Exchange rate and the balance of payments - The exchange rate and the balance of payments

5 important questions on Exchange rate and the balance of payments - The exchange rate and the balance of payments

Why does the FE market always clears?

Because when demand is created for a certain currency, there is always equal supply of another currency

When there is an inbalance in the FE market, in what three ways can this clear?

1. The imports/exports can adjust so it clears again.
2. Delayment of payment, hence the inbalance is turned into debt
3. Central bank trades clear the market

What is meant by a Balance of Payments surplus, since BP=0 always holds?

That the Balance of Payments had been in a surplus if the central bank hadn't interferred.
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What variable is equal to BPsurplus?

BPsurplus= -OR

What does an ideal system of flexible exchange rates compromise?

That the central bank does not participate in the foreign exchanges

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