Chapter 2
International Flow of Funds
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1. Factor income represents income received by investors on foreign investments in financial assets (securities). Factor income is part of which component of the balance of payments?
a. capital account
b. current account
c. balance of trade
d. none of the above

2. Which of the following are factors that affect international trade flows?
a. government restrictions
b. exchange rates
c. inflation
d. all of the above
e. none of the above

3. Even if a country's home currency weakens, its balance of trade will not necessarily improve immediately. This may occur because:
a. many international trade transactions are prearranged and cannot be immediately adjusted
b. the currencies of some other countries may have strengthened
c. prices on goods will remain the same, making goods just as competitive
d. all of the above
e. none of the above

4. Which of the following factors will lead to an inflow of direct foreign investment (DFI) into a country?
a. high tax rates in the country where the investment flows
b. privatization in the country where the investment flows
c. an expectation that the currency in the country where the investment flows will depreciate
d. all of the above
e. none of the above

5. Which of the following factors will lead to an inflow of portfolio investment into a country, everything else held constant?
a. an expectation of a weaker currency in the country where the investment flows
b. higher tax rates in the country where the investment flows
c. higher interest rates in the country where the investment flows
d. none of the above
e. both a and c

6. Among the major objectives of the ________ are to promote cooperation among countries on international monetary issues and to promote stability in exchange rates.
a. International Monetary Fund (IMF)
b. World Bank
c. World Trade Organization
d. International Financial Corporation
e. none of the above

7. The World Bank does cofinancing of loans with which of the following entities?
a. official aid agencies
b. export credit agencies
c. commercial banks
d. both a and c
e. all of the above

8. ______________ is a component of the capital account and represents the investment in fixed assets in foreign countries that can be used to conduct business operations.
a. Portfolio investment
b. Direct foreign investment (DFI)
c. Other capital investment
d. Transfer payments
e. None of the above

9. The General Agreement on Tariffs and Trade (GATT):
a. is an accord reached between 100 countries in 1980
b. reduced some tariffs by 80 percent on average
c. removed some tariffs over a five- to ten-year period
d. made more progress on reducing tariffs in service industries than in manufacturing industries
e. none of the above

10. The capital account is primarily composed of merchandise exports and imports and service exports and imports.
a. True
b. False

11. Tariffs are taxes imposed on imported goods.
a. True
b. False

12. In the long run, a weak dollar is expected to cause a higher balance of trade from the U.S. perspective.
a. True
b. False

13. The General Agreement on Tariffs and Trade (GATT) was established in 1993 to settle trade disputes and provide a forum for multilateral trade negotiations. It began operations in 1995 with a membership of 81 countries.
a. True
b. False

14. The International Development Association (IDA) was created in 1960 with country development objectives similar to those of the World Bank. Its loan policy is more appropriate for less prosperous nations.
a. True
b. False

15. Dumping reflects the exporting of products by one country to other countries at prices above cost.
a. True
b. False

16. A graphical illustration of the fact that the U.S. balance of trade may actually deteriorate in the short run as a result of dollar depreciation is called the J curve effect.
a. True
b. False



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