ECONOMICS
ECONOMIC DEVELOPMENT
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Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
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When net inflows of foreign currency are greater than net outflows.
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When net outflows of foreign currency are greater than net inflows.
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When net imports of foreign currency are greater than net exports.
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When net exports of foreign currency are greater than net imports.
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Detailed explanation-1: -A foreign currency gap exists when the country is not attracting sufficient capital flows to make up for a deficit in the capital account on the balance of payments. In other words, the value of the current account deficit is larger than the value of capital inflows.
Detailed explanation-2: -The difference between the outflow and inflow of foreign currency is known as Current Account Deficit.
Detailed explanation-3: -To satisfy the excess demand (excess supply), the central bank will automatically intervene on the Forex and sell (buy) foreign reserves. Thus by tracking sales or purchases of foreign reserves in the official reserve account, we can determine if the country has a balance of payments deficit or surplus.
Detailed explanation-4: -Capital outflows affect the domestic currency’s exchange rate, which leads to depreciation in the domestic currency. More people sell their local currency and exchange it for foreign currency when capital leaves the country. The value of the local currency decreases as a result.