Question

can someone give a detailed answer?

Q.Explain Balance of payments accounts used in International trade for any country. What is its relationship with Balance of payment Accounting?

Q. Discuss the ripple effects if Monetary policy committee decides to adopt one of following options: (a) Monetary expansion policy

(b) Monetary contraction policy

Answer 1

Question 1
A balance of payments(BOP) account is an organized record of all economic transactions between the home country's residents(individuals, businesses, firms,etc) and that of the outside world, in a time period. It consists of three components : (A)Financial Account(change in international owenership) (B)Current Account(international trade,income from investments,etc) (C) Capial Account(does not affect national economic output)
For a country, the BoP reflects the following :
1) Income of that country relative to the rest of the world
2) Transaction histories of goods and services
3) Total debits and total credits, such that there is always a balance.
Thus, BoP accounting can track credit and debit transactions between different countries to amount for deficits and surpluses in the economy.

Question 2
Ripple effects of -
(a) Monetary expansion policy : It involves reducing the interest rates in order to increase the money supply in the economy. It creates a ripple effect in the economy as the consumer spending increases owing to the fact that consumers can easily borrow more money, which in turn increases the aggregate demand and thus the production of goods. The increase in production will increase the income and will get reflected on the aggregate demand as well. This leads to an inflation spiral as the cycle continues.

(b) Monetary contraction policy : It involves increasing the interest rates in order to decrease the money supply in the economy to curb inflation. This increase in interest rate causes a decrease in the level of output in the economy, which in turn reduces the aggregate demand and the production is cut down as available capital becomes less. This causes a decline in income and people speculates the interest rates to increase even more in the future and save more than spending in consumption of goods. Hence a ripple effect is created in the economy.