Module 5: External Sector
1. Foreign-produced goods and services that are sold domestically are called
a. imports.
b. exports.
c. net imports.
d. net exports.
2. Net exports of a country are the value of
a. goods and services imported minus the value of goods and services exported.
b. goods and services exported minus the value of goods and services imported.
c. goods exported minus the value of goods imported.
d. goods imported minus the value of goods exported.
3. One year a country has negative net exports. The next year it still has negative net exports and imports have risen
more than exports.
a. its trade surplus fell.
b. its trade surplus rose.
c. its trade deficit fell.
d. its trade deficit rose
4. Suppose that a country imports $100 million of goods and services and exports $75 million of goods and services,
what is the value of net exports?
a. $175 million
b. $75 million
c. $25 million
d. -$25 million
5. Country A buys $40 of wine from Country B and Country B buys $100 of wool from Country A. Supposing this
is the only trade that these countries do. What are the net exports of A and B in that order?
a. $140 and $140
b. $100 and $40
c. $60 and -$60
d. None of the above is correct
6. If U.S. imports total $100 billion and U.S. exports total $150 billion, which of the following is correct?
a. The U.S. has a trade surplus of $100 billion.
b. The U.S. has a trade surplus of $50 billion.
c. The U.S. has a trade deficit of $100 billion.
d. The U.S. has a trade deficit of $50 billion.
7. Ravi traps lobsters in India and sells them to a restaurant in Malaysia. Other things the same, these sales
a. increase India. net exports and has no effect on Malaysian net exports.
b. increase India. net exports and decrease Malaysian net exports.
c. decrease India. net exports and have no effect on Malaysian net exports.
d. decrease India. net exports and increase Malaysian net exports.
8. Net capital outflow refers to the purchase of
a. foreign assets by domestic residents minus the purchase of domestic assets by foreign residents.
b. foreign assets by domestic residents minus the purchase of foreign goods and services by domestic
residents.
c. domestic assets by foreign residents minus the purchase of domestic goods and services by foreign
residents.
d. domestic assets by foreign residents minus the purchase of foreign assets by domestic residents.
9. Harry, a U.S. citizen, opens and operates a shoe factory in India. This counts as
a. investment for Harry and U.S. foreign direct investment.
b. investment for Harry and U.S. foreign portfolio investment.
c. U.S. foreign direct investment and U.S. domestic investment.
d. U.S. foreign portfolio investment and U.S. domestic investment.
10. An Indian citizen opens and operates a restaurant in the United States. This is Indian
a. foreign direct investment that increases Indian net capital outflow.
b. foreign direct investment that decreases Indian net capital outflow.
c. foreign portfolio investment that increases Indian net capital outflow.
d. foreign portfolio investment that decreases Indian net capital outflow
11. A U.S. citizen buys bonds issued by an automobile manufacturer in India. Her expenditures are U.S.
a. foreign direct investment that increase U.S. net capital outflow.
b. foreign direct investment that decrease U.S. net capital outflow.
c. foreign portfolio investment that increase U.S. net capital outflow.
d. foreign portfolio investment that decrease U.S. net capital outflow
12. A Japanese company builds a television factory in India. His expenditures
a. increase Japanese and Indian net capital outflow.
b. increase Japanese net capital outflow, but decrease Indian net capital outflow.
c. decrease Japanese net capital outflow, but increase Indian net capital outflow.
d. None of the above is correct.
13. An open economy's GDP is always given by
a. Y = C + I + G.
b. Y = C + I + G + T.
c. Y = C + I + G + S.
d. Y = C + I + G + M-X
14. Other things the same, if the exchange rate changes from 48 Indian rupee per dollar to 35 Indian rupee per
dollar, the dollar has
a. appreciated and so buys more Indian goods.
b. appreciated and so buys fewer Indian goods.
c. depreciated and so buys more Indian goods.
d. depreciated and so buys fewer Indian goods
15. A depreciation of the Indian real exchange rate induces Indian. consumers to buy
a. fewer domestic goods and fewer foreign goods.
b. more domestic goods and fewer foreign goods.
c. fewer domestic goods and more foreign goods.
d. more domestic goods and more foreign goods.
16. An appreciation of the Indian. real exchange rate induces Indian consumers to buy
a. fewer domestic goods and fewer foreign goods.
b. more domestic goods and fewer foreign goods.
c. fewer domestic goods and more foreign goods.
d. more domestic goods and more foreign goods.
17. If the Indian real exchange rate appreciates,
a. Indian. exports increase and Indian imports decrease.
b. Indian. exports decrease and Indian imports increase.
c. Indian. exports and Indian imports both increases.
d. Indian. exports and Indian imports both decrease.
