Balance of Payments Test - 2

Current account of balance of payment is trade balance & trade balance includes exports and imports of goods and services.

All transactions relating to borrowings from abroad by private sector, government, etc. Receipts of such loans and repayment of loans by foreigners are recorded on the positive (credit) side.

All transactions of lending to abroad by private sector and government. Lending abroad and repayment of loans to abroad is recorded as negative or debit item.

Capital account of BOP records all those transactions, between the residents of a country and the rest of the world, which cause a change in the assets or liabilities of the residents of the country or its government. It is related to claims and liabilities of financial nature.

Balance of payment account is a systematic record of all economic transactions between residents of home country and residents of foreign countries during a given point of time.

As per definition .

Foreign exchange rate defines the price of currency of domestic country in terms of foreign currency

At this point , the market for foreign exchange gets cleared.

The nominal exchange rate is defined as the number of units of the domestic currency that can purchase a unit of a given foreign currency. A decrease in this variable is termed nominal appreciation of the currency.

Excess supply of an entity always lead to deflation of value. Same happens with foreign exchange.

yes it contradicts with the objectives of free markets .It can be explained as suppose,

•  If a currency is falling below its band the government will have to intervene. It can do this by buying sterling but this is only a short term measure.
•  The most effective way to increase the value of a currency is to raise interest rates. This will increase hot money flows and also reduce inflationary pressures.
•  However higher interest rates will cause lower AD and economic growth, if the economy is growing slowly this may cause a recession and rising unemployment

Currency's value goes up (or down) if the demand for it goes up more (or less) than the supply does. In the short run this can happen unpredictably for a variety of reasons, having to do with trade flows,speculation, or other factors in the international capital market.