ECONOMICS
BALANCE OF PAYMENTS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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Capital inflows in the Financial Account (as foreign investors move money into Australian banks) and currency appreciation (gain in value)
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Capital outflows in the Financial Account (as Australians less from domestic banks and invest overseas instead) and currency appreciation
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Capital inflows in the Current Account (income credit) and currency appreciation
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Capital outflows in the Current Account (income debit) and currency depreciation
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Detailed explanation-1: -A country’s currency will rise in value when interest rates are high because higher rates will attract more foreign capital. This will lead to an increase in exchange rates and a strong currency. As a general rule, the higher the interest rates, the more foreign investment a country is likely to attract.
Detailed explanation-2: -When Australian interest rates decline, relative to interest rates in other advanced economies, Australian assets become less attractive for foreign investors and Australian investors. Demand for Australian assets declines, leading to a decrease in demand for Australian dollars and an increase in supply.
Detailed explanation-3: -Higher interest rates can increase a currency’s value. They can attract more overseas investment, which means more money coming into a country and higher demand for the currency.
Detailed explanation-4: -Capital inflows generate higher demand for both tradables and nontradables and lead to a higher relative price of nontradables and to appreciation of the real exchange rate. This is necessary so that domestic resources will be diverted to production of nontradables to meet the increased demand.