zahid
Sheikh Mujib-ur-Rahman
Balance of Payments
and Exchange Rates
Multiple Choice
Select the alternative that most fully and correctly answers the following questions
1 Interest payments resulting from borrowings from overseas are recorded in Australia's balance of payments as a
(a) debit on current account
(b) credit on current account
(c) debit on capital and financial account
(d) credit on capital and financial account
2 The payment of interest to foreign lenders is recorded as
(a) services debits
(b) capital outflows
(c) transfers in
(d) an income payment
Questions 3 to 6 are based on the following hypothetical figures for Australia's balance of payments in the year 2004
Current Account $ billion
Merchandise exports 95.5
Merchandise imports 92.0
Net services -6.8
Net income -31.5
3 The balance of merchandise trade is
(a) -$7.5 b (c) $7.5 b
(b) -$3.5 b (d) $3.5 b
4 The balance on goods and services is equal to
(a) - $ 10.3 b (c) - $ 6.8 b
(b) - $ 3.3 b (d) - $ 2.3 b
5 The balance of payments on current account shows a
(a) deficit of $16.4 b
(b) surplus of $3.5 b
(c) deficit of $34.8b
(d) surplus of $28.2 b
6 The balance of payments on capital account for the same period will show a
(a) deficit of $10 b
(b) surplus of $31.5 b
(c) deficit of $3.5 b
(d) surplus of $34.8b
7 A reduction in the current account deficit is most likely to occur when
(a) there is an increase in borrowings from overseas
(b) interest rates throughout the world are rising
(c) higher tariffs are imposed by other countries on Australian goods
(d) the domestic rate of inflation is falling
8 Portfolio investment refers to the
(a) purchase of shares in Australian companies by overseas investors
(b) establishment of subsidiaries of foreign firms in Australia
(c) purchase of Australian property through overseas financial institutions
(d) acquisition of a collection or portfolio of gilt edged government securities
9 The following items appear on the current account of Australia's balance of payments except for
(a) dividends paid to foreign residents who own Australian shares
(b) freight and insurance costs incurred by Australian importers
(c) the sale of a hotel chain owned by an overseas conglomerate
(d) the payment to farmers for wool sold to overseas countries
10 Which of these is likely to worsen the current account deficit in the short-run?
(a) improving international competitiveness
(b) a depreciation in the value of the $A
(c) a reduction in the value of imports
(d) a fall in domestic wage rates
11 Which of the following items on the current account are classified as income?
(a) insurance charges on goods imported into Australia
(b) export receipts received from the sale of wool to Indonesia
(c) the inflow of financial assets from an Asian immigrant
(d) dividends from a mining venture in Vietnam paid to Australia
12 In an open economy, when national income rises, other things being equal
(a) total exports tend to fall
(b) total imports tend to rise
(c) total imports tend to fall
(d) imports and exports remain largely unchanged
13 Reducing tariffs in Australia during a period of high domestic inflation would
(a) worsen the current account deficit and increase foreign debt
(b) improve the current account deficit and boost domestic employment
(c) worsen the current account deficit and boost domestic employment
(d) increase the current account deficit and raise productivity levels in industry
14 If a country has a persistent balance of payments surplus it is likely that
(a) employment levels in exporting firms will fall
(b) tariffs and other protective measures will be raised
(c) the level of interest rates will rise in order to attract foreign capital
(d) an appreciation in its currency will result
15 Australia is said to have a favourable trade balance with Japan when
(a) the value of net services from Japan is positive
(b) the flow of funds from Japan exceed Australia's payments to Japan
(c) the value of goods exported to, is greater than imports from Japan
(d) the volume of export sales to Japan is above imports
16 Which of the following would contribute to an improvement in Australia's current account deficit
(i) fewer exports
(ii) a reduction in capital outflow
(iii) a decrease in dividends paid overseas
(a) (i) and (ii) (c) (iii) only
(b) (ii) and (iii) (d) (i), (ii) and (iii)
17 Loans raised overseas which finance corporate takeovers in Australia are
(a) credits on the capital and financial account
(b) debits on the current account
(c) credits on the current account
(d) debits on the capital and financial account
18 If imports are relatively inelastic, a deterioration in Australia's terms of trade may directly lead to
(a) fewer imports of capital equipment
(b) net capital outflow to rise
(c) a worsening of the trade balance on the current account
(d) the current account deficit to improve
19 The floating of the $A means that the value of Australia's currency is mainly determined by
(a) a weighted average of a basket of international currencies
(b) the free market forces of demand and supply
(c) the Reserve Bank in consultation with the Treasurer
(d) the current level of interest rates
20 The value of the Australian dollar moves from $A = $0.52 US to $A = $0.58 US. Other things being equal
(a) Australia's exports to the USA will fall
(b) US investment in Australia will rise
(c) Australia will import fewer goods from the US
(d) both (b) and (c)
21 Any anticipated rise in the value of the $A against the $NZ will cause forex dealers
(a) to sell Australian dollars before any rise occurs
(b) to buy Australian dollars and sell New Zealand dollars
(c) to purchase other currencies as a hedge against the rise
(d) to buy New Zealand dollars in anticipation of a similar appreciation
22 The Australian dollar may suffer a decline in value when
(a) domestic interest rates fall
(b) Australia's stock of gold holdings rise
(c) there is a persistent current account surplus
(d) there is a strong demand for Australian shares
23 The value of the Australian dollar has appreciated strongly over the past several years. Which of the following may have contributed most to this rise?
