The document discusses key concepts related to a country's balance of payments including:
1. The current account balance is the difference between a country's exports and imports and is a component of GNP.
2. If the US imports more than it exports, the US dollar would be under pressure to depreciate against other currencies.
3. The balance of payments is a statistical record of a country's international transactions over time presented as a double-entry bookkeeping system.
The document discusses key concepts related to a country's balance of payments including:
1. The current account balance is the difference between a country's exports and imports and is a component of GNP.
2. If the US imports more than it exports, the US dollar would be under pressure to depreciate against other currencies.
3. The balance of payments is a statistical record of a country's international transactions over time presented as a double-entry bookkeeping system.
The document discusses key concepts related to a country's balance of payments including:
1. The current account balance is the difference between a country's exports and imports and is a component of GNP.
2. If the US imports more than it exports, the US dollar would be under pressure to depreciate against other currencies.
3. The balance of payments is a statistical record of a country's international transactions over time presented as a double-entry bookkeeping system.
is the difference between a country's than it exports, then exports and imports, is a component of the A. the supply of dollars is likely to country's GNP. Other components of GNP exceed the demand in the foreign exchange include market, ceteris paribus. A. consumption and investment and B. one can infer that the U.S. dollar would be government expenditure. under pressure to depreciate against other B. consumption and government currencies. expenditure and net exports. C. a) and b) C. consumption and net exports and D. None of the above government expenditure. D. consumption less imports. 6. Generally speaking, any transaction that results in a receipt from foreigners 2. If the United States imports more A. will be recorded as a debit, with a negative sign, than it exports, then this means that in the U.S. balance of payments. A. the supply of dollars is likely to B. will be recorded as a debit, with a positive sign, exceed the demand in the foreign exchange in the U.S. balance of payments. market, ceteris paribus. C. will be recorded as a credit, with a negative B. the demand for dollars is likely to sign, in the U.S. balance of payments. exceed the supply in the foreign exchange D. will be recorded as a credit, with a positive sign, market, ceteris paribus. in the U.S. balance of payments. C. the U.S. dollar would be under pressure to appreciate against other currencies. D. both b) and c) are correct 7. Generally speaking, any transaction that results in a payment to foreigners 3. Balance of payments A. will be recorded as a debit, with a negative sign, A. is defined as the statistical record of a in the U.S. balance of payments. country's international transactions over a B. will be recorded as a debit, with a positive sign, certain period of time presented in the form in the U.S. balance of payments. of a double-entry bookkeeping. C. will be recorded as a credit, with a negative B. provides detailed information concerning sign, in the U.S. balance of payments. the demand and supply of a country's D. will be recorded as a credit, with a positive sign, currency. in the U.S. balance of payments. C. can be used to evaluate the performance of a country in international 8. If Japan exports more than it imports, economic competition. then D. all of the above A. the supply of dollars is likely to exceed the demand in the foreign exchange market, ceteris 4. If a country is grappling with a paribus. major balance-of-payment difficulty, it may B. one can infer that the yen would be likely to not be able to expand imports from the appreciate against other currencies. outside world. Instead, the country may be C. a) and b) tempted to D. None of the above A. impose measures to restrict imports. B. impose measures to discourage capital 9. The balance of payments records outflows. A. only international trade, (exports and imports). C. Both a) and b) B. only cross-border investments (FDI and D. None of the above portfolio investment). C. not only international trade, (exports and C. answers a) and b) are both true imports) but also cross-border investments. D. none of the above D. none of the above 14. Suppose the InBev Corporation (a 10. Credit entries in the U.S. balance of non-U.S. MNC) buys the Anheuser-Busch payments Corporation, paying the U.S. shareholders A. result from foreign sales of U.S. goods cash. and services, goodwill, financial claims, and A. Payment by InBev will be recorded as a real assets. debit. B. result from U.S. purchases of foreign B. The deposit of the funds by the sellers goods and services, goodwill, financial will be recorded as a debit. claims, and real assets. C. Payment by InBev will be recorded as a C. give rise to the demand for dollars. credit. D. give rise to the supply of dollars. D. The deposit of the funds by the buyer will E. both a) and c) be credit. 