Question

1.The sale of Australian superfine merino wool to Loro Piana, an Italian luxury goods manufacturer, shows up in the Australian balance of payments as

A. a credit on the capital account B. a debit on the current account C. a debit on the official reserves account D. a credit on the merchandise trade account

2. The spot rate on the Pound is $1.21 and the 180-day forward rate is $1.35. The difference between the two rates means

A.	the Pound is expected to fall in value relative to the dollar
	B.	interest rates are higher in the U.S. than in the United Kingdom
	C.	the Pound has risen in relation to the dollar
	D.	the inflation rate in the United Kingdom is declining

The balance of payments identity is given by BCA + BKA + BRA = 0. Rearrange the identity for a country with a pure flexible exchange rate regime. BCA, BKA and BRA are defined as follows:BCA=Balance on the current account

BKA=Balance on the capital account

BRA=Balance on the reserves account

	A.	BCA + BKA + BRA = 0
	B.	BRA = -BCA
	C.	BCA + BKA = -BRA
	D.	BCA = -BKA

Answer 1

We can calculate the desired result as follows:

A) The sale of Australian superfine merino wool to Loro Piana, an Italian luxury goods manufacturer, shows up in the Australian balance of payments as "a credit on the merchandise trade account" because the goods are sold and money will be received from the foreign country where goods are sold. Therefore the correct answer is option (d)

B) The spot rate on the Pound is $1.21 and the 180-day forward rate is $1.35. The difference between the two rates means "the Pound has risen in relation to the dollar" as earlier $1.21 would buy you 1 Pound but now the same would cost $ 1.35 which means that more US dollars have to be paid to purchase 1 Pound. Therefore the correct answer is option (c)

C) The identity for a country with a pure flexible exchange rate regime, the balance of payments identity will be as follows:

Balance on the current account + Balance on the capital account = 0 or

Balance on the current account = - Balance on the capital account

So, the correct answer is option (d)

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