(a) persistently high interest rates relative to overseas countries
(b) low levels of corporate taxation
(c) overseas investment in the domestic economy
(d) an increasing demand for imports
24 The Trade Weighted index is an index of the value of the $A in relation to
(a) an average of international currencies including gold
(b) the consumer price index and the weighting of selected consumer items
(c) a basket of currencies of Australia's major trading partners
(d) the rise in the debt servicing requirement in the current account
25 Which of the following will not affect the demand for the Australian dollar?
(a) foreigners purchasing assets such as land and shares in Australia
(b) Australian's receiving dividend payments on investments made overseas
(c) Australian investors purchasing domestic bonds and other securities
(d) increased numbers of tourists in Queensland and Western Australia
26 An appreciation in the Australian dollar will cause
(a) a greater demand for Australian goods from overseas
(b) the government to reduce tariffs on imports
(c) imports to become cheaper from overseas
(d) no long-run effect on Australia's exports or imports
27 Which of the following policies is most likely to reduce Australia's current account deficit over the long term?
(a) export assistance to selected industries
(b) improved productivity and international competitiveness
(c) higher tariffs and import controls
(d) an appreciation of the value of $A on world currency markets
28 A surplus on the capital and financial account in Australia has
(a) financed Australia's excessive import demand
(b) resulted in a depreciation of $A on currency markets
(c) contributed to strong growth in the domestic money supply
(d) helped reduce our foreign debt levels
Definitions
Select the term which corresponds to the statements which follow
A balance on capital and financial account H fixed exchange rate
B exchange rate equilibrium I international reserves
C portfolio investment K income
D depreciation L managed float
E balance of merchandise trade M net income
F trade weighted index N balancing item
G revaluation O balance on goods & services
1 ___ The difference between the value of exports and imports of goods
2 ___ A partial balance in the current account which records investment income
3 ___ The purchase of Australian shares and debentures by overseas investors
4 ___ The sum of all private and government sector capital transactions between Australia and the rest of the world
5 ___ The rate at which one currency is traded for another in a freely floating system
6 ___ Measures the value of the $ A in relation to a group of key currencies dependent on the degree of trade importance
7 ___ Any deliberate increase in a currency's value from direct government intervention
8 ___ A country's holdings of international currencies plus holdings of gold or other special drawing rights provided by the International Monetary Fund
9 __ The Federal Government through the Reserve Bank enters the FOREX market to buy or sell large quantities of $ A in order to smooth out short term fluctuations
10 __ Any fall in the currency caused through market forces on the forex market
11 __ Exchange rates which are officially set and maintained by the Reserve Bank
12 __ The sum of the merchandise trade balance and net services.
13 __ An item on the Balance of Payments which takes account of omissions and statistical discrepancies.
Problem Solving
The following information is a random list of balance of payments data for a year
Income (credits) 14
Services (debits) 25
Direct investment (net) 3
Net official capital 3
Exports 64
Portfolio investment (net) 2
Imports 59
Income (debits) 25
Services (credits) 22
(figures in $b)
1 (a) Calculate the following partial balances.
(i) balance on merchandise trade ___________________
(ii) net services ___________________
(iii) balance on goods and services ___________________
(iv) balance on current account ___________________
(v) balance on capital and financial account ___________________
(b) Is the current account in deficit or surplus? ___________________
(c) What is the value of the balancing item? ___________________
(d) Carefully analyse each partial balance and comment on any conclusions you may draw from the data
(e) Does this economy have a debt servicing problem?
2 The following table gives the demand and supply schedule for the $A in terms of Japanese Yen.
Qd $A ($ billion) Price $ A in terms of Yen Qs $A ($ billion)
100 120 170
120 110 160
150 100 150
170 90 140
185 80 130
(a) Assuming a freely floating or flexible exchange rate
(i) Graph the above demand and supply schedules. Clearly labelling each axis and mark the equilibrium exchange rate.
(ii) How many $A will be purchased on FOREX markets?
_____________________________________________________
(iii) What will the rate of exchange for the $A be ?
