LOS b CFA Level 2 - Economics Session 4 - Reading 19 Foreign Exchange Parity Relations

CFA Level 2 - Economics Session 4 - Reading 19 Foreign Exchange Parity Relations - LOS b (Practice Questions, Sample Questions) 1. Which of the following statements regarding the balance of payments accounts is most accurate? A) The total of the balance of payments accounts does not have to equal zero.B) A current account surplus is an indication of economic strength. C) Running a deficit in the current account balance means acountry imports more than it exports Explanation — C: The balance of payments (BOP) equation is: Current Account + Capital Account + Official Reserve Account = 0 The current account measures the exchange of merchandisegoods, services, investment income, and unilateral transfers (giftsto and from other nations) between nations. The BOP equationmust equal zero and a surplus or deficit in any account does notindicate an economic strength or weakness. 2. In balance of payments accounting, the net inflow of debt and equity investment funds into the country appears in the: A) official reserve account. B) financial account. C) current account Explanation — B: The financial account measures the flow of debt and equity investment funds into and out of the country

3. If a nation is running a deficit in the current account, the sum of the financial account and the official reserve account must be: A) negative.B) zero. C) positive Explanation — C: The balance of payments equation is: Current account balance + financial account balance + official reserveaccount balance = 0. If the current account balance is in deficit, theothers must be positive for the sum of these balances to be zero. 4. Under a system of flexible exchange rates, a nation that has a surplus on current account transactions will experience a: A) surplus on its financial accounts transactions. B) deficit on its financial accounts transactions. C) deficit on its balance of payments Explanation — B: A surplus on current account transactions must be offset by a deficit in its financial accounts in order to have abalance on a nation’s account transactions, a balance of payments 5. Which of the following statements is most accurate for a country with a current account surplus? The current account surplus mustbe: A) exactly offset by a deficit in the sum of the financial and officialreserve accounts. B) exactly offset by a deficit in the financial account.C) accompanied by surpluses in the financial and official reserve accounts Explanation — A: By definition: current account + financial account + official reserve account = 0

6. The current account balance reflects the exchange of: A) goods, services, and investment income.B) goods and services only. C) goods, services, investment income, and unilateral transfers. Explanation — C: The current account balance reflects the exchange of merchandise, services, investment income, andunilateral transfers