Review Questions Ch.

4 (more)

1. The "J-curve effect" shows: A. the initial deterioration and the eventual improvement of a country's trade balance following a currency depreciation B. the initial improvement and the eventual depreciation of a country's trade balance following a currency depreciation C. the trade balance's lack of responsiveness to the exchanges rate changes D. none of these 2. Which of the following is true under a pure flexible exchange rate regime? A. Balance of current account + Balance of capital account > 0 B. Balance of current account + Balance of capital account < 0 C. Balance of current account + Balance of capital account = 0 D. There is insufficient information to warrant any of the above answers 3. Foreign direct investment (FDI) occurs: A. when an investor acquires a measure of control of a foreign business B. when an investor buys foreign bonds directly C. with sales and purchases of foreign stocks and bonds that do not involve a transfer of control D. when a company buys foreign government bonds directly 4. PetroCanada exports oil to New York. This transaction will be recorded in the balance of payments as A. a credit in the current account B. a debit in the current account C. a credit in the capital account D. a debit in the capital account

Review Questions Ch. 4 (more)

5. Nokia Inc, a Finnish company, hires a French consulting firm. This transaction will be recorded in Finland's balance of payments as A. a credit in the current account B. a debit in the current account C. a credit in the capital account D. a debit in the capital account 6. Nokia Inc, a Finnish company, hires a French consulting firm. This transaction will be recorded in France's balance of payments as A. a credit in the current account B. a debit in the current account C. a credit in the capital account D. a debit in the capital account 7. Can a country have a current account and a capital account surplus at the same time? Explain. Yes. The balance of payments identity states that BCA (Balance of Current Account)+ BKA (Balance of Capital Account) + BRA (Balance of Reserve Account)= 0. If BCA and BKA are positive, the balance on the reserve account must be negative which means that the country has increased its foreign exchange reserves. China is an example for a country in this position.

AK 1. 2. 3. 4. 5. 6. A C A A B A
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