Question

Suppose Turkey starts welcoming foreign investment with open arms. Specifically it offers tax benefits to attract business either to set up foreign subsidiaries or to set up production sites. How is this policy likely to affect the value of the Turkish Lira (answer the following questions)?

1.Does this create Credit or Debit effect on the balance of payment to Turkey?

2. Which Corresponding account type (Current, Capital, Official Reserve, Financial)?

3. Does this create supply or demand of Lira?

4. Will Lira appreciate or depreciate based on your answer of 3?

Answer 1

1) this will be credit effect of BOP because payment will come to Turkey from outsider investor.Bop transaction are normally those which increase liability or decrease assets.

2) Capital Account which leads to flow of currencies rather than goods and services.

3)This will increase the demand of Lira

4) Lira will apprecite because increase in demand of domestic currency will increase the value of domestic currency leading to decrease in exchange rate and will appreciate the economy.