What are the differences between the current account and the capital account?
The current account tracks goods, services, and income, while the capital account tracks investments in assets.
What are the key differences between a trade surplus and a trade deficit?
A trade surplus occurs when exports exceed imports; a trade deficit occurs when imports exceed exports.
What are the differences between financial investments and real investments in the capital account?
Financial investments involve the purchase of stocks and bonds, while real investments involve the purchase of land and businesses.
What is the difference between a debit and a credit in the balance of payments?
A credit represents money flowing into the country, while a debit represents money flowing out.
Differentiate between net investment income and net transfers in the current account.
Net investment income involves interest and dividends, whereas net transfers involve aid and grants.
What is the difference between the capital account and the official reserves account?
The capital account tracks investments, while the official reserves account is used by the central bank to balance payments.
What is the difference between exports and imports?
Exports are goods and services sold to other countries, while imports are goods and services bought from other countries.
What is the difference between a current account surplus and a capital account surplus?
A current account surplus means a country is exporting more than it imports, while a capital account surplus means more foreign investment is flowing in than domestic investment flowing out.
What is the difference between direct investment and portfolio investment?
Direct investment involves controlling ownership in a business, while portfolio investment involves passive ownership of stocks and bonds.
What is the difference between unilateral transfers and investment income?
Unilateral transfers are one-way payments like foreign aid, while investment income is earned from investments.
How would tariffs on imports affect the current account?
Tariffs may decrease imports, potentially improving the current account balance.
What is the impact of expansionary monetary policy on the capital account?
Lower interest rates may decrease foreign investment, potentially worsening the capital account.
How does increased government spending on infrastructure projects affect the balance of payments?
Increased imports of materials may worsen the current account; increased foreign investment could improve the capital account.
How does a country's decision to devalue its currency affect its trade balance?
Devaluation makes exports cheaper and imports more expensive, potentially improving the trade balance.
What is the effect of capital controls on the capital account?
Capital controls restrict the flow of investments, potentially limiting both inflows and outflows.
How does a policy promoting domestic investment affect the capital account?
It may reduce the need for foreign investment, potentially decreasing capital inflows.
How does a policy of quantitative easing affect the balance of payments?
It can lower interest rates, potentially decreasing capital inflows and depreciating the currency.
How does a policy of attracting foreign direct investment (FDI) affect the capital account?
It increases capital inflows, leading to a capital account surplus.
How does a policy of providing subsidies to domestic exporters affect the current account?
It increases exports, improving the current account balance.
How does a policy of increasing taxes on foreign investment income affect the current account?
It may reduce net investment income outflows, improving the current account balance.
How does a U.S. company exporting goods to Europe affect the U.S. Balance of Payments?
It is a positive entry in the current account, specifically in net exports.
How does a foreign investor purchasing U.S. Treasury bonds affect the U.S. Balance of Payments?
It is a positive entry in the capital account, as foreign money flows into the U.S.
How does a U.S. citizen buying stock in a foreign company affect the U.S. Balance of Payments?
It is a negative entry in the capital account, as U.S. money flows out of the country.
If a country has a large trade deficit, what does this imply about its current account?
It implies that the country likely has a current account deficit, assuming other components of the current account do not offset the trade deficit.
How does an increase in foreign aid given by the U.S. affect the current account?
It is recorded as a negative entry in the net transfers section of the current account.
How does the Fed use official reserves to manage a balance of payments deficit?
The Fed uses its official reserves to cover the deficit, decreasing the reserves.
How does the circular flow of dollars relate to the balance of payments?
Dollars sent abroad for imports eventually return through purchases of goods/services or assets, balancing the BOP.
How does a trade surplus impact a country's currency value?
It tends to increase the demand for the country's currency, potentially leading to appreciation.
How does an increase in domestic interest rates affect the capital account?
It can attract foreign investment, leading to a capital account surplus.
How does a government's decision to purchase foreign currency affect the official reserves account?
It increases the official reserves account balance.