18. Capital flight refers to
a. the movement of workers across international borders in response to exchange rate changes.
b. the movement of funds between financial intermediaries when interest rates change.
c. the ability of foreign direct investment to lift a country out of poverty.
d. a large and sudden movement of funds out of a country.
19. One of the main reasons that mercantilists wanted to limit imports is the
a. fear that imports will decrease the income
b. idea that cheap foreign labor destroys jobs.
c. concept that if trade benefits one country, it must harm others.
d. All of the above are correct.
20. The main reason why one nation trades with another is to
a. save its natural resources from rapid depletion.
b. exploit the advantages of specialization.
c. eliminate the danger of retaliation from other nations.
d. improve political alliances.
21. ---------- first explained that international trade is not a zero sum game and it can help both the exporter and the
importer
a. Adam Smith
b. Paul Krugman
c. Joseph Stiglitz
5. None of the above
22. . ---------- explained that international trade is not a zero sum game and it can help both the exporter and the
importer
a. David Ricardo
b. Paul Samuelson
c. Joseph Stiglitz
5. None of the above
23. Which of the following might lead a nation to engage in international trade?
a. Differences in natural endowments such as climate
b. Differences in skills of labor force
c. Differences in endowments of natural resources
d. All of the above are correct.
24. Mercantilist ideas prompted trade policies which
a. focus on virtues of free trade
b. promote exports and restrict imports
c. called for complete tariff abolition
d. argued for flexible exchange rates
25. Theory of comparative advantage shows
a. trade improves welfare by increasing level of consumption in both exporting and importing countries
b. trade is not a zero sum game
c. both (a) and (b)
d. None of the above
26. Autarky means
a. A regime of free trade
b. A regime of high tariff
c. A regime of licensing
d. None of the above
27. In a country’s Balance of Payment reporting, trade in services in reported under
a. Merchandise trade balance
b. Capital account
c. Invisibles
d. None of the above
28. In a country’s Balance of Payment reporting, ‘invisibles’ include:
a. Net factor incomes
b. Transfer payments
c. Both a) and b)
d. None of the above
29. In a country’s Balance of Payment reporting ‘transfers’ include
a. services trade
b. remittances
c. portfolio investment
d. foreign direct investment
30. Merchandise trade include
a. exports and imports of goods and services
b. exports and imports of services
c. inflow and outflow of remittances
d. None of the above
31. India is
a. Generally a current account deficit country
b. Generally a current account surplus country
c. Generally a trade surplus country
d. None of the above
32. When goods or services cross international borders
a. countries must ship gold to make payment.
b. money must generally move in the opposite direction.
c. a future shipment must be made to offset the current purchase.
d. payment must be made in another good, using barter.
33. In capital account, debt creating flows include
a. Foreign direct investment
b. Foreign portfolio investment
c. Both foreign direct investment and foreign portfolio investment
d. None
34. ‘External assistance’ is a part of
a. Invisibles
b. Debt creating flows under capital account
c. Non-debt creating flows under capital account
d. None of the above
35. ‘External commercial borrowings” is a part of
a. Invisibles
b. Debt creating flows under capital account
c. Non-debt creating flows under capital account
d. None of the above
36. Greenfield investment is a type of
a. Foreign direct investment
b. Foreign portfolio investment
c. Can be either foreign direct or foreign portfolio investment
d. None of the above
37. Which of the following best refers to the outright construction or purchase abroad of productive facilities by
domestic residents?
a) foreign direct investment
b) portfolio Investment
c) short-term capital investment.
d) None of the above
38. FIIs bring in
a. Foreign portfolio investment
b. Foreign direct investment
c. Long term capital flows
d. None of the above
39. Direct foreign investment may take any of the following forms except
a) investors buying bonds of an existing firm overseas.
b) the creation of a wholly owned business overseas.
c) the takeover of an existing company overseas.
d) the construction of a manufacturing plant overseas.
40. FIIs have to be registered with
a. Reserve Bank of India
b. Department of Industrial Policy and Promotion
c. National Stock Exchange
d. None of the above
41. Participatory Notes is an instrument used by
a. Foreign direct investors
b. Floor traders
c. Bankers
d. FIIs
42. ADRs and GDRs are source of
a. Foreign portfolio investment
b. Foreign direct investment
c. Long term capital flows
d. None of the above
43. Which is not a part of foreign portfolio investment
a. ADR
b. GDR
c. Participatory Notes
d. Greenfield investment
44. If India’s currency appreciates, then
a. India’s exports are expected to grow
b. India’s exports are expected to come down
c. India’s balance of trade is expected to improve
d. None of the above
45. FDI and FPI are forms of
a. bilateral subsidies.
b. private investment.
c. IMF lending.
d. NGO development aid.