_____________________________________________________
I shall post up the answers soon...copy this into word and print it off....then have fun revising
and Exchange Rates
Multiple Choice
Select the alternative that most fully and correctly answers the following questions
1 Interest payments resulting from borrowings from overseas are recorded in Australia's balance of payments as a
(a) debit on current account
(b) credit on current account
(c) debit on capital and financial account
(d) credit on capital and financial account
2 The payment of interest to foreign lenders is recorded as
(a) services debits
(b) capital outflows
(c) transfers in
(d) an income payment
Questions 3 to 6 are based on the following hypothetical figures for Australia's balance of payments in the year 2004
Current Account $ billion
Merchandise exports 95.5
Merchandise imports 92.0
Net services -6.8
Net income -31.5
3 The balance of merchandise trade is
(a) -$7.5 b (c) $7.5 b
(b) -$3.5 b (d) $3.5 b
4 The balance on goods and services is equal to
(a) - $ 10.3 b (c) - $ 6.8 b
(b) - $ 3.3 b (d) - $ 2.3 b
5 The balance of payments on current account shows a
(a) deficit of $16.4 b
(b) surplus of $3.5 b
(c) deficit of $34.8b
(d) surplus of $28.2 b
6 The balance of payments on capital account for the same period will show a
(a) deficit of $10 b
(b) surplus of $31.5 b
(c) deficit of $3.5 b
(d) surplus of $34.8b
7 A reduction in the current account deficit is most likely to occur when
(a) there is an increase in borrowings from overseas
(b) interest rates throughout the world are rising
(c) higher tariffs are imposed by other countries on Australian goods
(d) the domestic rate of inflation is falling
8 Portfolio investment refers to the
(a) purchase of shares in Australian companies by overseas investors
(b) establishment of subsidiaries of foreign firms in Australia
(c) purchase of Australian property through overseas financial institutions
(d) acquisition of a collection or portfolio of gilt edged government securities
9 The following items appear on the current account of Australia's balance of payments except for
(a) dividends paid to foreign residents who own Australian shares
(b) freight and insurance costs incurred by Australian importers
(c) the sale of a hotel chain owned by an overseas conglomerate
(d) the payment to farmers for wool sold to overseas countries
10 Which of these is likely to worsen the current account deficit in the short-run?
(a) improving international competitiveness
(b) a depreciation in the value of the $A
(c) a reduction in the value of imports
(d) a fall in domestic wage rates
11 Which of the following items on the current account are classified as income?
(a) insurance charges on goods imported into Australia
(b) export receipts received from the sale of wool to Indonesia
(c) the inflow of financial assets from an Asian immigrant
(d) dividends from a mining venture in Vietnam paid to Australia
12 In an open economy, when national income rises, other things being equal
(a) total exports tend to fall
(b) total imports tend to rise
(c) total imports tend to fall
(d) imports and exports remain largely unchanged
13 Reducing tariffs in Australia during a period of high domestic inflation would
(a) worsen the current account deficit and increase foreign debt
(b) improve the current account deficit and boost domestic employment
(c) worsen the current account deficit and boost domestic employment
(d) increase the current account deficit and raise productivity levels in industry
14 If a country has a persistent balance of payments surplus it is likely that
(a) employment levels in exporting firms will fall
(b) tariffs and other protective measures will be raised
(c) the level of interest rates will rise in order to attract foreign capital
(d) an appreciation in its currency will result
15 Australia is said to have a favourable trade balance with Japan when
(a) the value of net services from Japan is positive
(b) the flow of funds from Japan exceed Australia's payments to Japan
(c) the value of goods exported to, is greater than imports from Japan
(d) the volume of export sales to Japan is above imports
16 Which of the following would contribute to an improvement in Australia's current account deficit
(i) fewer exports
(ii) a reduction in capital outflow
(iii) a decrease in dividends paid overseas
(a) (i) and (ii) (c) (iii) only
(b) (ii) and (iii) (d) (i), (ii) and (iii)
17 Loans raised overseas which finance corporate takeovers in Australia are
(a) credits on the capital and financial account
(b) debits on the current account
(c) credits on the current account
(d) debits on the capital and financial account
18 If imports are relatively inelastic, a deterioration in Australia's terms of trade may directly lead to
(a) fewer imports of capital equipment
(b) net capital outflow to rise
(c) a worsening of the trade balance on the current account
(d) the current account deficit to improve
19 The floating of the $A means that the value of Australia's currency is mainly determined by
(a) a weighted average of a basket of international currencies
(b) the free market forces of demand and supply
(c) the Reserve Bank in consultation with the Treasurer
(d) the current level of interest rates
20 The value of the Australian dollar moves from $A = $0.52 US to $A = $0.58 US. Other things being equal
(a) Australia's exports to the USA will fall
(b) US investment in Australia will rise
(c) Australia will import fewer goods from the US
(d) both (b) and (c)
21 Any anticipated rise in the value of the $A against the $NZ will cause forex dealers
(a) to sell Australian dollars before any rise occurs
(b) to buy Australian dollars and sell New Zealand dollars
(c) to purchase other currencies as a hedge against the rise
(d) to buy New Zealand dollars in anticipation of a similar appreciation
22 The Australian dollar may suffer a decline in value when
(a) domestic interest rates fall
(b) Australia's stock of gold holdings rise
(c) there is a persistent current account surplus
(d) there is a strong demand for Australian shares
23 The value of the Australian dollar has appreciated strongly over the past several years. Which of the following may have contributed most to this rise?
