1. Which of the following is considered a capital inflow?

a. A sale of U.S. financial assets to a foreign buyer

b. A loan from a U.S. bank to a foreign borrower

c. A purchase of foreign financial assets by a U.S. buyer

d. A U.S. citizen's repayment of a loan from a foreign bank

2. The role of international _____ is to direct one nation's savings into another nation's investments.

a. merchandise trade flows

b. services flows

c. unilateral transfers

d. capital flows

3. The net value of flows of goods, services, income, and unilateral transfers is described as the:

a. capital account balance.

b. current account balance.

c. trade balance.

d. official reserve balance.

4. When a U.S. resident increases her holdings of a foreign financial asset, this item is recorded as a:

a. credit entry in the U.S. current account.

b. debit entry in the U.S. current account.

c. credit entry in the U.S. capital account.

d. debit entry in the U.S. capital account.

5. In September 2005, exports of goods from the U.S. decreased $3.3 billion to $73.4 billion, and imports of goods increased $3.8 billion to $144.5 billion. This increased the deficit in:

a. the balance of payments.

b. the financial account.

c. the current account.

d. unilateral transfers.

6. A country experiencing a current account surplus:

a. needs to borrow internationally.

b. is able to lend internationally.

c. must also have had a surplus in its overall payments balance.

d. spends more than it earns on its merchandise and service trade, international income payments and receipts and international transfers.

7. If the overall balance in the balance of payments account is in ____, there can be an accumulation of official reserve assets by the country or a decrease in foreign official reserve holdings of the country's assets.

a. surplus

b. deficit

c. equilibrium

d. remission

8. A deficit in the overall balance of payments of a nation generally is an indication that:

a. the country's monetary authority is selling foreign currency.

b. the country's monetary authority is buying foreign currency.

c. the country's monetary authority is buying domestic government bonds.

d. the country's monetary authority is selling domestic currency.

9. 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.

10. Suppose that a Korean television set that costs 600 won in Korea costs $400 in the United States. Which of the following correctly indicates the implied won per dollar exchange rate?

a. 1.5 won per dollar

b. 0.67 won per dollar

c. $1.50 per won

d. $2.40 per won

11. 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.

12. An increase in capital inflows in the United States will result in a(n) _____ foreign currency and a(n) _____ the U.S. dollars in the foreign exchange market.

a. increase in the demand for; increase in the supply of

b. increase in the supply of; increase in the demand for

c. shortage of; surplus of

d. decrease in the supply of; decrease in the demand for

13. In Figure 1, a downward movement along the vertical axis would correspond to a(n) _____ of the U.S. dollar.

a. arbitrage

b. swap

c. appreciation

d. depreciation

14. In Figure 1, 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

15. In Figure 1, if the exchange rate is pegged at $2.50 per pound:

a. the pound will be overvalued.

b. the pound will be undervalued.

c. the British goods will become cheap in U.S. markets.

d. the demand for the American goods will fall in British markets.

16. Refer to Figure 1. Who among the following groups will most likely benefit if the exchange rate is pegged at $2.50 per pound?

a. The U.S. importers

b. The British importers

c. The British exporters

d. The import-competing producers in the U.K.

17. Refer to Figure 1, if the U.S. Federal Reserve uses a contractionary monetary policy, the _____ curve would shift right and the pound would tend to ____.

a. supply; appreciate

b. demand; depreciate

c. supply; depreciate

d. demand; appreciate

18. Under a floating exchange rate system, everything remaining constant, an increase in European exports to Japan is most likely to result in:

a. a decrease in the demand for euro in the foreign exchange market.

b. a decrease in the supply of euro in the foreign exchange market.

c. an appreciation of the Japanese yen vis-a?-vis the euro.

d. an appreciation of the euro vis-a?-vis the Japanese yen.

19. Under the system of pegged exchange rates, when the domestic currency's value presses against the top of its official price range, officials must:

a. sell foreign currency and buy domestic currency.

b. buy foreign currency and sell domestic currency.

c. let the exchange rate change and refrain from intervention in the foreign exchange market.

d. guide the exchange rate to reach the equilibrium rate.

20. Under a floating exchange rate system, the value of the dollar per euro exchange rate rises when:

a. The U.S. trade deficit with the euro-area countries increases.

b. European demand for U.S. products increases.

c. The U.S. government raises personal income tax rates.

d. The inflation rate in the U.S. is much lower than the inflation rate in the euro-area.

21. The act of taking a net asset position or a net liability position in some asset class is referred to as ____.

a. hedging

b. speculating

c. investing

d. buying

22. Concerning the covering of exchange rate risks, assuming that a depreciation of the domestic currency is feared, one can say that there is an incentive for:

a. exporters to rush to cover their future needs.

b. importers to rush to cover their future needs.

c. both exporters and importers to rush to cover their future needs.

d. monetary authorities to rush to cover their future needs.

23. Assume you are an American importer who must pay 500,000 Euros at the end of 90 days when you receive 1,000 cases of French wine at your warehouse in New York. Suppose that you have not covered this transaction in the forward market, in which of the following cases will you suffer the largest loss?

a. The euro spot exchange rate value vis-a?-vis the dollar does not change

b. The euro (spot) initially appreciates by 2 percent, and then depreciates by 1 percent

c. The euro (spot) initially depreciates by 3 percent, and then appreciates by 2 percent

c. The euro (spot) initially appreciates by 3 percent, and then depreciates by 2.9 percent

24. Assume you are a Chinese exporter and expect to receive $250,000 at the end of 60 days. You can remove the risk of loss due to a devaluation of the dollar by:

a. selling dollars in the 60-day forward exchange market.

b. buying dollars now and selling these dollars at the end of 60 days.

c. selling the yuan equivalent in the forward exchange market for 60-day delivery.

d. keeping the dollars in the United States after they are delivered to you.

25. An import-export business that finds itself in a "short" foreign-currency position risks a financial loss if:

a. it pays attention to exchange rate forecasts.

b. foreign demand for its product rises (more than expected).

c. the domestic currency depreciates (more than expected).

d. the foreign currency depreciates (more than expected).