Exam 3: The Balance of Payments

Under a fixed exchange rate system, the government bears the responsibility to ensure that the BOP is near zero. If the sum of the current and capital accounts do not approximate zero, the government is expected to intervene in the foreign exchange market by buying or selling official foreign exchange reserves. If the sum of the first two accounts is GREATER THAN ZERO, a ________ demand for the domestic currency exists in the world. To preserve the fixed exchange rate, the government must then intervene in the foreign exchange market and ________ domestic currency for foreign currencies or gold so as to bring the BOP back near zero.

Which of the following statements about the balance of payments is NOT true?

Countries occasionally intentionally devalue their currencies. So what is the logic and likely results of intentionally devaluing their domestic currency? International economic analysis characterizes the trade balance adjustment process as occurring in three stages. List and explain the three stages too.

China is currently experiencing a surplus in its current account and its capital/financial accounts. Which of the following is NOT a contributing factor for this unusual situation?

Imports have the potential to lower a country's inflation rate because of each of the following EXCEPT:

An era of retrenchment, in which major economic powers returned to policies of isolationism and protectionism, restricting trade and nearly eliminating capital mobility.

As of year-end 2016, the United States still held the world's largest foreign exchange reserve, but the total was rapidly being approached by China.

The transition to floating exchange rate regimes in the 1970s (described in Chapter .3) changed the focus from the total BOP to its various subaccount like the current and financial account balances.

The authors identify four distinct periods of capital mobility since 1860. Which do they term as a "period of global economic destruction"?

The biggest problem that China faces in maintaining a stable value for their currency, the yuan, is their lack of foreign exchange reserves.

An excess of merchandise exports over merchandise imports results in a balance of trade deficit.

Like a balance sheet, the Balance of Payments adds up the value of all assets and liabilities of a country on a specific date.

A country with a managed float that wishes to WEAKEN its currency may choose to raise domestic interest rates to attract additional capital from abroad.

The effect of an imbalance in the BOP is the same for countries on a fixed exchange rate regime as for those on a floating exchange rate regime.

In general, as a country's income increases, so does the demand for imports.

A country's overall level of interest rates should have an impact on the financial account of the BOP. Relatively low real interest rates should normally stimulate an outflow of capital seeking higher interest rates in other country currencies.

The subcategory that typically dominates the current account is:

This was an era dominated by industrialized nation economies that were dependent on gold convertibility to maintain confidence in the system.

Because current and financial/capital account balances use double-entry bookkeeping it is unusual to find serious discrepancies in the debits and credits.

What is a country's balance of (merchandise) trade, and why is it so widely reported in the financial and popular press?