Balance of Payments: Components, Deficits, and Surpluses

Question 1

Which of the following is NOT a component of the balance of payments?

Accepted Answer

Statistical discrepancy

Answer

Current account

Answer

Capital account

Answer

Financial account

Question 2

A balance of trade deficit implies that:

Accepted Answer

Imports are greater than exports

Answer

Exports are greater than imports

Answer

Exports and imports are equal

Answer

The current account is in surplus

Question 3

What does the concept of the "twin deficits" refer to?

Accepted Answer

Budget deficit and trade deficit

Answer

Budget surplus and trade deficit

Answer

Budget deficit and trade surplus

Answer

Budget surplus and trade surplus

Question 4

Define 'balance of payments deficit' and discuss its potential economic consequences.

Accepted Answer

When a country's imports exceed its exports

Answer

When a country's exports exceed its imports

Answer

When a country's currency is overvalued

Answer

When a country's central bank buys foreign currency

Question 5

Which of these is a part of the current account in the balance of payments?

Accepted Answer

Exports of goods

Answer

Foreign direct investment

Answer

Foreign exchange reserves

Answer

Loans to foreign governments

Question 6

Which of the following is a component of the current account in the balance of payments? Select the correct option from the list below.

Accepted Answer

Exports of goods

Answer

Portfolio investment

Answer

Foreign direct investment

Answer

Short-term capital inflows

Question 7

A surplus in the current account typically indicates which of the following?

Accepted Answer

Exports exceed imports.

Answer

Imports exceed exports.

Answer

Foreign investment exceeds domestic investment.

Answer

Domestic investment exceeds foreign investment.

Question 8

What is the primary purpose of the balance of payments?

Accepted Answer

To systematically record all economic transactions between a country and the rest of the world.

Answer

To determine the country's gross domestic product (GDP).

Answer

To control the country's exchange rate.

Question 9

Which of the following is a potential benefit of a current account surplus?

Accepted Answer

Increased investment opportunities

Answer

Reduced domestic production

Answer

Depreciation of the currency

Answer

Inflationary pressures

Question 10

What is the potential long-term impact of a sustained current account deficit on economic growth?

Accepted Answer

It can hinder economic growth.

Answer

A current account surplus always leads to economic growth.

Answer

The balance of payments has no impact on economic growth.

Question 11

Which of the following is NOT included in the current account of the balance of payments?

Accepted Answer

Foreign direct investment

Answer

Investment income

Answer

Imports of goods and services

Answer

Exports of goods and services

Question 12

What is the definition of a balance of payments deficit?

Accepted Answer

When the total value of imports exceeds the total value of exports

Answer

When the current account is in surplus

Answer

When the capital account is in surplus

Answer

When the total value of exports exceeds the total value of imports

Question 13

Which of the following is a potential consequence of a sustained balance of payments deficit?

Accepted Answer

Depreciation of the domestic currency

Answer

Appreciation of the domestic currency

Answer

Increased economic growth

Answer

Lower inflation

Question 14

What is the primary purpose of a floating exchange rate system?

Accepted Answer

To allow the exchange rate to be determined by market forces

Answer

To control the level of domestic inflation

Answer

To maintain a fixed exchange rate with another currency

Question 15

What is the main role of the International Monetary Fund (IMF) in the global economy?

Accepted Answer

To provide financial assistance to countries experiencing economic difficulties

Answer

To set interest rates for member countries

Answer

To regulate the global banking system

Question 16

What is the key difference between a tariff and a quota?

Accepted Answer

A tariff is a tax on imports, while a quota is a limit on the quantity of imports

Answer

A tariff is a limit on the quantity of exports, while a quota is a tax on imports

Answer

A tariff is a subsidy on exports, while a quota is a tax on imports

Question 17

What is a potential criticism of free trade?

Accepted Answer

It can lead to job losses in certain industries

Answer

It can reduce consumer prices

Answer

It can increase economic growth

Answer

It can promote innovation

Question 18

Which of the following is NOT a component of the current account in the balance of payments?

Accepted Answer

Foreign Direct Investment

Answer

Trade in services

Answer

Trade in goods

Answer

Income from investments

Question 19

If a country has a trade deficit, it is likely to have:

Accepted Answer

A capital account surplus

Answer

A larger trade deficit

Answer

A smaller trade deficit

Answer

A balanced current account

Question 20

Which of the following could cause a country's currency to depreciate?

