Reference no: EM131426780

1. Explain how each of the following transactions generates two entries- a credit and a debit- in the U.K. balance of payments accounts, and describe how each entry would be classified.

a. The UK Red Cross sends $5000 worth of tents to the survivors of the earthquake in Turkey.

b. An American clothing firm sells its factory in Oxford (UK) to a German firm. Payment is made by a transfer of  $ 97000 to the bank account of the US firm in New York.

c. The FED transfers $200000 to a bank in UK in exchange for British government bonds.

d. The UK citizen holding the German government bonds receives an interest payment of $2000. Payment is transferred to the bank account of UK citizens in Frankfurt.

e. A UK importer buys $600000 worth of Sony videos from Japan. $300000 is transferred to Japanese firm's bank account in Tokyo. The rest will be paid in 6 month's time.

f. A Swedish jean company imports $4000 worth of cotton from UK. Payment is made by transferring $4000 to the British producer's bank account in UK.

2. For each transaction, show the entries for UK's balance of payments. Find the balance on goods and services, current account balance, capital and financial account balance, changes in official reserves, and overall balance for the year assuming that above are all the international transactions of the year.

3. Explain the relationship between the current account deficit and the exchange rate. By considering the foreign exchange market, explain whether it is possible for a country's currency to appreciate when the current account deficit in that country grows. Assume that there is no government intervention to the exchange rate market. Make sure to explain your case both graphically and verbally.