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Reading 19: Foreign Exchange Parity Relations - LOS c ~ Q6

Q6. 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’s international currency reserve holdings have increased.

C)   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:

 

Q6. 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’s international currency reserve holdings have increased.

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

Correct answer is C)

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. Both remaining 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 and if its foreign currency reserves increase, it shows up in its official reserve account.

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