4.2.6.3 The balance of payments Quiz: AQA Economics, Unit 2

The 20 questions

1. What is the current account of the balance of payments?

   • A record of government borrowing from foreign banks
   • A record of purchases and sales of shares between firms
   • A record of trade in goods and services, primary income and secondary income
   • A record of the value of the central bank's gold reserves

2. What is the capital account of the balance of payments?

   • The account recording government tax revenue from abroad
   • The main account recording all trade in goods and services
   • A small account recording capital transfers and the acquisition or disposal of non-produced assets
   • The account recording the share price of UK firms

3. What is the financial account of the balance of payments?

   • A record of the government's tax revenue from overseas income
   • A record of the value of goods exported only
   • A record of the price of foreign currency in the market
   • A record of investment flows into and out of the country, such as direct and portfolio investment

4. What does a deficit on the current account mean?

   • The value of imports of goods, services and income is greater than the value of exports
   • The value of exports of goods and services is greater than the value of imports
   • The country's exchange rate has risen against all other currencies
   • The government's budget is in surplus

5. What does a surplus on the current account mean?

   • The government has a balanced budget
   • Exports of goods, services and income exceed imports
   • Imports exceed exports, so the country borrows from abroad
   • The exchange rate has fallen against all other currencies

6. What is foreign direct investment?

   • The purchase of foreign currency by a central bank
   • Short-term purchases of shares in foreign companies by individual investors
   • Long-term investment in productive assets in another country, where the investor has a significant degree of control
   • Loans made by a bank to a foreign government

7. What is portfolio investment?

   • Purchases of financial assets such as shares and bonds in another country, without control over the company
   • Investment in new factories and machinery abroad with full managerial control
   • The purchase of goods by a foreign government for public use
   • The transfer of government aid to a foreign country

8. A country exports 200 billion pounds of goods and services, imports 230 billion pounds, has net primary income of 10 billion pounds and net secondary income of minus 5 billion pounds. What is the current account balance?

   • A deficit of 35 billion pounds
   • A deficit of 15 billion pounds
   • A deficit of 25 billion pounds
   • A surplus of 25 billion pounds

9. A currency depreciation makes exports cheaper and imports dearer. Under what condition does this improve the current account?

   • When the country has a fixed exchange rate with all its trading partners
   • When the currency depreciation causes an immediate fall in the price level
   • When the demand for exports and imports is sufficiently responsive to price changes
   • When the demand for exports and imports is completely unresponsive to price changes

10. Which policy is an example of an expenditure-reducing policy to correct a current account deficit?

    • A devaluation that makes imports more expensive for domestic buyers
    • Higher interest rates that reduce domestic spending and therefore imports
    • A tariff on imports that makes foreign goods more expensive
    • A subsidy to exporters that makes their goods cheaper abroad

11. A government wants to reduce a current account deficit without reducing overall spending. Which policy is most appropriate?

    • An expenditure-switching policy, such as a tariff, that shifts spending from imports to domestic goods
    • A rise in the money supply that increases domestic spending on imports
    • An expenditure-reducing policy, such as a rise in income tax, that cuts overall spending
    • A reduction in exports to lower the amount of foreign currency earned

12. A current account deficit is corrected by contractionary policy. What is a likely side effect?

    • Lower unemployment, because demand for workers rises when spending is cut
    • No side effects, because contractionary policy affects only the exchange rate
    • Lower inflation with no effect on output or jobs
    • Higher unemployment, because domestic demand and output fall

13. What is a likely response of trading partners to a country that imposes tariffs to correct its deficit?

    • No response, because tariffs have no effect on other countries
    • Retaliatory tariffs, which can reduce trade and harm both countries
    • Immediate reductions in their own tariffs to match the country's measures
    • A rise in their own exports to the country

14. A country with a large current account surplus is asked by others to take corrective action. Why might this matter for the global economy?

    • Surplus countries always cause global inflation, so they should spend more
    • Its surplus has no effect on any other country, so no action is needed
    • Surpluses are impossible for any major economy to sustain
    • Its surplus is matched by deficits elsewhere, so reducing it can help correct global imbalances

15. A rise in productivity makes domestic goods more competitive. What is the likely effect on the current account?

    • It tends to worsen the current account by raising imports
    • It always causes a fall in the exchange rate, worsening the deficit
    • It tends to improve the current account by raising exports
    • It has no effect, because productivity affects only domestic output

16. Inflows of foreign direct investment into the UK raise the financial account. What does this mean for the balance of payments?

    • The current account must show a surplus from these inflows
    • The inflows have no effect on any part of the balance of payments
    • The inflows reduce the financial account, so the balance of payments is in deficit
    • The financial account shows a surplus from these inflows, which is matched by flows elsewhere in the accounts

17. Evaluate expenditure-switching compared with expenditure-reducing policies.

    • Expenditure-switching can improve the balance without cutting spending, but it may cause inflation and retaliation
    • Expenditure-switching always reduces output more than expenditure-reducing policies do
    • The two types of policy have identical effects in all circumstances
    • Expenditure-reducing policies never affect output or jobs

18. Evaluate the significance of a persistent current account deficit for an economy.

    • It may signal reliance on foreign borrowing and can be sustainable only while foreign investors remain willing to finance it
    • It has no significance, because deficits never affect a country's economy
    • It always proves that the economy is in trouble and must end immediately
    • It always means that the country has a surplus of goods, so no action is needed

19. Why might a devaluation worsen inflation in the short run?

    • Higher import prices raise domestic costs and prices, which can feed into inflation
    • A devaluation reduces the money supply, which lowers prices
    • A devaluation lowers import prices, which always reduces inflation
    • A devaluation has no effect on prices, because exchange rates do not affect costs

20. Evaluate the use of higher interest rates to correct a current account deficit.

    • Higher rates have no effect on capital flows or the exchange rate in any case
    • Higher rates always improve the current account with no effect on demand or growth
    • Higher rates can attract capital inflows that support the currency, but they also cut demand and may slow growth
    • Higher rates always raise the deficit, so they should never be used

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