Accepted Answer

A decrease in demand for the country's exports

Answer

A decrease in interest rates

Answer

An increase in government spending

Answer

An increase in demand for the country's exports

Question 21

What is a key feature of a floating exchange rate system?

Accepted Answer

The value of the currency is determined by market forces of supply and demand.

Answer

The currency is pegged to another currency.

Answer

The government sets a fixed exchange rate.

Answer

The exchange rate is managed by the central bank.

Question 22

Which of the following is a potential benefit of a trade surplus for a country?

Accepted Answer

Increased foreign exchange reserves

Answer

Lower employment opportunities

Answer

Higher inflation

Answer

Reduced economic growth

Question 23

What term describes the overall balance of the current account and the capital account in the balance of payments?

Accepted Answer

Overall balance of payments

Answer

Balance of trade

Answer

Net foreign investment

Answer

Foreign exchange reserves

Question 24

Which of these is NOT a typical measure used to address a balance of payments deficit?

Accepted Answer

Devaluation of the currency

Answer

Imposition of tariffs or quotas

Answer

Contractionary monetary policy

Answer

Expansionary fiscal policy

Question 25

How does a depreciation of a country's currency generally affect its balance of trade?

Accepted Answer

A depreciation tends to improve the balance of trade, making exports cheaper and imports more expensive.

Answer

A depreciation has no impact on the balance of trade.

Answer

A depreciation tends to worsen the balance of trade, making exports more expensive and imports cheaper.

Question 26

Which of the following is a component of the capital account in the balance of payments?

Accepted Answer

Foreign Direct Investment

Answer

Income from investments

Answer

Trade in services

Answer

Current transfers

Question 27

What is the primary function of the balance of payments?

Accepted Answer

To record all economic transactions between a country and the rest of the world.

Answer

To control the money supply.

Answer

To promote economic growth.

Answer

To manage inflation.

Question 28

Which of the following is NOT a component of the current account in the balance of payments?

Accepted Answer

Foreign direct investment

Answer

Imports of services

Answer

Exports of goods

Answer

Net income from abroad

Question 29

A country has a current account deficit. This means that:

Accepted Answer

The value of its imports exceeds the value of its exports.

Answer

The value of its exports exceeds the value of its imports.

Answer

It has a surplus in its financial account.

Question 30

Which of the following is an example of a capital inflow?

Accepted Answer

A foreign company invests in a UK factory.

Answer

A UK tourist spends money on a holiday in Spain.

Answer

A UK resident buys shares in a foreign company.

Answer

A UK bank lends money to a foreign bank.

Question 31

A country's balance of payments is always in equilibrium because:

Accepted Answer

Any surplus in one account must be offset by a deficit in another account.

Answer

It is a measure of the country's overall economic strength.

Answer

Governments intervene to ensure balance.

Question 32

A persistent current account deficit can lead to:

Accepted Answer

Depreciation of the domestic currency.

Answer

Higher interest rates.

Answer

Increased unemployment.

Answer

Increased inflation.

Question 33

Which of the following is NOT a factor that can influence the balance of payments?

Accepted Answer

The country's population growth rate.

Answer

Changes in consumer tastes and preferences.

Answer

Exchange rate fluctuations.

Question 34

A country's terms of trade are defined as:

Accepted Answer

The ratio of its export prices to its import prices.

Answer

The value of its exports minus the value of its imports.

Answer

The difference between its current account balance and its capital account balance.

Question 35

If a country's terms of trade improve, this will:

Accepted Answer

Increase the value of its exports relative to its imports.

Answer

Lead to a decrease in its current account balance.

Answer

Cause a depreciation of its currency.

Question 36

A country's balance of payments is a useful tool for:

Accepted Answer

Monitoring the country's international transactions and economic performance.

Answer

Predicting future economic growth.

Answer

Controlling inflation.

Question 37

Which of the following policies would likely lead to a decrease in a country's current account deficit?

Accepted Answer

Raising interest rates to attract foreign investment.

Answer

Reducing import tariffs.

Answer

Devaluing the domestic currency.