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What are official reserve transactions? Explain their importance in the balance of payments. |
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Answer» Solution :Official reserve transactions refer to transactions by the central bank that cause changes in its official reserves of foreign EXCHANGES. Such transactions take place when a country WITHDRAWS from its stock of foreign EXCHANGE reserves to finance DEFICIT in its overall balance of payments (BOP). A country with surplus in its overall BOP leads to rise in foreign exchange reserves. Official reserve transactions are very important as they HELP to bring a balance in the country's overall balance of payments. So, such transactions act as accommodating item in BOP. |
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