balance of payments

Question 1

balance of payments definition

Answer 1

record of all transactions between one country with all other countries, consisting of payments entering the country from abroad and payments leaving the country

Question 2

what is the current account a sum of

Answer 2

capital account
financial account
errors and omissions

Question 3

what does current account always equal to

Answer 3

0

Question 4

importance of current account

Answer 4

shares the highest proportion in the current account so most likely determines the current account balance

Question 5

4 components of current account

Answer 5

1. balance of trade in goods
2. balance of trade in services
3. income
4. current transfers

Question 6

2 components in capital account

Answer 6

1. capital transfers
2. transaction of non-produced, non-financial assets

Question 7

4 components of financial account

Answer 7

1. direct investment
2. portfolio investment
3. reserved assets
4. official borrowing

Question 8

what does demand for a currency give rise to

Answer 8

credits

Question 9

what does supply for a currency give rise to

Answer 9

debits

Question 10

what does surplus in the current account mean in terms of financial account

Answer 10

deficit in financial account

Question 11

how does a country pay off current account deficit [4]

Answer 11

1. selling physical assets
2. selling financial assets
3. selling foreign currencies to buy domestic currency
4. borrow money form abroad

Question 12

how does selling physical assets help current account deficit

Answer 12

credit increases
- use gains from selling physical assets to pay off the current account deficit

Question 13

how does selling financial assets help current account deficit

Answer 13

credit increases
- use the gains from selling physical assets to pay off the current account deficit

Question 14

how does selling selling foreign currencies to buy domestic currency help current account deficit

Answer 14

credit increases
- creates an inflow of domestic currency

Question 15

how does borrowing money from abroad help current account deficit

Answer 15

credit increases
- use the foreign loan to pay off the current account deficit

Question 16

deficit effect on exchange rate + elaborate (loop when determined by market forces)

Answer 16

depreciation
- makes exports more competitive → reduce current account deficit
- currency will appreciate again → exports will be less competitive which reduces current account surplus

Question 17

how does expansionary fiscal policy help with current account surplus

Answer 17

debit increases
- government spending increases and tax decreases → AD increases → disposable income increases
= increase imports in general

Question 18

how does expansionary monetary policy help with current account surplus

Answer 18

debit increases
- interest rate decreases → consumption and interest increases → AD increases → disposable increases
= increase imports in general

Question 19

how does reducing trade barrier help with current account surplus

Answer 19

eg. tariffs, quotas, subsidy
debit increases → import increases

Question 20

how does supply-side policies help with current account surplus

Answer 20

debit increases
- if the effect of potential output increases → Y increases
= imports increases
- exports may increase too when inflationary pressure decreases

Question 21

how does buying domestic currency using foreign reserves help with current account surplus

Answer 21

debit increases
- currency will appreciate
financial credit increases
cheaper to buy imports
= increase imports

Question 22

cons of using expansionary monetary policies

Answer 22

• AD increase → inflation + inflationary gap increases
• interest rate decrease → currency for demand decreases (depreciation) → exports increase, imports decrease → cost-push inflation (SRAS decrease)

Question 23

cons of reducing trade barriers

Answer 23

may increase dumping- bad for local industries