11. A country experiencing a significant 15. The current account includes balance-of-payments surplus would be A. the export and import of goods and likely to services. A. expand imports, offering marketing B. all purchases and sales of assets such as opportunities for foreign enterprises. stocks, bonds, bank accounts, real estate, and B. refrain from imposing foreign exchange businesses. restrictions. C. all purchases and sales of international C. expand exports, offering international reserve assets such as dollars, foreign marketing opportunities for domestic exchanges, gold, and special drawing rights enterprises. (SDRs). D. Both a) and b) D. none of the above 12. Suppose the McDonalds Corporation 16. A country with a current account imports Canadian beef, paying for it by surplus transferring the funds to a New York A. acquires IOUs from foreigners, thereby bank account kept by the Canadian Beef increasing its net foreign wealth. producer. B. must borrow from foreigners or draw down on A. Payment by McDonalds will be recorded its previously accumulated foreign wealth. as a debit. C. will experience a reduction in the country's net B. The deposit of the funds by the seller will foreign wealth. be recorded as a debit. D. both b) and c) C. Payment by McDonalds will be recorded as a credit. 17. The capital account includes D. The deposit of the funds by the buyer A. the export and import of goods and services. will be credit. B. all purchases and sales of assets such as stocks, bonds, bank accounts, real estate, and businesses. 13. Since the balance of payments is C. all purchases and sales of international reserve presented as a system of double-entry assets such as dollars, foreign exchanges, gold, and bookkeeping, special drawing rights (SDRs). A. every credit in the account is balanced by D. none of the above a matching debit. B. every debit in the account is balanced by a matching credit. 18. The official reserve account includes A. the export and import of goods and services. and unilateral transfers. B. all purchases and sales of assets such as stocks, C. merchandise trade, services, portfolio bonds, bank accounts, real estate, and businesses. investment, and unilateral transfers. C. all purchases and sales of international reserve D. merchandise trade, services, factor income, assets such as dollars, foreign exchanges, gold, and and direct investment. special drawing rights (SDRs). D. none of the above 24. The factors of production are A. land, labor, capital, and entrepreneurial 19. A country's international transactions can ability. be grouped into the following three main types: B. interest, wages and dividends. A. current account, medium term account, and long C. payments and receipts of interest, term capital account. dividends, and other income on foreign B. current account, long term capital account, and investments that were previously made. official reserve account. D. none of the above C. current account, capital account, and official reserve account. 25. Factor income D. capital account, official reserve account, trade A. consists largely of interest, dividends, and account. other income on foreign investments. B. is a theoretical construct of the factors of 20. Invisible trade refers to production, land, labor, capital, and A. services that avoid tax payments. entrepreneurial ability. B. the underground economy. C. is generally a very minor part of national C. legal, consulting, and engineering services. income accounting, smaller than the statistical D. tourist expenditures, only. discrepancy. D. none of the above
21. A country that gives foreign aid to another
country can be viewed as The entries in the "current account" and the A. importing goodwill from the latter. "capital account", combined together, can be B. exporting goodwill to the latter. outlined (in alphabetic order) as:
22. In 2007 the United States had a current
account deficit. The current account deficit 26. Current account includes implies that the United States A. (i), (ii), and (iii) A. had a surplus on legal consulting and B. (ii), (iii), and (vii) engineering services. C. (iv), (v), and (vii) B. produced more output than it consumed. D. (i), (v), and (vi) C. consumed more output than it produced. D. none of the above 27. Capital account includes A. (i), (ii), and (iii) 23. The current account is divided into B. (ii), (iii), and (vii) four finer categories: C. (iv), (v), and (vii) A. merchandise trade, services, factor income, D. (i), (v), and (vi) and statistical discrepancy. B. merchandise trade, services, factor income, 28. The "J-curve effect" shows A. the initial deterioration and the eventual 32. When a country's currency depreciates improvement of a country's trade balance against the currencies of major trading following a currency depreciation. partners, B. the initial improvement and the eventual A. the country's exports tend to rise and depreciation of a country's trade balance imports fall. following a currency depreciation. B. the country's exports tend to fall and C. the trade balance's lack of responsiveness imports rise. to the exchanges rate changes. C. the country's exports tend to rise and D. none of the above imports rise. D. the country's exports tend to fall and 29. The "J-curve effect" imports fall. A. happens most of the time, in the short run. B. actually only occurs in about 40 percent of 33. A depreciation will begin to improve the cases according to a study by Sebastian the trade balance immediately if Edwards. A. imports and exports are responsive to the C. is a long-run phenomenon, not a short-run exchange rate changes. one. B. imports and exports are inelastic to the D. none of the above. exchange rate changes. C. consumers exhibit brand loyalty and price 30. The J-curve effect received wide inelasticity. attention when D. b) and c) A. the British trade balance worsened after a strengthening of the pound in 1967. 34. In the short run a currency B. the British trade balance worsened after a depreciation can make a trade balance worse if A. there is no domestic producer of an import. B. there is no domestic buyer for an import. C. there is no export market for a country's output.
