When a domestic resident purchases a foreign stock directly on the foreign stock exchange, the transaction is entered as a ________ in the BOP account.
Answer(s): D
In BOP accounting, by convention:1. Any inflow of domestic currency represents a credit and any outflow of domestic currency represents a debit on the BOP account.2. Any inflow of foreign currency represents a debit and any outflow of foreign currency represents a credit on the BOP account.Thence, direct purchase of a foreign stock, which represent an outflow of domestic currency, is treated as a debit in the BOP account.
If high-yield investment opportunities attract capital from abroad and lead to a capital account surplus, then the:
If a nation is experiencing a surplus on its capital account balance, it must experience an offsetting deficit on its current account and vice versa. By definition, the balance of payments must be in balance so that the capital account offsets the current account.
If a restrictive fiscal policy places downward pressure on real interest rates, we would expect
Investors facing a declining real interest rate would liquidate their assets and move their capital elsewhere in search of a higher yield. The consequence would be a capital outflow from the country.
The flow of money for the purpose of taking advantage of a covered interest differential is known as ________.
The flow of money for the purpose of taking advantage of a covered interest differential is known as covered interest arbitrage'
Supplementary reserves in the form of accounting entries maintained with the IMF by various governments are known as:
Special Drawing Rights are accounting entries established with the International Monetary Fund which can be used to satisfy debits or credits on the BOP account. Of course, these are simply accounting devices used to keep track of the assets or debts of the different nations arising from international exchange. Ultimately, the entries must come to fruition through a supply of goods, services or unrequited transfers. So if country A uses the SDR to make a short-term payment to country B on its BOP account, it is not considered to be in default but must ultimately extinguish this debt by supplying goods or services to the B.The SDRs are more significant for economies trying to artificially maintain a fixed exchange rate system.For floating currencies, the BOPs can be at least partially offset through changes in exchange rates.
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