46. The exchange rate is:
a. the growth rate differential between two countries.
b. the value of one currency in terms of another.
c. the rate at which goods are sold in a country.
d. the interest rate differential between two countries.
47. As opposed to a closed economy, in an open economy:
a. trade is only beneficial to the relatively larger economy.
b. the exchange rate is determined by the government.
c. there is trade in goods, services, or assets with other countries.
d. specialization in activities with a comparative advantage is not possible.
48. In India, Foreign Exchange Reserves are around
a. 10-20 billion US$
b. 50-100 billion US$
c. 100-150 billion US$
d. 250-300 billion US$
49. FDI is a type of
a. bilateral subsidies.
b. private investment.
c. IMF lending.
d. NGO development aid.
50. Positive source of foreign exchange reserve in India is
a. Current account
b. Trade balance
c. Capital account
d. None of the above
51. One of the most important roles of foreign exchange reserve in India is
a. Increase trade
b. Improve capital adequacy
c. Maintaining confidence in monetary and exchange rate policies
d. improving income distribution in India
52. Foreign Exchange Reserves are maintained in India by
a. Planning Commission
b. SEBI
c. NSE
d. RBI
53. Suppose that the exchange rate between the U.S. dollar and the Euro is 1.5 $/Euro. Suppose protein drinks
cost 4.5 Euro/drink. What is the dollar price of the protein drink?
a) 3
b) 1
c) 6.75
d) 1.5
54. If consumers in the United States favor imports over domestically produced goods, the international value
of the United States dollar and United States exports will most likely change in which of the following
ways?
International value of the Dollar Exports
(a) Appreciate Increase
(b) Appreciate Decrease
(c) Depreciate Increase
(d) Depreciate Decrease
55. The major difference between a closed economy and an open economy is that a(n)
(a) closed economy balances budget, while an open economy does not.
(b) open economy is a market economy, while a closed economy relies on planning.
(c) open economy interacts with the rest of the world, while a closed economy does not.
(d) closed economy keeps political affairs secret, while an open economy does not.
56. In USA, the main input into the production of Starbuck’s coffee is imported coffee beans. If the dollar
depreciates, how will this affect the U.S. retail coffee market?
(a) Input prices will fall and supply will decrease.
(b) Input prices will fall and supply will increase.
(c) Input prices will rise and supply will decrease.
(d) Input prices will rise and supply will increase.
57. A currency appreciation should
(a) reduce net exports and therefore increase aggregate demand.
(b) raise net exports and therefore decrease aggregate demand.
(c) reduce net exports and therefore decrease aggregate demand.
(d) raise net exports and therefore increase aggregate demand.
58. Other things equal, if American exports to Japan increase and American imports from Japan decrease,
then, under a floating exchange rate system, we would expect the dollar to:
(a) Weaken against the Japanese yen.
(b) Depreciate against the Japanese yen.
(c) Devalue against the Japanese yen.
(d) Strengthen against the Japanese yen.
59. An appreciation in the value of the U.S. dollar against the British pound would tend to:
(a) Discourage the British from buying American goods
(b) Discourage Americans from buying British goods
(c) Increase the number of dollars that could be bought with a pound
(d) Discourage U.S. tourists from traveling to Britain
60. Over time, a depreciation in the value of a nation’s currency in the foreign exchange market will result in:
(a) Exports rising and imports falling
(b) Imports rising and exports falling
(c) Both imports and exports rising
(d) Both imports and exports falling
61. If the real exchange rate is high, foreign goods:
(a) and domestic goods are both relatively expensive.
(b) and domestic goods are both relatively cheap.
(c) are relatively expensive and domestic goods are relatively cheap.
(d) are relatively cheap and domestic goods are relatively expensive
62. In the 2-factor, 2 good Heckscher- Ohlin model, a change from autarky (no trade) to trade will benefit the
owners of
(a) capital.
(b) the relatively abundant factor of production.
(c) the relatively scarce factor of production.
(d) the relatively inelastic factor of production
63. According to the Heckscher-Ohlin model, the source of comparative advantage is a country's
(a) technology.
(b) advertising.
(c) human capital.
(d) factor endowments.
64. Starting from an autarky (no-trade) situation with Heckscher-Ohlin model, if Country H is relatively
labor abundant, then once trade begins
(a) wages and rents should rise in H
(b) wages and rents should fall in H
(c) wages should rise and rents should fall in H.
