1. autonomous receipts equal autonomous payments and there are no induced transactions.
2. the stock of foreign exchange reserves is neither increasing nor decreasing.
3. the foreign exchange rate is determined by demand and supply forces without government intervention.
4. both 1 and 3 are true.
Choose the correct option.
The tricky issue in this question relates to option 2 . If the government relies entirely on foreign exchange transactions to manipulate the exchange rate when it wants to do so, then constancy of the stock of reserves indicates balance of payments equilibrium. If the government is interfering with private transactions, however, for the purpose of restricting the supply of domestic currency going onto the international currency market, the balance of payments may be in deficit even though the stock of foreign exchange reserves is constant or increasing. In subsequent lessons, as well as in subsequent topics of this one, it will be assumed unless otherwise stated that changes in the stock of foreign exchange reserves are the only induced transactions present.