Under a system of flexible exchange rates,balance-of-payments deficits and surpluses show up
A) in a country's central bank purchases and sales of foreign currencies.
B) in gold flows into and out of the country.
C) as changes in exchange rates rather than as central bank transactions.
D) as the net difference between debit and credit items in the balance of payments accounts.
E) in the unilateral transfer account in the balance-of-payments accounts.

Question

Quizplus · Accepted Answer

Under a system of flexible exchange rates, balance-of-payments deficits and surpluses are reflected in changes in exchange rates rather than in central bank transactions. When a country runs a balance-of-payments deficit, meaning its imports exceed its exports, this causes its currency to decrease in value on foreign exchange markets. This in turn makes its exports less expensive for foreign buyers, while making imports more expensive for domestic consumers. This can help to bring the country's balance of trade back into balance. Alternatively, when a country runs a balance-of-payments surplus, meaning it exports more than it imports, this increases demand for its currency on foreign exchange markets, which causes the currency to appreciate in value. This can make exports more expensive for foreign buyers, while making imports cheaper for domestic consumers, which in turn can help to bring the balance of trade back into balance.

Under a System of Flexible Exchange Rates,balance-Of-Payments Deficits and Surpluses