ECONOMICS
BALANCE OF PAYMENTS
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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A Domestic money supply will increase.
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B Rival producers may react with trade protection measures.
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C The economy’s foreign exchange reserves may run down.
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D The economy’s short-run standard of living will be reduced.
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Detailed explanation-1: -ANSWER: Following are the causes of Deficit in BOP or Unfavourable BOP. For fast development, developing countries import machines, technology, and other equipment. This leads to a high level of outflows of foreign exchange that can result in a deficit in the BOP account.
Detailed explanation-2: -The market balance of payments refers to the balance of supply and demand for a country’s currency in the foreign-exchange market at a given rate of exchange. If the exchange rate is fixed, the market balance of payments would be in balance only by chance.
Detailed explanation-3: -When the central bank buys domestic currency and sells the foreign reserve currency in the private Forex, the transaction indicates a balance of payments deficit. Alternatively, when the central bank sells domestic currency and buys foreign currency in the Forex, the transaction indicates a balance of payments surplus.
Detailed explanation-4: -A change in a country’s balance of payments can cause fluctuations in the exchange rate between its currency and foreign currencies. The reverse is also true when a fluctuation in relative currency strength can alter balance of payments.