4.8.1 Balance Of Payments

## What are the two main components of the balance of payments? - [x] Current account and the capital and financial account - [ ] Government spending account and savings account - [ ] Investment account and trade account - [ ] Import account and export account > **Explanation:** The balance of payments statement consists of two main components: the current account, which records imports and exports of goods and services, and the capital and financial account, which records financial flows related to investments. ## What does the current account record? - [x] The import and export of goods and services and net transfers - [ ] Foreign direct investment and portfolio investment - [ ] Government budget deficit - [ ] Inflation rate changes > **Explanation:** The current account records the import and export of goods and services between residents and non-residents, as well as net transfers like foreign aid. ## What does the capital and financial account record? - [ ] Daily transactions in stock markets - [x] Financial flows related to investments by foreigners in Canada and Canadians abroad - [ ] Government tax revenues - [ ] Household savings > **Explanation:** The capital and financial account records financial flows related to investments by foreigners in Canada and by Canadians abroad. ## What creates a demand for foreign currency according to balance of payments transactions? - [ ] Only foreign investments in Canada - [ ] Canadian dollar appreciation - [x] Current account outflows such as buying foreign goods or paying interest on debt - [ ] Increase in Canadian exports > **Explanation:** Current account outflows create a demand for foreign currency when, for example, Canadians buy foreign goods or pay interest on foreign-held debt. ## What leads to a current account deficit? - [x] A country buying more goods and services from abroad than it sells - [ ] A country exporting more than it imports - [ ] Increase in foreign investments in the country - [ ] Decrease in government spending > **Explanation:** A current account deficit occurs when a country imports more goods and services than it exports. ## How can a current account deficit be financed? - [ ] By only saving more money - [ ] By increasing tax revenues - [x] By selling more assets or borrowing money to make up the difference - [ ] By reducing government budgets > **Explanation:** A current account deficit can be financed by selling assets or borrowing money. ## What analogy is used to explain the balance of payments? - [ ] A household's monthly grocery shopping - [ ] A country’s military spending - [x] Making up the difference by borrowing money or selling something of value when spending more than earning - [ ] A business expanding its operations > **Explanation:** The balance of payments is explained by the analogy of spending more than earning, and making up the difference by borrowing money or selling something of value. ## What does running a capital and financial account surplus suggest? - [ ] A decrease in foreign investments into the country - [ ] An increase in the country's currency value - [ ] A reduction in debt levels - [x] Selling more assets or receiving more investments than what is spent abroad > **Explanation:** Running a capital and financial account surplus suggests selling more assets or receiving more investments than what is spent abroad to finance a current account deficit. ## Which of the following is sometimes called the trade account? - [ ] Capital and financial account - [x] Current account - [ ] Government account - [ ] National savings account > **Explanation:** The current account is sometimes referred to as the trade account, as it records the import and export of goods and services. ## How do balance of payments transactions affect currency exchange? - [ ] They have no effect on currency exchange rates. - [x] They create a supply or demand for foreign currency and for the country’s currency. - [ ] They stabilize foreign currency exchange rates. - [ ] They determine the country's interest rates. > **Explanation:** Balance of payments transactions involve a supply or demand for foreign currency and for the Canadian currency, affecting exchange rates.