ECONOMICS
BALANCE OF PAYMENTS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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A an increase in the foreign value of the currency of the country
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B an increase in the level of income within the country
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C a reduction in the quantity of money within the country
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D a reduction in unemployment within the country
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Detailed explanation-1: -Hence, a rising current account deficit leads to an increased supply of a nation’s currency in the foreign exchange markets. Therefore, in the currency market there will be an outward shift of supply. This – ceteris paribus – might lead to the external value of the currency falling.
Detailed explanation-2: -Balance of payments surplus occurs when a country’s total exports are higher than its imports. This helps to generate capital to fund its domestic productions. With a surplus in its BoP, a country can also lend funds outside its borders. A surplus in BoP can help to boost the short term economic growth of a country.
Detailed explanation-3: -A deficit in the balance of payments leads to a higher demand for foreign currency to the detriment of national currency which would depreciate in this situation. However, an exceeding account balance involves a high amount of foreign currency for which the national currency would be exchanged.
Detailed explanation-4: -Assuming no additional foreign demands for domestic currency on the financial account (to keep the exchange rate fixed), the central bank would need to intervene by selling foreign currency in exchange for domestic currency.