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The balance of payments tracks economic transactions between a country and the rest of the world over a specific period, including those made by individuals, firms, and government bodies.
Answer: True
Explanation: The balance of payments (BOP) is defined as the difference between all money flowing into a country and all money flowing out to the rest of the world over a specific period, tracking economic transactions by individuals, firms, and government bodies.
The three primary components of a country's balance of payments are the current account, the capital account, and the reserve account.
Answer: False
Explanation: The three primary components of a country's balance of payments are the current account, the financial account, and the capital account. The reserve account is typically part of the financial account or a broadly defined capital account, not a separate primary component.
What does the balance of payments (BOP) primarily track in international economics?
Answer: The difference between all money flowing into a country and all money flowing out to the rest of the world over a specific period.
Explanation: The balance of payments (BOP) primarily tracks the difference between all money flowing into a country and all money flowing out to the rest of the world over a specific period, encompassing economic transactions by individuals, firms, and government bodies.
Which of the following is NOT one of the three primary components of a country's balance of payments?
Answer: The national debt account
Explanation: The three primary components of a country's balance of payments are the current account, the financial account, and the capital account. The national debt account is not considered one of these primary components.
In older balance sheets, what did 'visible trade' specifically record?
Answer: The imports and exports of physical goods.
Explanation: In older balance sheets, 'visible trade' specifically recorded the imports and exports of physical goods, which is now often referred to as the merchandise balance.
What types of balance of payments deficits typically raise concern?
Answer: A visible trade deficit, an overall current account deficit, and a basic deficit.
Explanation: Deficits that typically raise concern in the balance of payments include a visible trade deficit, an overall current account deficit, and a basic deficit (current account plus foreign direct investment).
Before the 19th century, international trade was largely unregulated and constituted a significant portion of national output.
Answer: False
Explanation: Before the 19th century, international trade was highly regulated, often at the municipal level, and constituted a relatively small portion of national output.
Mercantilism, a dominant economic theory from the 16th century, advocated for trade surpluses and the accumulation of foreign exchange or precious metals to increase national wealth.
Answer: True
Explanation: Mercantilism, a prominent economic theory from the 16th century, promoted policies such as tariffs to achieve trade surpluses and accumulate foreign exchange or precious metals, believing these actions increased national wealth.
Thomas Mun's 1664 work, 'England's Treasure by Foreign Trade,' argued against mercantilist orthodoxy, promoting free trade over accumulating precious metals.
Answer: False
Explanation: Thomas Mun's 'England's Treasure by Foreign Trade' (1664) articulated the prevailing mercantilist orthodoxy, advocating for trade surpluses and the accumulation of foreign exchange or precious metals, rather than promoting free trade.
During the mercantilist era (1700-1820), economic growth was high, and balance of payments crises were frequent due to significant financial integration.
Answer: False
Explanation: During the mercantilist era (1700-1820), economic growth was low, and balance of payments crises were very rare due to minimal financial integration and international trade forming a small proportion of GDP.
David Hume, Adam Smith, and David Ricardo were prominent classical economists who challenged mercantilist dogma.
Answer: True
Explanation: David Hume, Adam Smith, and David Ricardo are recognized as prominent classical economists who introduced new perspectives on trade, money, and wealth, thereby challenging the prevailing mercantilist dogma.
David Hume argued that accumulating precious metals would lead to monetary inflation without affecting interest rates, laying groundwork for the modern quantity theory of money.
Answer: True
Explanation: David Hume's essays, 'Of Money' and 'Of the Balance of Trade,' argued that accumulating precious metals would cause monetary inflation without impacting interest rates, thereby laying the groundwork for the modern quantity theory of money.
Adam Smith supported mercantilist policies, believing that money was equivalent to actual wealth.
Answer: False
Explanation: Adam Smith critiqued mercantilist policies, accusing them of being anti-free trade and of mistakenly equating money with actual wealth, advocating instead for open markets.
David Ricardo developed the theory of absolute advantage, which is now a dominant theory in modern economics for growth and trade.
Answer: False
Explanation: David Ricardo developed the theory of comparative advantage, not absolute advantage, which remains a dominant theory in modern economics for growth and trade.
How was international trade regulated in Europe during the Middle Ages?
Answer: Commonly at the municipal level to safeguard local industries.
Explanation: During the Middle Ages, international trade in Europe was commonly regulated at the municipal level, primarily to protect local industries and established merchants.
What was the core belief of mercantilism regarding national wealth?
Answer: That accumulating foreign exchange or precious metals made nations wealthier.
Explanation: The core belief of mercantilism was that national wealth was increased by accumulating foreign exchange or precious metals, which was achieved through policies promoting trade surpluses.
Who authored 'England's Treasure by Foreign Trade' in 1664, articulating mercantilist orthodoxy?
Answer: Thomas Mun
Explanation: Thomas Mun authored 'England's Treasure by Foreign Trade' in 1664, a work that articulated the prevailing mercantilist orthodoxy of the time.
