3. *) (5 points) a. (1 point) Show the relation between net capital in flow and

Question

3. *) (5 points) a. (1 point) Show the relation between net capital in flow and total accumulated foreign b. (1 point) Now show the relation between Basic transfer, net capital inflow and interest c. (2 points) Explain how relation between average rate of interest and percentage rate of d. (1 point) When does the country have no change to foreign exchange in this context? debt. Just give expression payment. Just give expression increase in total debt ensure that a country gains, loses foreign exchange Explain in brief.

Explanation / Answer

a.

If Net Capital INflow be represented as Fn it can be shown as ,

Fn equals to rate of increase of total external debt (D)

Fn = dD

b)

(BT) = Basic Transfer, dD =rate of increase of total external debt, rD = Interest Payments

BT = dD-rD = (d-r) * D

c)

From the explantion given above,

BT will be positiove if d>r and country will be gaining in foreign exchange and similarly if r>d country will lose in foreign exchange.

d)

if rate of increase in total debt equals rate of interst payment there will be no change in foreign exchange

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