(d) wages should fall and rents should rise in H.
65. For developing countries, one of the dangers inherent in the inflows of capital that finance investment
is
a. increasing unemployment that accompanies foreign investment.
b. rapid outflows of funds that put pressure on exchange rates.
c. the deflation that accompanies inflows of foreign capital.
d. the inflation that accompanies outflows of foreign capital.
66. Which of the following do most economists consider to be the most basic measure of a nation’s
international transactions?
a. balance on current account
b. balance on capital account
c. balance of merchandise trade
d. balance on long-term capital
67. If a country has a balance of payments deficit and wishes to maintain the fixed value of its currency, it
will generally
a. sell its own currency for foreign currencies.
b. buy its own currency with foreign reserves.
c. decrease taxes to increase domestic disposable income.
d. increase the money supply to keep interest rates down.
68. A recession in the United States will tend to cause recessions in other countries because as U.S. GDP
falls, U.S.
a. tariffs will automatically rise.
b. exports will rise.
c. imports will fall.
d. exports will fall.
69. If the United States experiences an economic boom, compared to other countries, how will this affect
the value of the U.S. dollar?
a. It will fall because other nations would be forced to raise their interest rates.
b. It will fall because the United States will import more goods and services,
leading to an increased supply of dollars.
c. It will rise because U.S. GDP would be rising faster than other countries.
d. It will rise because the Fed will have to lower U.S. interest rates.
70. The prospect of a recession in the United States would probably cause the dollar to
a. depreciate because interest rates would be expected to rise.
b. depreciate because imports would be expected to rise.
c. appreciate because imports would be expected to fall.
d. appreciate because interest rates would be expected to decrease.
71. Countries with large current account surpluses might be viewed by the market as candidates for
a. devaluation.
b. revaluation.
c. bankruptcy.
d. All of the above.
72. A person holding dollar deposits during the devaluation of the dollar would
a. suffer a monetary loss.
b. see the foreign currency value of dollar assets increase by the amount of the exchange rate
change.
c. see the foreign currency value of dollar assets decrease by the amount of the exchange rate
change.
d. a) and c).
73. The current account surplus is
a. an increasing function of disposable income and an increasing function of the real exchange
rate.
b. a decreasing function of disposable income and a decreasing function of the real exchange rate.
c. a decreasing function of disposable income and an increasing function of the real exchange rate.
d. only a decreasing function of disposable income
74. Under fixed exchange rates,
a. Monetary policy is not an effective policy.
b. Fiscal policy is not an effective policy.
c. Monetary policy and fiscal policy are not effective.
d. Both monetary and fiscal policies are effective
75. Fiscal expansion
a. stimulates aggregate demand and causes output to decline.
b. decreases aggregate demand and causes output to decline.
c. stimulates aggregate demand and causes output to rise.
d. decreases aggregate demand and causes output to rise.
76. Pick the correct one:
a. In India, merchandise exports is higher than services exports
b. In India, merchandise exports is lower than services exports
c. a) is always true as merchandise exports include services exports
d. Both a) and b) has been true
78. Which one is not foreign direct investment
a. Coca Cola acquiring a domestic bottling plant
b. Tata buying Corus
c. MacDonald opening up restaurants in India
d. Morgan Stanley buying shares of ONGC
79. The underlying axiom of the purchasing power parity theory is:
a. the principle of comparative advantage
b. the interest parity condition
c. the principle of opportunity cost
d. the law of one price
80. India follows a policy of
a. Completely flexible exchange rates
b. Completely fixed exchange rates
c. Fixed exchange rates but it is adjusted from time to time
d. None of the above
81. 5. The theory of purchasing-power parity indicates that if the price level in the United States rises by 5%
while the price level in Mexico rises by 6%, then
a. the dollar appreciates by 1% relative to the peso.
b. the dollar depreciates by 1% relative to the peso.
c. the exchange rate between the dollar and the peso remains unchanged.
d. the dollar appreciates by 5% relative to the peso.
82. The exchange rate
a. is the ratio of two countries’ GDPs.
b. is the rate at which one country’s money is flowing into another country.
c. states the price of one currency in terms of another currency.
d. is closely related to the concept of absolute advantage.
83. At any given moment there is one exchange rate
a. for currencies in the free world.
b. between every pair of currencies.
c. for all the world’s currencies.
d. established by the RBI.
84. Appreciation is the term used to describe
a. the conversion of one currency into another currency in the free market
b. a reduction in the official value of a currency.
c. the upward movement of currencies in a free market.
d. an increase in the official value of a currency.
