QUESTION: 1273

For an upcoming sight-seeing visit to India, a U.S. resident recently purchased a hundred thousand Indian Rupees. His action

created a credit balance in the U.S. BOP account.
created a debit balance in the U.S. BOP account.
created a deficit in the U.S. trade account.
none of these answers.

Answer(s): B

Explanation:

This is a point of convention where much confusion exists. Before you answer it, you should remember two things:
In International Finance, a country's reserve of foreign currency and foreign- produced goods is treated as an asset.
In Accounting, by convention, increases in assets are recorded as "debit" entries and reductions are treated as "credit" entries.
In the above example, there is an inflow of Indian Rupees and is hence recorded as a debit to the U.S. BOP account.
Of course, it is also quite important to remember that the BOP account must balance out, just as surely as you must have debits = credits in accounting. The subtle part in BOP accounting is to recognize the offsetting credit entry that arises. Consider how this happens in the above example:
The dollars used to buy the Indian rupees represent a liability for the U.S. This debt will be extinguished during the year through a supply of goods by U.S. residents in the form of exports or end up as a recognition of liability on the Official Reserve account when the accounts are balanced at the end of an accounting period (quarter end or year end). When this happens, the offsetting credit entry shows up on the accounts and the national balance sheet balances out. Note that exports are thus treated as credits and imports are treated as debits on the BOP account.
In summary,
1. Any inflow of domestic currency represents a credit and any outflow of domestic currency represents a debit on the BOP account.
2. Any inflow of foreign currency represents a debit and any outflow of foreign currency represents a credit on the BOP account.

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QUESTION: 1274

The price for French francs is $0.1945-67. What is the percent spread for this currency?

0.99%
1.12%
11.3%
1.13%
11.2%

Answer(s): B

Explanation:

The percent spread is the (ask price - bid price)/ask price times 100. In this case, (0.1967 - 0.1945)/0.1967 x 100 = 1.12%

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QUESTION: 1275

Which of the following factors will cause country A's currency to appreciate relative to the currency of country B, all else equal?

A has higher income growth.
II. A has higher inflation.
III. B has higher real interest rate.
II & III
None of them
I, II & III
I only
II only
III only
I & III

Answer(s): B

Explanation:

A country's currency will appreciate relative to those of its trading partners if it has lower income growth (which will cause the increase in imports to lag behind the increase in exports), has a lower inflation rate or offers higher real interest rates.

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QUESTION: 1276

The government currently has no debt. To alleviate an economic slow down, Congress proposes an increase in spending partially offset by an increase in the highest marginal tax rate. This will force the Treasury to issue new debt. According to which of the following economic theories would this stimulate the economy?

fiscal policy
II. supply-side
III. crowding out
none of these answers is correct
I only
I, II, III
II only
II, III

Answer(s): B

Explanation:

Anytime the government runs a deficit, it can be considered a fiscal stimulus. However, since marginal tax rates were increased, the supply-side effect would be negative. The crowding out effect suggests that government borrowing will increase interest rates and partially offset the stimulate effects of the new spending.

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Free CFA-Level-I Exam Braindumps (page: 319)

QUESTION: 1273

Explanation:

QUESTION: 1274

Explanation:

QUESTION: 1275

Explanation:

QUESTION: 1276

Explanation: