MEcon Master of Economics International Trade and Finance 2 — Questions and Answers
Question 1: Which international institution was established to provide balance-of-payments support and promote exchange rate stability?
- World Bank
- WTO
- IMF (Correct answer)
- UNCTAD
Correct answer: IMF
The International Monetary Fund was created at Bretton Woods specifically to oversee the international monetary system and assist countries with balance-of-payments problems.
Question 2: The J-curve effect in international trade describes how:
- Exports rise immediately after a tariff
- The trade balance worsens before improving after currency depreciation (Correct answer)
- GDP growth accelerates after trade liberalization
- Foreign direct investment follows a J-shaped path
Correct answer: The trade balance worsens before improving after currency depreciation
After depreciation, the trade balance initially deteriorates because import values rise faster than export volumes adjust, then improves as quantities respond.
Question 3: Purchasing Power Parity (PPP) theory predicts that the exchange rate between two currencies will equal:
- The ratio of their interest rates
- The ratio of their price levels (Correct answer)
- The ratio of their GDP growth rates
- The ratio of their trade balances
Correct answer: The ratio of their price levels
PPP holds that exchange rates adjust so that identical baskets of goods cost the same across countries when converted to a common currency.
Question 4: Foreign Direct Investment (FDI) differs from portfolio investment primarily because FDI involves:
- Only bond purchases
- Controlling ownership interest in a foreign enterprise (Correct answer)
- Short-term currency speculation
- Government-to-government lending
Correct answer: Controlling ownership interest in a foreign enterprise
FDI represents a lasting interest and significant degree of influence (typically ≥10% ownership) in a foreign enterprise, unlike passive portfolio flows.
Question 5: A country running a current account deficit must be running a:
- Budget deficit
- Capital and financial account surplus (Correct answer)
- Trade surplus
- Monetary surplus
Correct answer: Capital and financial account surplus
Balance-of-payments accounting requires the current account and capital/financial account to sum to zero, so a current account deficit is financed by a capital account surplus.
Question 6: The 'terms of trade' refers to:
- The legal terms in bilateral trade agreements
- The ratio of a country's export prices to its import prices (Correct answer)
- The average tariff rate applied to trade partners
- The volume of goods exchanged in bilateral trade
Correct answer: The ratio of a country's export prices to its import prices
Terms of trade measure the relative price of exports versus imports; an improvement means exports buy more imports.
MEcon Master of Economics International Trade and Finance 2
Which international institution was established to provide balance-of-payments support and promote exchange rate stability?