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What is Balance of Payments Accounting?
Statistical Record of a country's international transactions over a certain period of time presented in double-entry bookkeeping
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If Missouri imports $100k worth of bicycle frams from England, would they record this as a debit or credit?
Debit
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What will happen to the British Pounds when they record a credit?
Rise in the supply of dollars and an increase in demand
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Which account contains exports and imports of goods and services
Current Account
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Which account has unilateral transfers of foreign aid included?
Current Account
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If debits exceed credits, than the country is running on a trade (deficit or surplus)?
Trade Deficit
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If there is a trade deficit, what does this mean?
Negative balance of trade, imports exceed exports
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Which account does the FX Rate have a direct effect on?
Current Account
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The current account balance is positive when FX (depreciates or appreciates)?
Depreciates
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Why could the FX rate have a J shape?
Due to the relative inelasticity of import/exports to currency price changes
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The account that contains purchases and sales of assets such as stocks, bonds, bank accounts, and real estate is?
Capital Account
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This account measures the difference between U.S. sales of assets to foreigners and purchases.
Capital Account
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FDIs (Foreign Direct Investments) are found in which account?
Capital Account
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What is a FDI?
Investment in long term assets resulting in a controlling stake
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The account which covers all purchases and sales of international reserve assets is what?
Official Reserves Account
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What are the reserve assets in the Official Reserves Account?
dollars, foreign exchanges, gold, and SDRs
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What is a SDR?
A virtual basket of currency created to substitue gold as a reference for currency values
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What are the four currencies that make a SDR?
Euro, Pound, Yen, USD
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What is a statistical discrepancy?
when there are some omissions and mis-recorded transactions
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What leads to statistical discrepancys?
differences in time and place and different accounting methods
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What is the equation under the pure flexible exchange rate?
BCA + BKA = 0
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The BOP equation should be:
BCA + BKA = BRA (+/-)
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Sovereign Wealth Funds are mostly domiciled in?
Asian and Mid-East countries
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What are sovereign wealth funds?
They are responsible for recycling foreign exchange reserves for these countries swelled by trade surpluses and oil revenues
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What effect occurs when a currency depreciates, and the trade balance deteriorates prior to improving?
J Curve Effect
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Since 1982, the U.S. has experienced continuous deficits on which account?
Current Account
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Which account has the U.S. experienced continuous surpluses in?
Capital Account
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What is Mercantilism?
It's when a country avoids trade deficits at all costs, even imposing various restrictions on imports
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What does Mercantilism followers argue?
That the main source of wealth in a country is its productive capacity, not its trade surpluses
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When BCA < 0 government budget deficits and or part of domestic investments are being financed by?
Foreign Controlled Capital
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If Savings less Imports is less than zero, then a country's domestic savings is (sufficient/insufficient) to finance domestic investments
Insufficient
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If tax revenues is less than government spending, the tax revenue is insufficient and a budget (deficit/surplus) exists?
deficit
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Why is it useful to examine a country's BOP data?
BOP provides detailed information about the supply and demand of the country's currency and can be used to evaluate the performance of the country in international economic competition
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What could the current account deficits of U.S. reflect?
High real interest rates (which is due to ballooning federal budget deficits) that keep the dollar strong and weak competitiveness in U.S. industries
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What does Japan have in relation to their current account?
A surplus
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What could be the cause for Japan's Continuous Current Account Surplus?
Weak yen and high competitiveness of Japanese industries
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What do continuous current account surpluses do to free trade?
It disrupts free trade by promoting protectionist sentimetn in the deficit country, so it isn't desirable
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If foreigners found the U.S. to be a great place to invest and sent their capital this way, what would be the result?
A Capital Account Surplus, which would strenghten the dollar, hurt exports, and encourage imports from foreign countries causing a current account deficit
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How can a country run an overall BOP deficit or surplus?
By engaging in the Official Reserve Transactions
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If there is an overall BOP deficit, what can the central bank do?
Draw down the reserve holdings
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What are official reserve assets?
Those financial assets that can be used as international means of payments; gold, foreign exchanges, SDRs, reserve positions with the IMF
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Which Reserve Asset is the most important?
Foreign Exchanges
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How do you compute the overall balance?
The cumulative BOP includes the current account, capital account, and the statistical discrepancies
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Why is the overall BOP significant?
It indicates a country's international payment gap that must be financed by the government's official reserve transactions
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As foreigners purchase U.S. Treasury bonds, the U.S. BOP will do what in the short run?
Improve
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What happens in the long run as foreigners purchase U.S. Treasury Bonds?
U.S. BOP may deteriorate because the U.S. should pay interests and principals to foreigners; however it can improve
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Under the pure flexible exchange rate regime central banks do what?
engage in official reserve transactions
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What does the BOP identity holds that the combined balance on the current and capital accounts should be equal in size and what in sign?
opposite
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Under the fixed exchange rate regime, a country can have an overall BOP surplus or deficit as the central bank will accommodate it via:
the Official Reserve Transactions
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