5 free questions on Balance of payments, part of learning outcome 2 (The macro-economic environment). Pick an answer to check it, or open the answer to see why each option is right or wrong.
Question 1 of 5
Which of these is recorded in the current account of the UK balance of payments?
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The answer is C: Earnings on investments held by Britons overseas
The current account covers trade in goods, trade in services, investment income (earnings on overseas investments) and transfer payments. Investment and loan flows themselves go in the capital and financial account.
Why the other options are wrong
A
Investment flows go in the capital and financial account.
B
That's an investment flow in the capital and financial account.
D
Loans are capital and financial account items.
Question 2 of 5
Why can a large current account deficit lead to a currency crisis?
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The answer is A: It must be funded by overseas lenders, who may lose confidence
A large current account deficit has to be financed by overseas lenders. If they lose confidence in the country's currency and economy, a currency crisis can follow.
Why the other options are wrong
B
There's no automatic sanction for a deficit.
C
Deficits don't stop imports.
D
The target is set by the Chancellor and isn't changed this way.
Question 3 of 5
If there's a net deficit on the combined current and capital accounts, how is it financed?
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The answer is B: From the official reserves held by the Bank of England
Any remaining net deficit is financed from the UK's official reserves: foreign currencies, gold, IMF special drawing rights and the UK's reserve tranche position at the IMF.
Why the other options are wrong
A
Deficits are covered from official reserves.
C
The WTO doesn't lend to cover deficits.
D
Tax changes aren't the mechanism here.
Question 4 of 5
What is the main drawback for the UK economy if sterling becomes too strong?
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The answer is A: Exports become dearer and manufacturers lose competitiveness
A strong pound reduces import costs and helps keep inflation down, but it makes exports more expensive, so domestic manufacturers struggle to compete at home and abroad.
Why the other options are wrong
B
A strong pound makes imports cheaper.
C
Cheaper imports tend to reduce inflation.
D
A strong pound reduces their sterling value.
Question 5 of 5
Sterling rises sharply against the US dollar. Which UK company is most likely to benefit?
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The answer is D: A manufacturer that imports most of its components
A rising pound reduces the profitability of exports and the sterling value of overseas profits. Firms that rely heavily on imported materials or components benefit.
Why the other options are wrong
A
A stronger pound makes its exports dearer.
B
Dollar profits buy fewer pounds when sterling rises.
C
UK holidays become more expensive for US visitors.
Practise all 12 Balance of payments questions
These are 5 of the 12 questions on this topic in R0 Exam Prep, and the full R02 bank covers every learning outcome. Practise free, track your weak areas and sit timed mocks.
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