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Chapter 20: Problem 9

The total of our current and capital accounts (LO2) a) will always be zero b) will always be negative c) will always be positive d) may be positive or negative

Short Answer

Expert verified
The total of our current and capital accounts will always be zero (option a), as per the balance of payments (BOP) identity. This identity ensures all international financial transactions of a country are balanced, meaning a surplus in the current account equals a deficit in the capital account, and vice versa.

Step by step solution

01

Understanding Current and Capital Accounts

Current account refers to the balance of trade in a country, which includes the net income from goods, services, interest payments, and primary income sources like salaries, rents, and profits. This account indicates whether a nation saves or spends more than it earns through international trade and investments. Capital account, on the other hand, records the net flow of assets and liabilities, including financial instruments, foreign direct investment, and loans between a country and other nations. It measures the changes in the ownership of a country's assets due to cross-border transactions.
02

Analyzing the Relationship Between Current and Capital Accounts

The relationship between the current and capital accounts is based on the balance of payments (BOP) identity. BOP identity implies that the combined value of the current and capital accounts must equal zero to ensure that a country's international financial transactions are balanced. Mathematically, it can be represented as: \( Current\ Account + Capital\ Account = 0 \) If a country has a surplus in its current account, it should have an equal deficit in its capital account to balance the BOP identity and vice versa. In other words, the total of the current and capital accounts will always be zero if the country has a balanced BOP.
03

Conclusion

Based on the BOP identity and the relationship between the current and capital accounts, we can conclude the total of our current and capital accounts: a) will always be zero Therefore, the correct answer is option (a).

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Most popular questions from this chapter

Which statement is the most accurate? (LO2) a) Our balance on the current account is negative. b) Since our balance of payments is always zero, there is little to worry about. c) The income Americans receive from their foreign investments is much greater than the income foreigners receive for their American investments. d) Because our imports are much greater than our exports, the federal government is forced to make up the difference.

The United States began to consistently run current account deficits since \((\mathrm{LO1}, 4)\) a) 1961 d) 1991 b) 1975 e) 2001 c) 1981

Suppose that last month the U.S. dollar was trading on the foreign-exchange market at \(0.85\) euro per dollar, and today the U.S. dollar is trading at \(0.88\) euro per dollar. Explain what has happened. (LO3) a) The dollar has depreciated and the euro has appreciated. b) The euro has depreciated and the dollar has appreciated. c) Both the euro and the dollar have appreciated. d) Neither the euro nor the dollar have depreciated.

The most important influence on the exchange rate between two countries is (LO3) a) the relative price levels of the two countries b) the relative growth rates of the two countries c) the relative level of interest rates in both countries d) the relative wage rates of both countries

Which statement is the most accurate? In early 2013 there was strong evidence that the (LO3) a) yuan and yen were overvalued against the dollar b) yuan and yen were undervalued against the dollar c) yuan was undervalued against the yen d) yen was undervalued against the yuan
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