c) The balance of payments identity holds that the combined balance on the current account (BCA)...

 

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c) The balance of payments identity holds that the combined balance on the current account (BCA) and capital accounts (BKA) should be equal in size, but opposite in sign, to the change in the official reserves (BRA): BCA + BKA = -BRA. Under the pure flexible exchange rate regime, central banks do not engage in official reserve transactions. Thus, the overall balance must balance, i.e., BCA = -BKA. Under the fixed exchange rate regime, however, a country can have an overall BOP surplus or deficit as the central bank will accommodate it via official reserve transactions. Hence, the sum of sub-accounts of the balance of payments always add up to zero. In this regard, it is common for most countries that their current account surplus is offset by a deficit in the financial/capital account or vice versa. i. Despite the balance of payments identity, it is realized that China has been running a surplus in both of its current account and financial/capital account for about 15 years. How is this possible? (3 marks) ii. Malaysia is an open economy that continuously experience current account surplus. It is certain that the country's balance of trade improved during a weakened of ringgit. In this context, does Malaysia encounter J-Curve effect? Explain. (2 marks) iii. How does international capital flows will affect the business in the local country? Which component of balance of payments will be affected? (2 c) The balance of payments identity holds that the combined balance on the current account (BCA) and capital accounts (BKA) should be equal in size, but opposite in sign, to the change in the official reserves (BRA): BCA + BKA = -BRA. Under the pure flexible exchange rate regime, central banks do not engage in official reserve transactions. Thus, the overall balance must balance, i.e., BCA = -BKA. Under the fixed exchange rate regime, however, a country can have an overall BOP surplus or deficit as the central bank will accommodate it via official reserve transactions. Hence, the sum of sub-accounts of the balance of payments always add up to zero. In this regard, it is common for most countries that their current account surplus is offset by a deficit in the financial/capital account or vice versa. i. Despite the balance of payments identity, it is realized that China has been running a surplus in both of its current account and financial/capital account for about 15 years. How is this possible? (3 marks) ii. Malaysia is an open economy that continuously experience current account surplus. It is certain that the country's balance of trade improved during a weakened of ringgit. In this context, does Malaysia encounter J-Curve effect? Explain. (2 marks) iii. How does international capital flows will affect the business in the local country? Which component of balance of payments will be affected? (2

Answer rating: 100% (QA)

i Chinas BOP surplus is indeed possible under the fixed exchange rate regime The central bank of China PBOC has been accumulating reserves since the early 2000s as the central bank has been intervenin... View the full answer