Question

29. Suppose you have the following balance of payment account balances for a country (in millions of dollars)

Year               1             2           3             4             5

   CA               85           95        115           125       150

   FA             -100       -105      -110          -115     -125

For each year calculate the country’s official reserve (OR) account balance and very briefly (in one sentence) describe the expected behavior of the real value of its currency over the five-year period.

Answer 1

Balance of Pyament = current acount+financial account+official reserve = 0

Official reserve Calculation:

Year 1: 85-100+OR=0 => OR= 15

Year 2:OR =95-105 = 10

Year 3: OR = 115-110 = -5

Year 4: OR = 125-115= -10

Year 5:OR = 150-125= -25

Over the 5 year period as current account keeps on increasing indicating increasing exports and BoP as a result is increasing year on year resulting in stronger currency. The real value of currency over the 5 year period will behave in a postive manner with appreciation in the value of the currency.

answered by: anonymous