BofP question: why does the current account + capital and financial account equal 0? (1 Viewer)

[austinbaric]

(Under a floating exchange rate)

 

[Tsonga]

Re: BofP question: why does the current account + capital and financial account equal

Under a floating exchange rate, the exchange rate is determined as the equilibrium point of the supply and demand for the currency.
Therefore Supply = Demand.
Supply = M + K outflows + Y deb its and Demand = X + K inflow + Y credits.
Therefore, M + K outflows + Y debits (supply) = X + K inflows + Y credits (demand)
Rearranging the equation gives
M - X - Y credits (deficit on current account) = K inflows - K outflows (Surplus on KAFA)