Under a flexible exchange rate system, a nation that offers more attractive investment opportunities than its trading partners will be likely to experience a: A) deficit on current account transactions. B) surplus on current account transactions. C) deficit on its capital account transactions.
I will try this one… fingers crossed. More attractive investment opportunities - so more financial inflows. This will make the Finacial Account have a surplus --> causes home Currency to appreciate --> exports become more expensive - so exports decrease, imports increase --> current account deficit. Choice A?
Yup, the answer is A Higher interest rates attract foreign investment and discourage domestic investment from leaving the country. Thus, the increased aggregate demand encourages imports, which moves the current account towards deficit.
A for sure. higher capital opps > interest rate is high > people will want to invest > capital account jumps higher > current account needs to drop in order to offset remember - assume reserve account = 0 unless specified.
It’s the season of A’s!
To be precise surplus capital account and Foreign reserves. In this case deficit in current account.
It’s A. Great explanations! Foreign Investments in Domestic Products UP implies Financial Account UP. Current Account must be down to balance.
Can someone clarify the mechanics of a current account surplus generating foreign currency? The curriculum says that an export (say US in this case) requires the foreign buyer to pay for it in US dollars. Thus the foreign buyer purchases US dollars and sells the foreign currency. If the foreign buyer purchased US dollars in their local bank, how exactly does the foreign currency that was sold to the bank find its way into the US reserves? The way I think of it is the US exporter is receiving US dollars for their sale, so just wondering how the US generates the foreign currency. My assumption is that the foreign buyer’s local bank would then purchase the US dollars it just sold somewhere else in the market and this process would continue until the foreign currency ultimately ended up in the treasury’s reserves. Is this analogy accurate?