GPE TEST #1 QUESTIONS UPDATED ACTUAL QUESTIONS
AND CORRECT ANSWERS
Question:
1. If the residents of a country receive income from their foreign investments, it is counted as a
Answer:
credit in the current account
Question:
2. Which of the following is NOT part of the current account?
A. Dividends received on a foreign investment
B. Purchase of a plane ticket on a foreign airline
C. Shipment of food aid to a poor country
D. Purchase of a foreign bond
Answer:
Purchase of a foreign bond
Question:
3. Which of the following is FALSE?
A) In 2002, the United States imported more goods and services from foreign suppliers than it exported to
foreign purchasers.
B) Services are almost one-third of total exports and are a growing part of U.S. and world trade.
C) The U.S. trade balance in services is in deficit.
D) With the exception of the Gulf War period in 1991, the U.S. current account has been in deficit since
the 1980s.
Answer:
C.) The U.S. trade balance in services is in deficit.
Question:
4. The current account balance of the United States began to deteriorate in
Answer:
the early 1980s
Question:
5. People sometimes worry that American trade with other countries will lead to large U.S. trade deficits
and the movement of massive amounts of American capital out of the country. This worry is unfounded
because countries cannot
Answer:
have both current account and financial account deficits at the same time.
Question:
6. A current account deficit implies that
Answer:
the financial account is in surplus
,Question:
7. Which of the following transactions would be recorded in the current account?
A.) A person living in the United States sends money home to her family in Cuba
B.) U.S. investors purchase bonds from Germany.
C) The Fed increases its holdings of yen.
D) The U.S. transfers a military base to another country.
Answer:
A.) A person living in the United States sends money home to her family in Cuba
Question:
8. Which of the following transactions would be recorded in the capital account?
A) U.S. investors purchase bonds from Germany.
B) The Fed increases its holdings of yen.
C) The U.S. transfers a military base to another country.
D) A U.S. firm sells a machine to a business in another country.
Answer:
C.) The U.S. transfers a military base to another country
Question:
9. Which of the following transactions would be recorded in the financial account?
A) U.S. investors purchase bonds from Germany.
B) A person living in the United States sends money home to her family in Cuba.
C) The Fed increases its holdings of yen.
D) The U.S. transfers a military base to another country.
Answer:
A.) U.S. investors purchase bonds from Germany
Question:
10. If there is a trade deficit, which of the following is true?
A) The current account balance could be positive, negative, or zero.
B) There will be a current account deficit.
C) There will be a current account surplus.
D) There will be a financial account surplus.
Answer:
A.) The current account balance could be positive, negative, or zero
Question:
11. Which of the following transactions would be recorded as a CREDIT in the current account?
A) A U.S. citizen purchases goods from Ireland.
B) A U.S. company pays dividends on its stock. Some of the dividends go to foreign owners of the stock.
C) The U.S. sells wheat to Mexico.
D) A person living in the United States sends money home to her family in Cuba.
Answer:
C.) The U.S. sells wheat to Mexico.
Question:
12. Payments made to foreign countries that are not in exchange for goods or services are known as
,Answer:
remittances
Question:
13. Purchases of stocks and bonds are recorded in the capital account. (T/F)
Answer:
FALSE
Question:
14. If the trade balance is negative, the current account balance will be negative. (T/F)
Answer:
FALSE
Question:
15. Briefly describe the factors that contributed to the U.S. current account deficits of the 1990s.
Answer:
Rapid U.S. economic growth raised income and import demand; economic growth was low or negative for
U.S. trading partners, depressing export demand.
Question:
16. How do recent current account deficits compare to GDP and to past ratios?
Answer:
It is over 6 percent of GDP, much larger than it has been in the past, and the percentage has grown sharply
over the last few years.
Question:
17. Explain the difference between primary and secondary income.
Answer:
Earned income paid abroad and received from abroad is called primary income. This includes income on
investments and compensation of employees.
