Financial Account and Exchange Rate (HL only)
Balance of Payments
AO2·HL
Syllabus requirement
How capital inflows and outflows in the financial account affect exchange rate fluctuations.
Assessment objectives
AO2 Application and Analysis
Higher LevelThis topic is assessed at HL.
Summary
This HL-only topic explains how movements in the financial account affect the exchange rate. It describes how foreign investment into a country increases demand for the domestic currency and tends to appreciate it, while domestic investors buying foreign assets increase supply of the domestic currency and tend to depreciate it. It also links dividend payments from portfolio investments to current account debits and their effect on currency supply and value.