Ch48 Policies to Correct BoP disequilibrium

Front

What does the financial account of the balance of payments record?

Back

The financial account records the domestic ownership of foreign assets and the foreign ownership of domestic assets, including Foreign Direct Investment (FDI).

Front

What does the capital account include?

Back

The capital account includes non-produced, non-financial assets.

Front

What are expenditure-switching policies?

Back

Expenditure-switching policies aim to persuade consumers to buy more of their own country’s products and fewer products from elsewhere, and to increase sales of exports in other countries.

Front

What are expenditure-reducing policies?

Back

Expenditure-reducing policies are designed to reduce aggregate demand in the country, including expenditure on imports.

Front

What are examples of transactions in the capital account?

Back

Examples include government debt forgiveness and the sale and purchase of copyrights and patents, which are non-financial assets.

Front

What is the effect of an expansionary fiscal policy on the balance of payments?

Back

An expansionary fiscal policy is likely to lead to a rise in import spending and potentially a deficit on the current account of the balance of payments.

Front

What is the effect of a deflationary fiscal policy on the balance of payments?

Back

A deflationary fiscal policy reduces aggregate demand and the demand for imported products, potentially improving the current account of the balance of payments.

Front

What is the effect of an expansionary monetary policy on the balance of payments?

Back

An expansionary monetary policy increases aggregate demand and the demand for imported products, possibly leading to a deterioration in the current account of the balance of payments.

Front

What is the effect of an increase in the interest rate on the financial account?

Back

An increase in the interest rate will attract additional flows of hot money, showing as a short-term credit in the financial account of the balance of payments.

Front

What are supply-side policies and their effect on the balance of payments?

Back

Supply-side policies increase aggregate supply and, if successful, improve the current account of the balance of payments and possibly the financial account by attracting foreign firms.