately 50 percent of the total reserve assets held by IMF member countries.

less than one percent of the total reserve assets held by IMF member countries.

less than one percent of the total reserve assets held by IMF member countries.

The most dominant currency in the World's Foreign Exchange Reserves is:

U.S. dollar.

Euro.

Japanese Yen.

none of the options

U.S. dollar.

Suppose a country is currently experiencing a trade deficit. In the long run, this could be self-correcting if

the deficit exists because of the import demand for capital goods.

the deficit exists because of the import demand for consumption goods.

the deficit exists because foreigners want to buy the country's currency as an investment.

none of the options

the deficit exists because of the import demand for capital goods.

The financial account is divided into three subcategories: direct investment, portfolio investment, and other investment. Direct investment involves

acquisitions of controlling interests in foreign businesses.

investments in foreign stocks and bonds that do not involve acquisitions of control.

bank deposits, currency investment, trade credit, and the like.

all of the options

acquisitions of controlling interests in foreign businesses.

The financial account is divided into three subcategories: direct investment, portfolio investment, and other investment. Portfolio investment involves

acquisitions of controlling interests in foreign businesses.

investments in foreign stocks and bonds that do not involve acquisitions of control.

bank deposits, currency investment, trade credit, and the like.

all of the options

investments in foreign stocks and bonds that do not involve acquisitions of control.

The financial account is divided into three subcategories: direct investment, portfolio investment, and other investment. Other investment involves

acquisitions of controlling interests in foreign businesses.

investments in foreign stocks and bonds that do not involve acquisitions of control.

bank deposits, currency investment, trade credit, and the like.

all of the options

bank deposits, currency investment, trade credit, and the like.

Which of the following statements are true regarding the 2017 Tax Cuts and Jobs Act?

generally eliminated taxes on repatriated earnings

illustrated a net decrease of direct investment in 2018 due to the repatriation of accumulated prior earnings of foreign affiliates by their US parent companies

neither generally eliminated taxes on repatriated earnings, nor illustrated a net decrease of direct investment in 2018 due to the repatriation of accumulated prior earnings of foreign affiliates by their US parent companies are true

both generally eliminated taxes on repatriated earnings, and illustrated a net decrease of direct investment in 2018 due to the repatriation of accumulated prior earnings of foreign affiliates by their US parent companies are true

both generally eliminated taxes on repatriated earnings, and illustrated a net decrease of direct investment in 2018 due to the repatriation of accumulated prior earnings of foreign affiliates by their US parent companies are true

Over the last several years, the U.S. has run persistent

balance-of-payments deficits.

balance-of-payments surpluses.

current account deficits.

capital account deficits.

current account deficits.

Under the pure flexible exchange rate regime,

a current account surplus or deficit will not be matched by a financial account deficit or surplus

the balance on the current and financial accounts will be equal in size, but opposite in sign.

a current account surplus or deficit must be matched by an official reserves deficit or surplus.

a financial account surplus or deficit must be matched by an official reserves deficit or surplus.

the balance on the current and financial accounts will be equal in size, but opposite in sign.

Which country does the United States currently maintain the largest trade deficit with?

Canada

Mexico

China

United Kingdom

China