Question

When the BOP (balance of payment) accounts are recorded correctly, by BOP identity

A. Under purely flexible exchange rate regime, BCA (balance of current accounts) + BKA (balance of capital accounts) = - BRA (Balance of official reserve accounts).
B. Under purely flexible exchange rate regime, BCA (balance of current accounts) = - BRA (Balance of official reserve accounts).
C. Under purely flexible exchange rate regime, BCA (balance of current accounts) = - BKA (balance of capital accounts).
D. Under fixed exchange rate regime, BRA (Balance of official reserve accounts) + BKA (balance of capital accounts) = BCA (balance of current accounts).
E. Under dirty floating exchange rate regime, BCA (balance of current accounts) = - BKA (balance of capital accounts).

Answer 1

Under a purely flexible exchange rate regime, the balance of current accounts plus the balance of capital accounts equals the negative balance of official reserve accounts.

Step-by-step explanation:

When the balance of payment (BOP) accounts are recorded correctly under a purely flexible exchange rate regime, the equation that stands correct is BCA (balance of current accounts) + BKA (balance of capital accounts) = - BRA (Balance of official reserve accounts). This identity signifies that if a country has a surplus in its current and capital accounts (BCA + BKA > 0), it must be accumulating reserves, whereas a deficit (BCA + BKA < 0) would imply it's spending reserves. This directly correlates with the concepts of trade balances and international flows of financial capital; where a current account surplus indicates that the country is a net lender internationally, whilst a deficit indicates it is a net borrower.