Secondary income is payments made abroad or received from abroad such as payments made that are not
in exchange for a good or service, like foreign aid, gifts, or the remittances (the transfer of wages earned in
one country to residents of another country) of immigrants temporarily residing in another country.
Question:
18. Which of the following is an example of a financial derivative?
A) An option to purchase stock in the future
B) A share of stock in Microsoft
C) A U.S. government bond
D) Monetary gold
Answer:
A) An option to purchase stock in the future
, Question:
19. All of the following are true about foreign direct investment (FDI) and portfolio investment except
A) increases in the flow of portfolio investments increase the likelihood of financial crisis.
B) both portfolio investments and FDI are the same in that they both give their holders a claim on the
future output of the foreign economy.
C) FDI is relatively illiquid compared to portfolio investment.
D) FDI changes very little from year to year.
Answer:
D) FDI changes very little from year to year.
Question:
20. Capital controls are most often aimed at slowing or eliminating movements of
Answer:
foreign portfolio investment.
Question:
21. Which of the following is an example of foreign direct investment?
A) Toyota builds an automobile plant in Ohio.
B) The Bank of Japan buys dollars.
C) A citizen of Japan buys stock in Microsoft.
D) A citizen of Japan buys a U.S. government bond.
Answer:
A) Toyota builds an automobile plant in Ohio.
Question:
22. Which of the following is an example of portfolio investment?
A) Toyota builds an automobile plant in Ohio.
B) The Bank of Japan buys dollars.
C) A citizen of Japan buys stock in Microsoft.
D) A citizen of Japan buys an option to purchase Microsoft stock in the future.
Answer:
C) A citizen of Japan buys stock in Microsoft.
Question:
23. Which of the following is an example of a change in reserve assets?
A) Toyota builds an automobile plant in Ohio.
B) The Bank of Japan buys dollars.
C) A citizen of Japan buys stock in Microsoft.
D) A citizen of Japan buys a U.S. government bond.
Answer:
B) The Bank of Japan buys dollars.
AND CORRECT ANSWERS
Question:
1. If the residents of a country receive income from their foreign investments, it is counted as a
Answer:
credit in the current account
Question:
2. Which of the following is NOT part of the current account?
A. Dividends received on a foreign investment
B. Purchase of a plane ticket on a foreign airline
C. Shipment of food aid to a poor country
D. Purchase of a foreign bond
Answer:
Purchase of a foreign bond
Question:
3. Which of the following is FALSE?
A) In 2002, the United States imported more goods and services from foreign suppliers than it exported to
foreign purchasers.
B) Services are almost one-third of total exports and are a growing part of U.S. and world trade.
C) The U.S. trade balance in services is in deficit.
D) With the exception of the Gulf War period in 1991, the U.S. current account has been in deficit since
the 1980s.
Answer:
C.) The U.S. trade balance in services is in deficit.
Question:
4. The current account balance of the United States began to deteriorate in
Answer:
the early 1980s
Question:
5. People sometimes worry that American trade with other countries will lead to large U.S. trade deficits
and the movement of massive amounts of American capital out of the country. This worry is unfounded
because countries cannot
Answer:
have both current account and financial account deficits at the same time.
Question:
6. A current account deficit implies that
Answer:
the financial account is in surplus
,Question:
7. Which of the following transactions would be recorded in the current account?
A.) A person living in the United States sends money home to her family in Cuba
B.) U.S. investors purchase bonds from Germany.
C) The Fed increases its holdings of yen.
D) The U.S. transfers a military base to another country.
Answer:
A.) A person living in the United States sends money home to her family in Cuba
Question:
8. Which of the following transactions would be recorded in the capital account?
A) U.S. investors purchase bonds from Germany.
B) The Fed increases its holdings of yen.
C) The U.S. transfers a military base to another country.
D) A U.S. firm sells a machine to a business in another country.