85. The rate at which one currency is traded for another is called a(n)
a. prime rate.
b. trade rate.
c. exchange rate.
d. money rate.
86. Why does anyone demand foreign currency?
a. international trade in goods and services
b. international trade in financial assets
c. purchases of physical assets overseas
d. All of the above are correct.
87. Can the U.S. dollar and the Indian Rupee both appreciate relative to each other?
a. Yes, both countries can gain in this manner.
b. Yes, provided the central banks permit it.
c. No, unless there is a system of fixed exchange rates.
d. No, if one currency appreciates, the other must depreciate.
88. Which of the following companies would gain from foreign currency depreciation?
a. companies which borrow in foreign currency.
b. companies which export goods and services.
c. companies which invest in the foreign equity markets.
d. companies which buy bonds issued by the foreign government.
89. According to the purchasing power parity theory, which of the following is most likely to affect
exchange rates?
a. differences in inflation rates
b. differences in interest rates
c. differences in income levels
d. differences in real GDP growth rates
90. When a country decreases the official value of its currency, for example, Russia changes the value of
the ruble from $.16 to $.04, it is said to have ____ its currency.
a. Floated
b. Revalued
c. Devalued
d. Appreciated
91. For developing countries, one of the dangers inherent in the inflows of capital that finance investment
is
a. increasing unemployment that accompanies foreign investment.
b. rapid outflows of funds that put pressure on exchange rates.
c. the deflation that accompanies inflows of foreign capital.
d. the inflation that accompanies outflows of foreign capital.
92. If India has a current account surplus and capital account deficit, its
a. Foreign exchange reserves grow
b. Foreign exchange reserves contract
c. Cannot be said as not enough information is available
d. These will have no impact on reserves
93. If India has a current account surplus and capital account surplus, its
a. Foreign exchange reserves grow
b. Foreign exchange reserves contract
c. Cannot be said as not enough information is available
d. These will have no impact on reserves
94. High foreign exchange reserves
a. Are useful to stabilize exchange rates
b. Can be useful during financial crisis
c. Provide confidence to the market about a country
d. All of the above
95. Data show between 1990-91 and 2008-09, that maximum contribution to India’s foreign exchange
reserves has come from
a. Foreign portfolio investment
b. Remittances
c. Current Account
d. Foreign direct investment
96. When Tata buys Corus
a. It is a credit item in current account
b. It is a debit item in current account
c. It is a credit item in capital account
d. It is a debit item in capital account
97. When a Non Resident Indian deposits money in an Indian bank
a. It is a credit item in current account
b. It is a debit item in current account
c. It is a credit item in capital account
d. It is a debit item in capital account
98. When Maruti exports cars, the export revenue is
a. It is a credit item in current account
b. It is a debit item in current account
c. It is a credit item in capital account
d. It is a debit item in capital account
99. When Mauritius based company invests in Indian stock market
a. It is a credit item in current account
b. It is a debit item in current account
c. It is a credit item in capital account
d. It is a debit item in capital account
100. When you buy a book from [Link], the money spent on the book is
a. is a credit item in current account
b. is a debit item in current account
c. is a credit item in capital account
d. is a debit item in capital account
101. When Infosys does BPO work for Microsoft, the money received by Infosys is part of
a. Capital account
b. Merchandise exports
c. Invisibles
d. Transfers
102. ‘Invisibles’ includes
a. Transfer payment
b. remittances
c. services trade
d. All of the above
103. Money sent as gift by a US resident to an Indian will be classified in Balance of Payments as
a. Illegal money
b. Remittances
c. Transfers
d. FDI
104. According to data for 2008, India is top recipient of
a. Foreign direct investment
b. Foreign portfolio investment
c. Remittances
d. Capital flows
105. Withdrawal of money from NRI deposits in India is classified as
a. Transfers
b. Outward capital flow
c. Remittances
d. None of the above
106. Which one is a part of current account
a. Foreign direct investment
b. Foreign portfolio investment
c. Remittances
d. Debt flows
107. External Commercial Borrowings is a part of
a. Foreign direct investment
b. Foreign portfolio investment
c. Capital Account
d. Invisibles
108. Money received under Overseas Development Assistance is a part of
a. Foreign direct investment
b. Foreign portfolio investment
c. Capital Account
d. Invisibles
109. Money raised abroad through the sales of India Development Bond will come under
a. Foreign direct investment
b. Foreign portfolio investment
c. Capital Account
d. Invisibles
110. A rupee appreciation is likely to
a. Increase competitiveness of Indian exports
b. Make Indian exports cheaper
c. reduce domestic price of oil
d. None of the above