35. What is the correct label for the
vertical axis in the J-curve? devaluation of the pound in 1967. C. the British trade balance improved after a devaluation of the pound in 1967. A. Time D. none of the above B. Change in the Trade Balance C. Size of Trade Balance 31. A currency depreciation will begin to D. Size of Merchandise Trade Balance improve the trade balance immediately A. if the demand for imports and exports are 36. In the long run, both exports and inelastic. imports tend to be B. if the demand for imports and exports are A. unresponsive to changes in exchange rates. elastic. B. responsive to changes in exchange rates. C. if imports decrease and exports decrease. C. both a) and b) D. none of the above D. none of the above
37. With regard to the capital account
A. the capital account balance measures the increase. difference between U.S. sales of assets to B. capital inflows into the U.S. may not foreigners and U.S. purchases of foreign assets. materialize. B. U.S. sales (or exports) of assets are recorded C. capital will flow out of the U.S. as credits, as they result in capital inflow. D. none of the above C. U.S. purchases (imports) of foreign assets are recorded as debits, as they lead to capital 42. If for a particular county an increase outflow. in the interest rate is more or less matched D. all of the above by an expected depreciation in the local currency, 38. The difference between Foreign Direct A. traders will probably be tempted to find Investment and Portfolio Investment is that another country to invest in. A. Portfolio Investment mostly B. the interest rate increase per se will not represents the sale and purchase of foreign be enough to spark capital flow into the financial assets such as stocks and bonds country. that do not involve a transfer of control. C. both a) and b) are true B. Foreign Direct Investment mostly D. capital will glow out of the country as the represents the sale and purchase of foreign disgruntled citizens riot and go to war with the financial assets such as stocks whereas neighbors. Portfolio Investment mostly involves the sales and purchase of foreign bonds. 43. The capital account measures C. Foreign Direct Investment is about A. the sum of U.S. sales of assets to foreigners and buying land and building factories, U.S. purchases of foreign assets. whereas portfolio investment is about B. the difference between U.S. sales of assets to buying stocks and bonds. foreigners and U.S. purchases of foreign assets. D. All of the above C. the difference between U.S. sales of manufactured goods to foreigners and U.S. purchases 39. In the latter half of the 1980s, with of foreign products. a strong yen, Japanese firms D. none of the above A. faced difficulty exporting. B. could better afford to acquire U.S. 44. When Honda, a Japanese auto maker, built assets that had become less expensive in a factory in Ohio, terms of yen. A. it was engaged in foreign direct investment. C. financed a sharp increase in Japanese B. it was engaged in portfolio investment. FDI in the United States. C. it was engaged in a cross-border acquisition. D. all of the above D. none of the above.
40. International portfolio investments have
boomed in recent years, as a result of 45. Government controlled investment funds, A. a depreciating U.S. dollar. known as sovereign wealth funds, B. increased gasoline and other commodity A. are playing a less-important role in international prices. finance following the end of the fixed exchange rate C. the general relaxation of capital controls era. and regulation in many countries. B. are mostly domiciled in Asian and Middle D. none of the above Eastern countries. C. are usually responsible for converting trade 41. If the interest rate rises in the U.S. while surpluses and oil revenues into foreign exchange other variables remain constant reserves. A. capital inflows into the U.S. will D. none of the above interest rates but insensitive to the anticipated change in exchange rate. 46. Foreign direct investment (FDI) occurs D. tend to be insensitive to changes in relative A. when an investor acquires a measure of control interest rates but sensitive to the anticipated of a foreign business. change in exchange rate. B. when there is an acquisition, by a foreign entity in the U.S., of 10 percent or more of the voting 50. Since security returns tend to have low shares of a business. correlations among countries, C. with sales and purchases of foreign stocks and A. investors can reduce risk more effectively if bonds that do not involve a transfer of control. they diversify their portfolio holdings D. both a) and b) internationally rather than purely domestically. B. investors who have a domestically diversified portfolio, with exposures across industry types will not gain much from 47. The capital account may be divided diversifying abroad. into three categories: C. investors who diversify internationally will A. cross-border mergers and acquisitions, likely underperform investors who keep all their portfolio investment, and other investment. investments in one country. B. direct investment, portfolio investment, D. none of the above and Cross-border mergers and acquisitions. C. direct investment, mergers and 51. The world's largest debtor nation and acquisitions, and other investment. creditor nation, respectively, are D. direct investment, portfolio investment, A. Japan and the U.S. and other investment. B. The U.S. and Japan. C. The U.S. and Canada. D. Great Britain and Mexico. 