(a) persistently high interest rates relative to overseas countries
(b) low levels of corporate taxation
(c) overseas investment in the domestic economy
(d) an increasing demand for imports
24 The Trade Weighted index is an index of the value of the $A in relation to
(a) an average of international currencies including gold
(b) the consumer price index and the weighting of selected consumer items
(c) a basket of currencies of Australia's major trading partners
(d) the rise in the debt servicing requirement in the current account
25 Which of the following will not affect the demand for the Australian dollar?
(a) foreigners purchasing assets such as land and shares in Australia
(b) Australian's receiving dividend payments on investments made overseas
(c) Australian investors purchasing domestic bonds and other securities
(d) increased numbers of tourists in Queensland and Western Australia
26 An appreciation in the Australian dollar will cause
(a) a greater demand for Australian goods from overseas
(b) the government to reduce tariffs on imports
(c) imports to become cheaper from overseas
(d) no long-run effect on Australia's exports or imports
27 Which of the following policies is most likely to reduce Australia's current account deficit over the long term?
(a) export assistance to selected industries
(b) improved productivity and international competitiveness
(c) higher tariffs and import controls
(d) an appreciation of the value of $A on world currency markets
28 A surplus on the capital and financial account in Australia has
(a) financed Australia's excessive import demand
(b) resulted in a depreciation of $A on currency markets
(c) contributed to strong growth in the domestic money supply
(d) helped reduce our foreign debt levels
Definitions
Select the term which corresponds to the statements which follow
A balance on capital and financial account H fixed exchange rate
B exchange rate equilibrium I international reserves
C portfolio investment K income
D depreciation L managed float
E balance of merchandise trade M net income
F trade weighted index N balancing item
G revaluation O balance on goods & services
1 ___ The difference between the value of exports and imports of goods
2 ___ A partial balance in the current account which records investment income
3 ___ The purchase of Australian shares and debentures by overseas investors
4 ___ The sum of all private and government sector capital transactions between Australia and the rest of the world
5 ___ The rate at which one currency is traded for another in a freely floating system
6 ___ Measures the value of the $ A in relation to a group of key currencies dependent on the degree of trade importance
7 ___ Any deliberate increase in a currency's value from direct government intervention
8 ___ A country's holdings of international currencies plus holdings of gold or other special drawing rights provided by the International Monetary Fund
9 __ The Federal Government through the Reserve Bank enters the FOREX market to buy or sell large quantities of $ A in order to smooth out short term fluctuations
10 __ Any fall in the currency caused through market forces on the forex market
11 __ Exchange rates which are officially set and maintained by the Reserve Bank
12 __ The sum of the merchandise trade balance and net services.
13 __ An item on the Balance of Payments which takes account of omissions and statistical discrepancies.
Problem Solving
The following information is a random list of balance of payments data for a year
Income (credits) 14
Services (debits) 25
Direct investment (net) 3
Net official capital 3
Exports 64
Portfolio investment (net) 2
Imports 59
Income (debits) 25
Services (credits) 22
(figures in $b)
1 (a) Calculate the following partial balances.
(i) balance on merchandise trade ___________________
(ii) net services ___________________
(iii) balance on goods and services ___________________
(iv) balance on current account ___________________
(v) balance on capital and financial account ___________________
(b) Is the current account in deficit or surplus? ___________________
(c) What is the value of the balancing item? ___________________
(d) Carefully analyse each partial balance and comment on any conclusions you may draw from the data
(e) Does this economy have a debt servicing problem?
2 The following table gives the demand and supply schedule for the $A in terms of Japanese Yen.
Qd $A ($ billion) Price $ A in terms of Yen Qs $A ($ billion)
100 120 170
120 110 160
150 100 150
170 90 140
185 80 130
(a) Assuming a freely floating or flexible exchange rate
(i) Graph the above demand and supply schedules. Clearly labelling each axis and mark the equilibrium exchange rate.
(ii) How many $A will be purchased on FOREX markets?
_____________________________________________________
(iii) What will the rate of exchange for the $A be ?
_____________________________________________________
I shall post up the answers soon...copy this into word and print it off....then have fun revising
