Question

If the current account balance is negative and the capital account balance is zero, _________.

	a.	the financial account balance must be negative
	b.	the financial account balance must be twice the current account balance
	c.	there is net inflow of foreign investment
	d.	there is net outflow of foreign investment
	e.	capital inflows must be less than capital outflows

Initially the exchange rate between the Australian dollar and yen is ¥80=A$1. Suppose that the exchange rate changes to ¥75 = A$1. Other things being equal, because of the change, __________.

	a.	Japan will import more Australian products
	b.	Japan will import less Australian products
	c.	Australia will import fewer Japanese products
	d.	Both (a) and (c) are correct correct
	e.	Both (b) and (c) are correct

If a country’s current account has a $200 million surplus and its capital account balance has a $30 million deficit, then its financial account balance must have a _____________.

		$200 million deficit
		$170 million deficit correct
		$230 million deficit
		$230 million surplus
		$170 million surplus

If currency traders expect the value of the dollar to rise, what effect will this have on the demand for dollars and the supply of dollars in the foreign exchange market?

	a.	Demand for dollar will increase, and supply of dollars will remain constant
	b.	Demand for dollars will decrease, and supply of dollars will decrease
	c.	Demand for dollars will increase, and supply of dollars will increase
	d.	Demand for dollars will increase, and supply of dollars will decrease
	e.	Demand for dollars will decrease, and supply of dollars will increase

A country’s current account balance will deteriorate if ___________.

	a.	it receives more dividends from its overseas investments
	b.	it receives less dividends from its overseas investments
	c.	it pays less dividends to foreign investors
	d.	Both (a) and (c) are correct.
	e.	Both (b) and (c) are correct.

Answer 1

(1) (c)

Current account + Capital account + Financial account = 0

If current account < 0 and capital account = 0, then capital account > 0, which means foreign investment inflow is higher than foreign investment outflow.

(2) (d)

The exchange rates mean that Australian dollar has depreciated and Yen has appreciated. That makes Australian exportable goods cheaper, and Japanese exportable goods costlier. So Japan will import more Australian goods and Australia will import less Japanese goods.

(3) (b)

Current account + Capital account + Financial account = 0

200 - 30 + Financial account = 0

170 + Financial account = 0

Financial account = - 170 (deficit)

(4) (d)

Dealers will buy more dollar now (to sell later at higher exchange rate), increasing the demand for dollar. Since they will sell less dollar, supply of dollar will decrease.

(5) (b)

Lower dividend received from abroad (and higher dividend paid abroad) will each weaken current account balance, by decreasing the net investment income received from abroad.