What characterized balance of payments crises during the mercantilist era (1700-1820)?
Answer: They were very rare due to low levels of financial integration and international trade.
Explanation: During the mercantilist era (1700-1820), balance of payments crises were very rare, primarily due to low levels of financial integration and international trade constituting a small proportion of GDP.
Which classical economist developed the theory of comparative advantage?
Answer: David Ricardo
Explanation: David Ricardo developed the theory of comparative advantage, a foundational concept in international trade theory.
What was David Hume's argument against accumulating precious metals?
Answer: It would cause monetary inflation without any real impact on interest rates.
Explanation: David Hume argued that accumulating precious metals would lead to monetary inflation without affecting interest rates, thereby laying the groundwork for the modern quantity theory of money.
According to Adam Smith, what was a key mistake of mercantilists?
Answer: Equating money with actual wealth.
Explanation: Adam Smith criticized mercantilists for mistakenly equating money with actual wealth and for their anti-free trade stance.
After the Napoleonic Wars, Great Britain became a proponent of free trade, unilaterally reducing its trade tariffs.
Answer: True
Explanation: Following its victory in the Napoleonic Wars, Great Britain actively promoted free trade by unilaterally reducing its trade tariffs and exporting capital to help correct global imbalances.
According to Carroll Quigley, Great Britain's benevolent actions in the 19th century were primarily due to its vast colonial empire.
Answer: False
Explanation: Carroll Quigley attributed Great Britain's benevolent actions in the 19th century to its advantageous geographical location, powerful naval forces, and economic leadership as the first nation to undergo an Industrial Revolution, rather than primarily its colonial empire.
The first age of Globalization began with the invention of the steam engine, according to Barry Eichengreen.
Answer: False
Explanation: According to Barry Eichengreen, the first age of Globalization began with the installation of transatlantic telegraph cables in the 1860s, not the invention of the steam engine.
During the 1820-1914 period, capital controls were largely absent, and a gold standard was widely adopted internationally.
Answer: True
Explanation: The period from 1820 to 1914 was characterized by largely absent capital controls and the widespread international adoption of a gold standard, particularly from 1870, fostering close economic integration.
Balance of Payments crises occurred more frequently between 1880 and 1914 than in the later 20th century.
Answer: False
Explanation: Balance of Payments crises occurred less frequently between 1880 and 1914 compared to the later 20th century, with approximately eight BoP crises and eight 'twin crises' during that period.
What marked the beginning of the first age of Globalization, according to Barry Eichengreen?
Answer: The installation of transatlantic telegraph cables in the 1860s.
Explanation: Barry Eichengreen identifies the installation of transatlantic telegraph cables in the 1860s as the beginning of the first age of Globalization, as it significantly boosted trade.
What was the state of capital controls during the 1820-1914 period?
Answer: They were largely absent, though current account controls were still used.
Explanation: During the 1820-1914 period, capital controls were largely absent, although current account controls were still widely employed by industrial nations (except Britain and the Netherlands) to protect infant industries.
After World War I, attempts to restore pre-1914 economic conditions were successful, leading to a stable global economy in the 1920s.
Answer: False
Explanation: Attempts to restore pre-1914 economic conditions after World War I were unsuccessful, and the 1920s did not lead to a stable global economy, partly due to surplus nations not adhering to gold standard rules.
During the Great Depression, countries abandoned the gold standard and engaged in competitive currency devaluations to export unemployment.
Answer: True
Explanation: During the Great Depression, many countries abandoned the gold standard and adopted 'beggar thy neighbour' policies, including competitive currency devaluations, in an attempt to export unemployment.
The International Monetary Fund (IMF) and the World Bank were established after World War II to promote free trade and allow states options to correct imbalances without deflating their economies.
Answer: True
Explanation: The IMF and World Bank were established as Bretton Woods institutions after World War II to support an international monetary system that promoted free trade and provided options for states to correct imbalances without resorting to economic deflation.
The Bretton Woods system featured purely floating exchange rates, with the US dollar convertible into gold.
Answer: False
Explanation: The Bretton Woods system established fixed but flexible exchange rates, not purely floating ones, with the US dollar as the anchor currency, convertible into gold.
The Bretton Woods system ended in the early 1970s due to the US ending the dollar's convertibility into gold, driven by gold outflows and loss of confidence.
Answer: True
Explanation: The Bretton Woods system concluded between 1971 and 1973 when the US ended the dollar's convertibility into gold, a decision prompted by gold outflows and a loss of confidence in the dollar's ability to meet future gold claims.
What economic policies did nations adopt during the Great Depression in response to persistent imbalances?
Answer: They abandoned the gold standard and engaged in competitive currency devaluations.
Explanation: During the Great Depression, countries abandoned the gold standard and resorted to 'beggar thy neighbour' policies, including competitive currency devaluations, in an attempt to export unemployment.
What was the primary purpose of establishing the International Monetary Fund (IMF) and the World Bank after World War II?
