(Copy of Anna's) IPE Week 5

Question 1

What is the Balance of Payments (BoP)?

Answer 1

The BoP, also known as the balance of international payments, is a statement of all transactions made between entities in one country and the rest of the world over a defined period, such as a quarter or a year.

Question 2

What are the components of the Balance of Payments (BoP)?

3. 4.

Answer 2

1. Trade balance
2. Current account balance
3. Financial (capital) account balance
4. Foreign exchange reserves

Question 3

Define Trade Balance and its implications.

1. 2.

Answer 3

Trade balance: Total export earnings minus payments for imports.
1. Positive number = trade surplus
2. Negative number = trade deficit

Question 4

What does the Current Account Balance include?
1.
2.
3.
4.
5.
6.
7.

Answer 4

1. Trade balance
2. Service receipts
3. Income receipts
4. Transfer receipts
5. Service payments
6. Income payments
7. Transfer payments

Question 5

Describe the Financial (Capital) Account in the BoP.
1. D
2. P
3. L

Answer 5

Includes direct investment, portfolio investment, and loans/borrowing.

1. Direct investment: investment in machinery, plants, and at least 10% of a firm
2. Portfolio investment: buying and selling shares or bonds.
3. Loans/Borrowing: borrowing is a plus, while repayment is a minus.

Question 6

How does the balance of payments relate to changes in foreign reserves?

-

Answer 6

The overall balance of payment (BoP) will be reflected in changes in foreign reserves.
Foreign reserves consist of foreign currencies and other reserve assets, such as gold, held by monetary authorities.

Question 7

What is an Exchange Rate?

Answer 7

The ‘price’ of one currency in terms of another currency. Fixed (set by government) or floating (change according to market)

Question 8

What happens if the exchange rate is out of equilibrium?

1.
2.

Answer 8

1. Balance-of-payments surplus: Dollar reserves accumulate or currency strengthens.
2. Balance-of-payments deficit: Dollar reserves are sold or currency weakens.

Question 9

What are the main components of macroeconomic policy?
1.
2.

Answer 9

1. Fiscal Policy: Government actions regarding taxes and spending to influence total demand in the economy.
2. Monetary Policy: Actions by monetary authorities to influence money supply or credit costs.

Question 10

How do interest rates affect the supply and demand of foreign currencies?

1. Too “strong”
2. Too “weak”

Answer 10

1. When Rand is ‘too weak’ – the pressures are on the Reserve Bank to raise interest rates.
2. When Rand is seen to be ‘too strong’ – pressures are to reduce interest rates

Question 11

Who are the winners and losers of interest rate changes?

Answer 11

1. Exporters: Like currency depreciation
2. Importers: Like appreciation
3. Producers: Like depreciation

Question 12

How does a country build up foreign debt?

Answer 12

borrows money from lenders outside the country

Question 13

What is the immediate effect of foreign borrowing on the balance of payments?

Answer 13

positive –involving ‘payments in’ to the country)

Question 14

What is the effect on the balance of payments (bop) after the initial loan repayment?

Answer 14

negative –involving ‘payments out’ to repay the loan, with interest

Question 15

The shift to macroeconomics requires a shift in thinking about the economy as a whole, with aims such as:
1.
2.
3.

Answer 15

1. Promoting economic growth
2. Combatting inflation and unemployment
3. Addressing balance-of-payment problems 4

Question 16

Gross domestic product (GDP):

Answer 16

Equal to “the total value of all goods and services produced by factors of production in a given country over a given period [usually one year].

Question 17

Alternative measures of the “size” of an economy:

Answer 17

1. Gross domestic expenditure (GNE)
2. Gross national income/gross national product (GNI/GNP

Question 18

The “fix” for GDP

Answer 18

Divide GDP (or an alternative measure of aggregate performance) by population –giving GDP per capita (per head

Question 19

Two main components of macroeconomic policy:

Answer 19

Fiscal and monetary policy

Question 20

Fiscal Policy:

Answer 20

Actions taken by the government regarding taxes and spending intended to influence total demand for all goods and services (aggregate demand) in the economy

Question 21

What are the usual effects of fiscal surpluses or fiscal deficits on economic output and prices

Answer 21

1. The larger the fiscal deficit, the more expansionary (or “loose”) fiscal policy is said to be –shifting the aggregate demand curve out to the right
2. In contrast, reducing the fiscal deficit –or even running a fiscal surplus –is known as a restrictive (or “tight”) fiscal policy

Question 22

Monetary Policy:

Answer 22

Actions taken by a country’s monetary authorities to influence the money supply or the price of credit (or cost of borrowing

Question 23

A restrictive (“tight”) monetary policy vs An expansionary (“loose”

Answer 23

A restrictive (“tight”) monetary policy involves reducing growth in the money supply and raising interest rates

vs

An expansionary (“loose”)monetary policy goes in the opposite direction.

Question 24

When the economy is “overheating” –with high levels of inflation

Answer 24

adopt restrictive macroeconomic policies

Question 25

When the economy is in recession –with low levels of growth

Answer 25

adopt expansionary macroeconomic policies

Question 26

The “Phillips curve” shows that:

Answer 26

Inflation and unemployment have an inverse relationship in the short run. When unemployment decreases, inflation tends to rise. Conversely, when inflation falls, unemployment often increases