48. When Nestlé, a Swiss firm, bought the American firm Carnation, it was engaged in 52. Statistical discrepancy, which by definition foreign direct investment. If Nestlé had only represents errors and omissions bought a non-controlling number of shares of A. cannot be calculated directly. the firm, B. is calculated by taking into account the balance- A. Nestlé would have been engaged in of-payments identity. portfolio investment. C. probably has some elements that are honest B. Nestlé would have been engaged in a cross- mistakes, it can't all be money laundering and drugs. border acquisition. D. all of the above C. it would depend if they bought the shares from an American or a Canadian. 53. The statistical discrepancy in the balance-of- D. none of the above payments accounts A. arise since recordings of payments and receipts 49. Transactions in currency, bank deposits are done at different times, in different places, and so forth possibly using different methods. A. tend to be insensitive to both changes in B. arise since some transactions (illegal relative interest rates and the anticipated change transactions?) occur "off the books". in exchange rate. C. represents omitted and misrecorded B. tend to be sensitive to both changes in transactions. relative interest rates and the anticipated change D. all of the above in exchange rate. C. tend to be sensitive to changes in relative 54. Which of the following is most indicative of the pressure that a country's currency faces for depreciation or appreciation? of Asian central banks). A. The current account C. could lend steam to the emergence of the B. The capital account euro as a credible reserve currency. C. The statistical discrepancies D. all of the above D. The official settlement balance 60. Currently, international reserve assets 55. The United States is considered are comprised of A. a net creditor nation. A. gold, platinum, foreign exchanges, and B. a net debtor nation. special drawing rights (SDRs). B. gold, foreign exchanges, special drawing 56. Regarding the statistical discrepancy in the rights (SDRs), and reserve positions in the balance-of-payments accounts International Monetary Fund (IMF). A. there is some evidence that financial C. gold, diamonds, foreign exchanges, and transactions may be mainly responsible for the special drawing rights (SDRs). discrepancy. D. reserve positions in the International B. the sum of the balance on the capital Monetary Fund (IMF), only. account and the statistical discrepancy is very close to the balance of the current account in 61. International reserve assets include "foreign magnitude. exchanges". These are C. it tends to be positive one year and A. Special Drawing Rights (SDRs) at the IMF. negative in others, so it's safe to ignore it. B. reserve positions in the International Monetary D. a) and b) Fund (IMF). C. foreign currency held by a country's central 57. The central bank of the United States bank. is D. none of the above A. the New York Fed. B. the Federal Reserve System. 62. The most important international reserve C. the EXIM bank. asset, comprising 94 percent of the total reserve D. none of the above—the U.S. does not assets held by IMF member countries is have a central bank. A. gold. B. foreign exchanges. 58. When a country must make a net C. special Drawing Rights (SDRs). payment to foreigners because of a balance- D. reserve positions in the International Monetary of-payments deficit, the central bank of the Fund (IMF). country A. should do nothing. 63. The "one word that haunts the dollar" is B. should run down its official reserve assets A. (Central bank) diversification. (e.g. gold, foreign exchanges, and SDRs). B. Reunification (Korean). C. should borrow anew from foreign central C. Euro. banks. D. (Current account) deficit. D. either b) or c) will work. 64. The vast majority of the foreign-exchange 59. Continued U.S. trade deficits coupled reserves held by central banks are denominated in with foreigners' desire to diversify their A. local currencies. currency holdings away from U.S. dollars B. U.S. dollars. A. could further diminish the position of the C. Yen. dollar as the dominant reserve currency. D. Euro. B. could affect the value of U.S. dollar (e.g. through the currency diversification decisions 65. Among IMF member countries, the dollar's dominant position in the world's reserve holdings D. none of the above may decline to a certain extent as the euro becomes a "known quantity" and its external 70. In a pure flexible exchange rate regime, value becomes more stable. In fact, the euro's a country's central banks will not need to share has increased maintain official reserves. Under this regime A. from zero percent in 1999 to 25.8 percent in A. -BCA = BKA. 2006. B. BCA = - BRA = 0. B. from 13.5 percent in 1999 to 25.8 percent in C. BKA = -BRA. 2006. D. BSA = BCA. C. from 13.5 percent in 1999 to 52.8 percent in 2006. 