Balance of Payments: A Comprehensive Guide for Economics Students

Question 1

Which of the following transactions would be included in the capital account of the balance of payments?

Accepted Answer

Domestic residents buying foreign assets

Answer

Remittances sent by foreign workers

Answer

Imports of goods and services

Question 2

A country with a positive balance in its capital account indicates that it is:

Accepted Answer

Exporting more capital than it is importing

Answer

Importing more capital than it is exporting

Answer

Experiencing a trade deficit

Answer

Facing a recession

Question 3

A balance of payments deficit occurs when:

Accepted Answer

Imports exceed exports

Answer

Exports exceed imports

Answer

Capital inflows are greater than capital outflows

Answer

Government spending is higher than tax revenue

Question 4

The purchasing power parity (PPP) theory suggests that:

Accepted Answer

The exchange rate between two currencies should reflect the relative price levels of goods and services in the two countries

Answer

The exchange rate is solely determined by the balance of payments

Answer

The value of a currency is directly proportional to its gold reserves

Answer

The exchange rate is set by government authorities

Question 5

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

Accepted Answer

Foreign direct investment

Answer

Exports of goods and services

Answer

Imports of goods and services

Answer

Income from foreign investments

Question 6

What is the main purpose of holding foreign exchange reserves?

Accepted Answer

To stabilize the exchange rate

Answer

To finance imports

Answer

To increase exports

Answer

To reduce inflation

Question 7

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 ensure currency stability

Answer

To promote economic growth

Answer

To reduce inflation

Question 8

Which of the following is not categorized as a capital flow?

Accepted Answer

Current account transactions

Answer

Foreign direct investment

Answer

Portfolio investment

Answer

Government borrowing

Question 9

What is a potential long-term effect of a sustained capital account surplus?

Accepted Answer

Currency appreciation

Answer

Increased inflation

Answer

Trade deficit

Question 10

What does a deficit in the capital account of the Balance of Payments indicate?

Accepted Answer

Net outflow of financial capital from the country

Answer

Net inflow of financial capital into the country

Question 11

What is the main objective of the Balance of Payments?

Accepted Answer

To monitor international economic transactions

Answer

To control imports and exports

Question 12

What is the difference between the gross and net balances of trade?

Accepted Answer

Gross balance includes intermediate goods, while net balance does not.

Answer

Net balance includes intermediate goods, while gross balance does not.

Question 13

What is the purpose of a managed float exchange rate system?

Accepted Answer

To prevent excessive fluctuations in the exchange rate

Answer

To maintain a fixed exchange rate

Question 14

How does the International Monetary Fund (IMF) primarily assist member countries with balance of payments imbalances?

Accepted Answer

Provides financial aid to countries with balance of payments deficits.

Answer

Sets exchange rate targets for member countries.

Answer

Imposes trade sanctions on countries with persistent balance of payments deficits.

Question 15

Which of the following is **not** a component of the current account of the Balance of Payments?

Accepted Answer

Foreign Direct Investment

Answer

Exports of goods

Answer

Imports of services

Answer

Net income received from abroad

Question 16

A country with a persistent current account surplus is likely to experience:

Accepted Answer

Appreciation of its currency

Answer

Inflation

Answer

Depreciation of its currency

Answer

No change in its exchange rate

Question 17

Which of the following is a capital inflow in the Balance of Payments?

Accepted Answer

Purchase of foreign bonds by domestic residents

Answer

Export of goods

Answer

Payment of dividends on foreign investment

Question 18

Which of the following is a potential benefit of a flexible exchange rate system for a country's Balance of Payments?

Accepted Answer

Automatic adjustment to external imbalances

Answer

Lower inflation

Answer

Increased foreign investment

Answer

Reduced volatility in exchange rates

Question 19

A country with a large and persistent trade deficit is likely to face:

Accepted Answer

Depreciation of its currency

Answer

No change in its exchange rate

Answer

Appreciation of its currency

Answer

Deflation

Question 20

What is the purpose of the double-entry accounting system used in the Balance of Payments?

Accepted Answer

To ensure that the sum of credits equals the sum of debits.

Answer

To track the flow of funds between different sectors of the economy.

Answer

To simplify the calculation of the trade balance.