Answer:
C.) The U.S. transfers a military base to another country
Question:
9. Which of the following transactions would be recorded in the financial account?
A) U.S. investors purchase bonds from Germany.
B) A person living in the United States sends money home to her family in Cuba.
C) The Fed increases its holdings of yen.
D) The U.S. transfers a military base to another country.
Answer:
A.) U.S. investors purchase bonds from Germany
Question:
10. If there is a trade deficit, which of the following is true?
A) The current account balance could be positive, negative, or zero.
B) There will be a current account deficit.
C) There will be a current account surplus.
D) There will be a financial account surplus.
Answer:
A.) The current account balance could be positive, negative, or zero
Question:
11. Which of the following transactions would be recorded as a CREDIT in the current account?
A) A U.S. citizen purchases goods from Ireland.
B) A U.S. company pays dividends on its stock. Some of the dividends go to foreign owners of the stock.
C) The U.S. sells wheat to Mexico.
D) A person living in the United States sends money home to her family in Cuba.
Answer:
C.) The U.S. sells wheat to Mexico.
Question:
12. Payments made to foreign countries that are not in exchange for goods or services are known as
,Answer:
remittances
Question:
13. Purchases of stocks and bonds are recorded in the capital account. (T/F)
Answer:
FALSE
Question:
14. If the trade balance is negative, the current account balance will be negative. (T/F)
Answer:
FALSE
Question:
15. Briefly describe the factors that contributed to the U.S. current account deficits of the 1990s.
Answer:
Rapid U.S. economic growth raised income and import demand; economic growth was low or negative for
U.S. trading partners, depressing export demand.
Question:
16. How do recent current account deficits compare to GDP and to past ratios?
Answer:
It is over 6 percent of GDP, much larger than it has been in the past, and the percentage has grown sharply
over the last few years.
Question:
17. Explain the difference between primary and secondary income.
Answer:
Earned income paid abroad and received from abroad is called primary income. This includes income on
investments and compensation of employees.
Secondary income is payments made abroad or received from abroad such as payments made that are not
in exchange for a good or service, like foreign aid, gifts, or the remittances (the transfer of wages earned in
one country to residents of another country) of immigrants temporarily residing in another country.
Question:
18. Which of the following is an example of a financial derivative?
A) An option to purchase stock in the future
B) A share of stock in Microsoft
C) A U.S. government bond
D) Monetary gold
Answer:
A) An option to purchase stock in the future
, Question:
19. All of the following are true about foreign direct investment (FDI) and portfolio investment except
A) increases in the flow of portfolio investments increase the likelihood of financial crisis.
B) both portfolio investments and FDI are the same in that they both give their holders a claim on the
future output of the foreign economy.
C) FDI is relatively illiquid compared to portfolio investment.
D) FDI changes very little from year to year.
Answer:
D) FDI changes very little from year to year.
Question:
20. Capital controls are most often aimed at slowing or eliminating movements of
Answer:
foreign portfolio investment.
Question:
21. Which of the following is an example of foreign direct investment?
A) Toyota builds an automobile plant in Ohio.
B) The Bank of Japan buys dollars.
C) A citizen of Japan buys stock in Microsoft.
D) A citizen of Japan buys a U.S. government bond.
Answer:
A) Toyota builds an automobile plant in Ohio.
Question:
22. Which of the following is an example of portfolio investment?
A) Toyota builds an automobile plant in Ohio.
B) The Bank of Japan buys dollars.
C) A citizen of Japan buys stock in Microsoft.
D) A citizen of Japan buys an option to purchase Microsoft stock in the future.
Answer:
C) A citizen of Japan buys stock in Microsoft.
Question:
23. Which of the following is an example of a change in reserve assets?
A) Toyota builds an automobile plant in Ohio.
B) The Bank of Japan buys dollars.
C) A citizen of Japan buys stock in Microsoft.
D) A citizen of Japan buys a U.S. government bond.
Answer:
B) The Bank of Japan buys dollars.