71. When the balance-of-payments D. none of the above accounts are recorded correctly, the combined balance of the current account, the 66. Which of the following would not count as a capital account, and the reserves account foreign-exchange reserve held by a central bank? must be A. The local currency A. equal in magnitude to the country's B. U.S. dollars national debt. C. SDRs B. zero. D. Euro C. equal in magnitude to the Trade Deficit or Surplus. 67. The balance of payments identity is given by D. none of the above BCA + BKA + BRA = 0. Rearrange the identity for a country with a pure flexible exchange rate 72. The balance of payments identity is regime. given by BCA + BKA + BRA = 0. Rearrange A. BCA + BKA + BRA = 0 the identity to solve for the statistical B. BCA = -BKA discrepancy. C. BCA + BKA = -BRA A. The statistical discrepancy = (BCA + D. BRA = -BCA BKA) - BRA B. The statistical discrepancy = BCA - BKA + Assume that the balance-of-payments accounts BRA for a country are recorded correctly. Balance on C. The statistical discrepancy = BCA - BKA - the current account = BCA = $130 billion BRA Balance on the capital account = BKA = -$86 D. The statistical discrepancy = BCA + BKA billion Balance on the reserves account = + BRA BRA = ? 73. BCA stands for 68. The balance on the reserves account A. the balance on the current account. (BRA), under the fixed exchange regime is B. the balance on the capital account. A. -$44 billion C. the balance on the official reserves. B. $44 billion D. net imports. C. $216 billion D. none of the above 74. BKA stands for A. the balance on the current account. 69. The balance on the reserves account B. the balance on the capital account. (BRA), under the pure flexible exchange C. the balance on the official reserves. regime is D. net imports. A. -$44 billion. B. $44 billion. 75. If the central banks of the world chose to C. $216 billion. diversify their foreign-exchange reserves away from the dollar and into the euro, demand for consumption goods. A. this would have the result of a strengthening of C. the deficit exists because foreigners want to the value of the dollar. buy the country's currency as an investment. B. this would have the result of a weakening in the D. none of the above value of the dollar. C. this would not have much impact, as the 81. The capital account is divided into three information would be lost in the day-to-day volatility subcategories: direct investment, portfolio of exchange rates. investment, and other investment. Direct investment involves. 76. The economic theory of mercantilism holds A. acquisitions of controlling interests in that foreign businesses. A. a continuing trade surplus should be a B. investments in foreign stocks and bonds government's major policy goal. that do not involve acquisitions of control. B. the main source of wealth of a country is its C. bank deposits, currency investment, trade productive capacity. credit, and the like. C. free trade is the result of countries exploiting D. all of the above their comparative advantage. D. none of the above 82. The capital account is divided into three subcategories: direct investment, portfolio investment, and other investment. Portfolio 77. The U.S. Trade Deficit investment involves A. is a capital account surplus. A. acquisitions of controlling interests in B. is a current account deficit. foreign businesses. C. is both a capital account surplus and a current B. investments in foreign stocks and bonds account deficit. that do not involve acquisitions of control. D. none of the above C. bank deposits, currency investment, trade credit, and the like. 78. As of 2007 gold accounting for D. all of the above A. 90 percent of the total reserve assets held by IMF member countries. 83. The capital account is divided into three B. 70 percent of the total reserve assets held by subcategories: direct investment, portfolio IMF member countries. investment, and other investment. "Other" C. approximately 50 percent of the total reserve investment involves assets held by IMF member countries. A. acquisitions of controlling interests in D. less than 2 percent of the total reserve assets foreign businesses. held by IMF member countries. B. investments in foreign stocks and bonds that do not involve acquisitions of control. 79. The most popular reserve currency is C. bank deposits, currency investment, trade now the credit, and the like. A. U.S. dollar. D. all of the above B. Euro. C. Japanese Yen. 84. Over the last several years the U.S. has run persistent 80. Suppose a country is currently A. balance-of-payments deficits. experiencing a trade deficit. In the long run, B. balance-of-payments surpluses. this could be self correcting if C. current account deficits. A. the deficit exists because of the import D. capital account deficits. demand for capital goods. B. the deficit exists because of the import 85. If a country must make a net payment to foreigners because of a balance-of-payments C = consumption deficit, the country should I = private investment A. either increase its official reserve assets or G = government spending X = exports borrow anew from foreigners. M = imports B. either run down its official reserve assets or borrow anew from foreigners. 