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TRUE or FALSE questions on BOP

1. In National Income Accounting, foreign savings play no role.
2. Current account deficits are always worse than current account surpluses.
3. An import of U.S. treasury bills shows up only in the financial account.
4. Canada's net balance of payment position with the U.S. will always fall if the volume of our imports from the U.S. falls.
5. Exchange rate undershooting explains daily variation in exchange rates.
6. Higher Canadian inflation explains current strength of our currency
7. Vehicle currencies are driven by their value as a medium of exchange and a unit of account.
8. A tourist from New York buys a meal in Toronto paying with travelers cheques. This shows up in the balance of payment as a debit item in the current account.
9. under covered interest parity, the forward premium is always positive if the Canadian dollar is expected to appreciate.
10. Purchasing power parity cannot hold if the law of one price does not hold.

Solution Preview

1. In National Income Accounting, foreign savings play no role.
TRUE.
Y= C+I+G+(EX-IM=CA)
Y= National Income
C= Consumption
I= Investment
G= Government Expenditure
EX= Exports
IM= Imports
CA= Current Account Balance

National income= GNP(value of all final goods and services produced by a country's factors of production and sold on the market in a given time period ) less depreciation plus net unilateral transfers (eg pension payments to retired citizens living abroad, reparation payments, foreign aid such as relief funds etc) less indirect business taxes (eg sales taxes). Foreign savings do not form part of this equation.
Hence the statement is false.
( The national income is also defined as the sum of domestic and foreign expenditure on the goods and services produced by the domestic factors of production ; The foreign savings do not enter the picture. It is the domestic savings which is used for investments which enter the national income accounting)

2. Current account deficits are always worse than current account surpluses.

FALSE
A country which has a current account deficit must borrow from abroad by the amount of deficit to finance the deficit. Similarly a country with a current account surplus is earning more from exports and is financing the current account deficit of its trading partners by lending to them.
A country's current account balance equals the change in its net foreign wealth.

Thus a country with a ...

Solution Summary

The solutions provides a discussion of 10 TRUE or FALSE questions on National Income Accounting, Current Accounts, Financial Account, Balance of Payments, Exchange rate overshooting, inflation, vehicle currencies, Covered Interest Parity, Purchasing Power Parity

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