1. What is the investment income account of the balance of payments? 2. What is

Question

1. What is the investment income account of the balance of payments?

2. What is the official settlements account of the balance of payments? How are official settlements deficits and surpluses associated with movements in the international reserves of the balance of payments?

3. Explain why private national saving plus government saving equals the current account of the balance of payments.

4. Suppose that the following transactions take place on the U.S. blance of payments during a given year. Analyze the effects on the merchandise trade balance, the international investment income account, the current account, the capital account, and the official settlements account.

a. Boeing, a US aerospace compnay, sells $3 billion of its 747 airplanes to the People's Republis of china, which pays with proceeds from a loan from a consortium of international banks.

b. Mitsubishi UFJ Financial Group purchases $70 million of 30-year US Treasury bonds for one of its Japanese clients. Mitsubishi draws down its dollar account with Bank of America to pay for the bonds.

6. What is the effect of a foreign exhange intervention on the money supply? How can a central bank offset this effect and still hope to influence the exchange rate?

7. As a foreign echange trader, you see the following quotes for Canadian dollars (CAD), US dollars (USD), and Mexican pesos (MXN): USD0.7047/CAD    MXN6.4390/CAD     MXN8.7535/USD   Is ther an arbitrage opportunity, and if so, how would you exploit it?

8. If the Japenese yen-US dollar exchange rate is Yen104.30/USD, and it takes 25.15 Thai bahts to purchase 1 dollar, what is the yen price of the baht?

Explanation / Answer

1. Investment income covers income derived from a resident entity's ownership of foreign assets. The most common types of investment income are income on equity (dividends) and income on debt (interest).

2. A type of account used in balance of payments accounting to keep track of central banks' reserve asset transactions with each other. The official settlement account keeps track of transactions involving gold, foreign exchange reserves, bank deposits and special drawing rights (SDRs). The overall balance or the official settlement balance measures all the private sector

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