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IAI Actuarial Core Principles · Business Economics · Balance of payments and exchange rates

Under a floating exchange rate with no central bank intervention, and ignoring errors, the current account balance is -₹90 billion. What must the capital and financial account balance be, and what is the implication for the economy?

The capital and financial account must be +₹90 billion, because with no reserve movement the accounts sum to zero. This net capital inflow means the country is financing its deficit by borrowing or selling assets to foreigners, so it is a net borrower.

  1. A+₹90 billion, meaning the country is a net borrower from the rest of the worldCorrect
  2. B+₹90 billion, meaning the country is a net lender to the rest of the world
  3. C-₹90 billion, meaning the country is a net borrower
  4. D0, because floating rates eliminate the deficit
  5. -₹90 billion, meaning the country is a net lender

Explanation

With no reserve change, the sum of the accounts is zero, so the financial account is +90 billion. A net capital inflow means foreign claims on the country rise, so it is a net borrower. Option 'net lender' reverses the sign.

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