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    Question

    An increase in the international reserves of an economy

    indicates that 
    A ex ante savings are higher than ex ante investment Correct Answer Incorrect Answer
    B ex ante savings are lower than ex ante investment Correct Answer Incorrect Answer
    C ex ante savings are equal to ex ante investment Correct Answer Incorrect Answer
    D Nothing can be said about ex ante savings or ex ante investment Correct Answer Incorrect Answer

    Solution

    An increase in the international reserves of an economy typically reflects a surplus in the balance of payments. The balance of payments includes the current account (trade balance, income from abroad, and transfers) and the capital and financial accounts (net investment from abroad and changes in foreign reserves). Here's how the options relate to the increase in international reserves: Balance of Payments Surplus: ·         A balance of payments surplus indicates that the total inflows of foreign currency (from exports, foreign investments, remittances, etc.) exceed the total outflows (from imports, investments abroad, etc.). ·         When there is a surplus, it often leads to an accumulation of foreign exchange reserves as the central bank buys foreign currency to maintain the exchange rate or manage the economy. Ex Ante Savings and Investment: ·         Ex ante savings refers to the planned or intended savings in the economy. ·         Ex ante investment refers to the planned or intended investment in the economy. ·         A situation where ex ante savings exceed ex ante investment typically results in a surplus in the balance of payments, as there is more capital available than needed domestically, leading to excess capital being invested abroad or used to build up reserves. Given this understanding, an increase in international reserves suggests that the economy is receiving more foreign currency than it is spending. This situation corresponds to ex ante savings being higher than ex ante investment.

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