Balance of Payments Quiz #2

What does the current account track?

• Domestic investments only

• Interest rates and inflation

• Payments for goods and services as well as money transfers between countries

• Tourism and travel expenses exclusively

What is included in the financial account?

• Payments for assets between countries

• Consumer spending habits

• Local business transactions

• Government fiscal policies

How does an increase in a country's price level affect its current account?

• Increases both exports and imports

• Has no effect on the current account

• Reduces exports and increases imports

• Increases exports and reduces imports

What happens if exports are greater than imports for a country?

• The country's currency depreciates

• The country faces inflation

• The country has a trade surplus

• The country enters a recession

What does a debit in the balance of payments indicate?

• An appreciation of the domestic currency

• Money flowing out of the economy

• An increase in national income

• A surplus in the current account

How do interest rates affect financial capital flows?

• Higher interest rates attract foreign investors

• Interest rates have no impact on capital flows

• Lower interest rates increase domestic investments only

• Interest rates determine the exchange rate directly

What ensures the balance of payments always equals zero?

• Fixed exchange rates

• Government intervention in currency markets

• The sum of the current account and financial account

• Trade tariffs and quotas

How does the appreciation of the US Dollar affect its trade balance?

• Increases imports and decreases exports

• Has no effect on the trade balance

• Decreases both imports and exports

• Increases exports and decreases imports

What is a trade deficit?

• An increase in a country's interest rates

• A decrease in the value of a country's currency

• When a country's imports exceed its exports

• When a country's exports exceed its imports

How does the balance of payments impact foreign exchange markets?

• It has no impact on foreign exchange markets

• It only affects domestic currency valuation

• It sets the exchange rates directly

• Money flows affect the demand and supply of a country's currency