MEcon Master of Economics International Trade and Finance 2

Question 1

Which international institution was established to provide balance-of-payments support and promote exchange rate stability?

Accepted Answer

IMF

Answer

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:

Accepted Answer

The trade balance worsens before improving after currency depreciation

Answer

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:

Accepted Answer

The ratio of their price levels

Answer

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:

Accepted Answer

Controlling ownership interest in a foreign enterprise

Answer

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:

Accepted Answer

Capital and financial account surplus

Answer

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.

MEcon Master of Economics Practice Test

MEcon Master of Economics Practice Test

MEcon Master of Economics International Trade and Finance 2