89. The current account balance is given by C. either run down its official reserve assets or lend A. C+I+G+X+M more foreigners. B. X-M D. none of the above C. I+X+M D. M-X 86. Under the fixed exchange rate regime A. the combined balance on the current and capital 90. The difference between a country's accounts will be equal in size, but opposite in sign, to savings and investment is given by the change in the official reserves. A. S - I B. the balance on the current and capital accounts B. I S will be equal in size, but opposite in sign. C. X - M C. a current account surplus or deficit must be D. GNP - Y matched by an official reserves deficit or surplus. D. a capital account surplus or deficit must be 91. If the difference between tax revenue matched by an official reserves deficit or surplus. and government expenditures is negative, it implies that 87. Under the pure flexible exchange rate A. tax revenue is insufficient to cover regime government spending. A. the combined balance on the current and B. a government budget deficit exists. capital accounts will be equal in size, but C. the government will be issuing new debt opposite in sign, to the change in the official securities. reserves. D. all of the above B. the balance on the current and capital accounts will be equal in size, but opposite in 92. National income, or Gross National Product sign. is given by C. a current account surplus or deficit must be A. GNP Y C + I + G + X + M matched by an official reserves deficit or surplus. B. GNP Y C + I + G + X - M D. a capital account surplus or deficit must be C. GNP I C + Y + G + X - M matched by an official reserves deficit or surplus. D. GNP Y C + I + X + M – G 88. More important than the absolute size of a country's balance-of-payments 93. Which of the following is a true statement? disequilibrium A. BCA X - M A. is the nature and cause of the B. BKA X - M disequilibrium. C. BKA - BCA X - M B. is whether it is a trade surplus or deficit. C. is whether the local government is D. BKA X - M mercantilist or not. D. Nothing is more important than the absolute 94. There is an intimate relationship between a size of a country's balance-of-payments country's BCA and how the country finances its disequilibrium. domestic investment and pays for government expenditures. Given this, which of the following is For questions in this section, the notation is Y a true statement? = GNP = national income A. If (S - I) < 0, it implies that a country's domestic savings is insufficient to finance This relationship is given by BCA X - M domestic investment. (S - I) + (T - G). Given this, which of the B. If (T - G) < 0, it implies that a country's tax following is a true statement? revenue is insufficient to finance government A. If (S - I) < 0, it implies that a country's spending. domestic savings is insufficient to C. When BCA is negative, it implies that finance domestic investment. government budget deficits an/or part of B. If (T - G) < 0, it implies that a country's domestic investment are being finance with tax revenue is insufficient to finance foreign-controlled capital. government spending. D. All of the above are true. C. both a) and b) are true D. none of the above 95. There is an intimate relationship between a country's BCA and how the 98. There is an intimate relationship country finances its domestic investment and between a country's BCA and how the pays for government expenditures. This country finances its domestic investment relationship is given by BCA X - M (S - I) and pays for government expenditures. + (T - G). Given this, in order for a country Given this, which of the following is a to reduce a BCA deficit, which of the true statement? following must occur? A. If (S - I) < 0, it implies that a country's A. For a given level of S and I, the domestic savings is insufficient to government budget deficit (T - G) must be finance domestic investment. reduced. B. If (T - G) < 0, it implies that a country's B. For a given level of I and (T - G), S must tax revenue is insufficient to finance be increased. government spending. C. For a given level of S and (T - G), I must C. both a) and b) are true fall. D. none of the above D. All of the above would work to reduce a BCA deficit. 99. There is an intimate relationship between a country's BCA and how the 96. There is an intimate relationship country finances its domestic investment between a country's BCA and how the and pays for government expenditures. country finances its domestic investment and This relationship is given by BCA X - pays for government expenditures. Given M (S - I) + (T - G). Given this, which this, in order for a country to reduce a BCA of the following is a true statement? deficit, which of the following must occur? A. If (S - I) < 0, it implies that a country's domestic A. For a given level of S and I, the savings is insufficient to finance domestic government budget deficit (T - G) must be investment. reduced. B. If (T - G) < 0, it implies that a country's tax B. For a given level of I and (T - G), S must revenue is insufficient to finance government be increased. spending. C. For a given level of S and (T - G), I must C. When BCA is negative, it implies that fall. government budget deficits and/or part of D. All of the above would work to reduce a domestic investment are being finance with BCA deficit. foreign-controlled capital. 97. There is an intimate relationship D. All of the above are true between a country's BCA and how the country finances its domestic investment and pays for government expenditures. Chapter 03 - Balance of Payments