1．The primary reason why the balance of payments method is difficult to implement in determining exchange rates is that:

A)   foreign exchange markets affect trade flows and help determine the values of the balance of payments and not the other way around.

B)   data on trade flow elasticity is difficult to obtain and the sensitivity of such trade flows to the movement of exchange rates is not determinable.

C)   the timeliness of trade flow data tends to affect the current account more dramatically than the capital account and thus gives rise to volatility in the foreign exchange markets.

D)   a country’s official reserves are usually invested in foreign currencies that have no effect on the balance of payments, but still increases volatility in the foreign exchange markets.

2．Larry Goren, CFA, is an economist for the Federal Reserve Bank. He is interested in using a country’s balance of payments as a forecasting tool in determining exchange rates. He notices that China has a high current account balance resulting in a large surplus in its balance payments. It can be implied that:

A)   China provided a great deal of financial assistance to other nations.

B)   China purchased a great deal of real estate in other countries.

C)   China’s international currency reserve holdings have increased.

D)   China received a great deal of income flows from the sale of trade merchandise and services and payments on its existing investments.

答案和详解如下：

1．The primary reason why the balance of payments method is difficult to implement in determining exchange rates is that:

A)   foreign exchange markets affect trade flows and help determine the values of the balance of payments and not the other way around.

B)   data on trade flow elasticity is difficult to obtain and the sensitivity of such trade flows to the movement of exchange rates is not determinable.

C)   the timeliness of trade flow data tends to affect the current account more dramatically than the capital account and thus gives rise to volatility in the foreign exchange markets.

D)   a country’s official reserves are usually invested in foreign currencies that have no effect on the balance of payments, but still increases volatility in the foreign exchange markets.

The correct answer was B)

The traditional approach to foreign exchange rate determination suggests that exchange rate adjustments are required to restore balance of payments equilibrium. This is a difficult model to implement, however. An analysis of these potential adjustments requires an estimate of trade flow elasticity in response to movements in exchange rates. Further, the model must be dynamic and complex enough to handle the impact of capital flows and the effect on the balance of payment components. Ultimately, small changes in current account flows cannot substantiate the dramatic points of inflection and volatility in the exchange rate markets, meaning an analysis of the elements of the balance of payments is not useful in explaining how exchange rates are determined.

2．Larry Goren, CFA, is an economist for the Federal Reserve Bank. He is interested in using a country’s balance of payments as a forecasting tool in determining exchange rates. He notices that China has a high current account balance resulting in a large surplus in its balance payments. It can be implied that:

A)   China provided a great deal of financial assistance to other nations.

B)   China purchased a great deal of real estate in other countries.

C)   China’s international currency reserve holdings have increased.

D)   China received a great deal of income flows from the sale of trade merchandise and services and payments on its existing investments.

The correct answer was D)

A large increase in China’s current account can only mean that it has received income from the sale of its trade merchandise (exports) and payments on its existing investments. All other transactions affect the other elements of the balance of payment accounts. If China lends financial assistance to other nations, it shows up in its capital account. If China purchased real estate, it shows up in its financial account. If its foreign currency reserves increase, it shows up in its official reserve account.