AD 501 TOPICS IN BUSINESS ECONOMICS Prof.

Metin ERCAN

FINAL EXAM EXERCISE

SPRING 2020

1) Last year’s trade balance was -30, current account balance was -20, financial account
balance was +18. Compared to last year, this year:
- Exports up by 15
- Imports down by 5
- Tourism revenues up by 20
- Worker remittances down by 10
- Government securities invested by foreigners up by 12
- Outward FDI down by 5
- Inward FDI up by 7

Ceteris paribus (this years’ values of all other items not stated above are the same as last
years’ values), what are the values of trade balance (net exports of goods), current account
balance, financial account balance and reserve assets account this year? Show your
calculations according to the balance of payments format.

Note that:
a) Sum of current, capital and reserve assets accounts equals 0. So a negative (positive)
sign on reserve assets account show an increase (decrease) in reserve assets. We are
asking the value of the reserve assets account not the increase/decrease in reserves
b) We are asking balances of the accounts as of this year, not changes in balances

Hint:
i) First calculate the balances of current and financial accounts for this year, and then
arrive at the value of reserve assets account this year. Combine last years’ values and this
year’s changes in the correct sign. To determine the sign of the change, start with the fact
that an increase in exports must improve the current account balance.

ii) Plot the values on a simple balance of payments format with appropriate signs so that you
do not get confused.

Answer:

(Answer: Trade balance -10, current account balance +10, financial account balance +42,
reserve assets account -52)

1
2) Below are selected items of a two-period hypothetical balance sheet of CBRT:

(TL billion) T1 T2
FOREIGN ASSETS 120 140
Valuation account 0 0
Credit extended 7 42
Currency In Circulation 27 37
Required Reserves 0 0
OMO 10 -5
Public deposits 0 0

a) Fill in the below table using above figures:

T1 T2 Change
DOMESTIC ASSETS
CENTRAL BANK MONEY
RESERVE MONEY
OTHER CENTRAL BANK MONEY
NET FOREIGN ASSETS

Hint: One item you need is missing. However you can arrive at this figure through balance
sheet identities.

Is CBRT in long/short FX position in each of the quarters?

b) Interpret the change in central bank money. What actions of CBRT may be the source of
this change? Refer to magnitudes of changes (give numbers).

c) Compare the changes in central bank money and reserve money and interpret the result. If
there is any discrepancy, what policy actions (what kind of OMO) may CBRT have taken and
for what reason? Refer to magnitudes of changes (give numbers).

Answers:

a)

Long in T1, short in T2

b) CB made a net FX sale of 40. And increased domestic assets by 35. Yielding a net decrease in
CBM - hence money supply - of 5

c) CBM is down by 5 while RM increased by 10. In order to inject liquidity, CB conducted repo
transaction of 15.