Balance of Payments and Policies to Correct Disequilibrium
33 questions· page 1 of 4
The current account on the balance of payments moves into deficit.
What is a possible reason for this?
Options
A a decrease in tax revenue
B export-led growth
C repayment of debts to other countries
D the import of new technology
Which components are included in the current account and financial account of the balance of payments?
Options
| current account | financial account | |
|---|---|---|
| A | official reserve assets and trade in goods | trade in services and transactions in official reserve assets |
| B | primary income and trade in goods | official reserve assets and secondary income |
| C | trade in goods and trade in services | foreign direct investment and secondary income |
| D | trade in services and secondary income | portfolio investment and official reserve assets |
Which policy will help to correct a deficit on the current account of the balance of payments?
Options
A decreasing direct taxes
B decreasing government regulations
C increasing exchange rates
D increasing government spending
A country is experiencing high unemployment, high inflation and a trade deficit.
Which policy is most likely to solve all of these problems?
Options
A devaluation of the currency
B export subsidies
C lower interest rates
D tariffs on imports
When will a balance of payments deficit create the most demand-pull inflationary pressure in an economy with a floating exchange rate?
Options
| price elasticity of demand for exports | unemployment rate | |
|---|---|---|
| A | elastic | high |
| B | elastic | low |
| C | inelastic | high |
| D | inelastic | low |
What would be the most effective long-term solution to a persistent deficit on the current account of the balance of payments?
Options
A to increase borrowing from foreign financial institutions
B to persuade foreign firms to increase direct investment in the economy
C to revalue the currency to make it stronger on foreign exchange markets
D to reduce the reserves of foreign exchange to zero
A country has a deficit on the current account of the balance of payments. The government can try to reduce this deficit by using either an expenditure-switching policy or an expenditure-reducing policy.
Under which conditions will an expenditure-reducing policy be more successful than an expenditure-switching policy?
Options
| price elasticity of demand for imports | price elasticity of demand for exports | marginal propensity to import | |
|---|---|---|---|
| A | 0.2 | 0.2 | 0.1 |
| B | 0.2 | 0.2 | 0.4 |
| C | 0.6 | 0.2 | 0.1 |
| D | 0.6 | 0.6 | 0.4 |
A country’s trade balance has worsened. The country has a fixed exchange rate.
Which additional changes for unemployment and price level are likely to follow?
Options
| the level of unemployment | the price level | |
|---|---|---|
| A | decreases | decreases |
| B | decreases | increases |
| C | increases | decreases |
| D | increases | increases |
Which statement about the components of the balance of payments is correct?
Options
A The current account consists of transactions in goods, services, investment income and remittances between countries.
B The current account consists of transactions in goods, services, and portfolio investment between countries.
C The financial account consists of transactions in financial assets, investment income and remittances between countries.
D The financial account consists of transactions in fixed assets, investment income and the balancing item between countries.
There is a rise in the domestic rate of interest in an economy. This economy has a fixed exchange rate.
What would be the impact on the current and financial accounts of the balance of payments?
Options
| current account | financial account | |
|---|---|---|
| A | improves | improves |
| B | improves | worsens |
| C | worsens | improves |
| D | worsens | worsens |