Answer: To promote free trade while allowing states options to correct imbalances without deflating their economies.
Explanation: The IMF and World Bank were established after World War II to support an international monetary system that promoted free trade and provided mechanisms for states to correct imbalances without resorting to deflationary policies.
What was a key characteristic of the Bretton Woods system regarding exchange rates?
Answer: Fixed but flexible exchange rates, with the US dollar as the anchor currency.
Explanation: A key characteristic of the Bretton Woods system was its establishment of fixed but flexible exchange rates, with the US dollar serving as the anchor currency, convertible into gold.
What ultimately led to the end of the Bretton Woods system in the early 1970s?
Answer: The US ending the dollar's convertibility into gold due to gold outflows and loss of confidence.
Explanation: The Bretton Woods system ended in the early 1970s primarily because the US ceased the dollar's convertibility into gold, a decision driven by significant gold outflows and a loss of confidence in the dollar.
After the Bretton Woods collapse, the Washington Consensus emerged, with economists like Milton Friedman arguing that Balance of Payments issues were a major concern.
Answer: False
Explanation: After the Bretton Woods collapse, the Washington Consensus, influenced by economists like Milton Friedman, adopted a more relaxed attitude, arguing that there was no significant need to be concerned about Balance of Payments issues.
'The Snake' was an early attempt by a group of European countries to maintain stable exchange rates among themselves after the Bretton Woods system ended.
Answer: True
Explanation: 'The Snake' was indeed an initiative by European countries, formed in 1971, to maintain stable exchange rates among themselves following the dissolution of the Bretton Woods system, eventually evolving into the ERM.
From the mid-1970s to the early 1990s, many developing countries with floating exchange rates often developed significant current account surpluses, financed by capital outflows.
Answer: False
Explanation: From the mid-1970s to the early 1990s, many developing countries with floating exchange rates often developed significant current account *deficits*, which were financed by capital account *inflows*, frequently leading to crises.
The 1997 Asian financial crisis led emerging economies to increase their reliance on free markets due to sympathetic responses from Western powers.
Answer: False
Explanation: The 1997 Asian financial crisis prompted emerging economies to re-evaluate their reliance on free markets due to *unsympathetic* responses from Western powers, leading to a collective shift away from current account deficits.
'Bretton Woods II' describes a global imbalance where emerging economies, like China, peg their currency against the US dollar to keep its value depressed and prevent currency appreciation.
Answer: True
Explanation: 'Bretton Woods II' characterizes a global imbalance where emerging economies, particularly China, intervene in exchange markets by pegging their currency to the US dollar to maintain a depressed value, thereby preventing natural currency appreciation despite trade surpluses.
After the Bretton Woods collapse, what was the prevailing view of economists like Milton Friedman regarding Balance of Payments issues?
Answer: There was no significant need to be concerned about them.
Explanation: Following the Bretton Woods collapse, economists associated with the Washington Consensus, such as Milton Friedman, generally held the view that Balance of Payments issues were not a significant concern.
What was 'the Snake' in the context of post-Bretton Woods exchange rate management?
Answer: A group of European countries attempting to maintain stable exchange rates among themselves.
Explanation: 'The Snake' was an early initiative by a group of European countries in 1971 to maintain stable exchange rates among themselves after the Bretton Woods system dissolved.
What trend did many developing countries with freely floating exchange rates experience from the mid-1970s to the early 1990s?
Answer: Significant current account deficits financed by capital account inflows.
Explanation: From the mid-1970s to the early 1990s, many developing countries with freely floating exchange rates experienced significant current account deficits, which were financed by capital account inflows and often led to crises.
What was a key outcome of the 1997 Asian financial crisis for emerging economies' policies?
Answer: A re-evaluation of reliance on free markets due to unsympathetic Western responses.
Explanation: The 1997 Asian financial crisis prompted emerging economies to re-evaluate their reliance on free markets, largely due to the unsympathetic responses from Western powers, leading to a collective shift towards running current account surpluses.
What is the core characteristic of 'Bretton Woods II'?
Answer: Emerging economies pegging their currency against the US dollar to keep its value depressed.
Explanation: The core characteristic of 'Bretton Woods II' is the global imbalance where emerging economies, particularly China, peg their currency against the US dollar to maintain a depressed value, thereby preventing currency appreciation despite trade surpluses.
What was the primary reserve asset under the gold standard?
Answer: Gold
Explanation: Under the gold standard, gold served as the primary reserve asset for all participating nations, playing a central role in international monetary systems.
What was the shift in mainstream opinion regarding large current account imbalances during and after the 2008 financial crisis?
Answer: Opinion shifted to view them as a major concern, contrary to the Washington Consensus.
Explanation: During and after the 2008 financial crisis, mainstream opinion shifted to view large current account imbalances as a major concern, a reversal from the more relaxed stance of the Washington Consensus.
According to World Bank data, what was the US current account deficit in 2019?
Answer: $498 billion
Explanation: World Bank data indicates that the current account deficit in the United States was $498 billion in 2019.