ECONOMICS
BALANCE OF PAYMENTS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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A a decrease in interest rates in foreign countries
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B a decrease in the country’s interest rates
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C a decrease in the income of foreign countries
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D an increase in the country’s national income
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Detailed explanation-1: -If the country has a fixed exchange rate, the central bank buys or sells foreign exchange on demand to maintain stability in the rate. When sales by the central bank are too brisk, the growth of the monetary base decreases, the quantity of money and credit declines, and interest rates…
Detailed explanation-2: -When the central bank sells domestic currency and buys foreign currency in the Forex, the transaction indicates a balance of payments surplus. A balance of payments deficit (surplus) arises whenever there is excess demand for (supply of) foreign currency on the private Forex at the official fixed exchange rate.
Detailed explanation-3: -(Q7) Improvement in exchange rate of the country’s currency does not necessarily mean improvement in BOP status of the country. Ans: True. Improvement in country’s exchange rate may in fact cause deficit BOP equilibrium, because exports may decrease and imports may increase.
Detailed explanation-4: -When foreign exchange rate rises it makes the countries imports costly. The importers have to pay a higher price in terms of domestic currency for the goods and services imported. This may reduce demand for imports.