The Open Economy 1. The Balance of Payments Construct a balance of payments for the hypothetical economy (the \"domestic country\"), using the list of its transactions with the \"foreign country\". (Hint: use the macroeconomic theory approach) (i) The domestic country purchased $75 in oil from the foreign country. (ii) Foreign tourists spent $20 on domestic ski slopes. (iii) Domestic residents purchased $45 in life insurance in the foreign country. (iv) Domestic residents purchased $5 in illegal substances from foreigners. (v) Foreign investors were paid $12 in dividends from their holdings of domestic equities. (vi) Domestic residents sent $25 to foreign charities. (vii) Foreign businessmen spent $35 in bribes to domestic government ofcials. (viii) Domestic businessmen borrowed $65 from foreign banks. (ix) Foreign investors purchased $15 in domestic junk bonds. (x) Domestic residents purchased $60 in real estate in the foreign country. (xi) The foreign country purchased $40 in wheat from the domestic economy, and this sum was deposited on the commercial banks' accounts of the foreign country. (xii) Foreign workers sent home part $8 of their wage. (xiii) Foreign tourists charted the steamer in the domestic economy for $30 to take a ride on its famous river. (xiv) The charitable foundation of the foreign country paid $18 grants to the scientists of the domestic country. (xv) The firms of the domestic country spent $23 for the creation of subsidiary companies in the foreign country. (xvi) Domestic investors sold off $50 in holdings of foreign government bonds. (a) Dene the difference between a credit and a debit in the balance of payments. Which of the above transactions are credits and which are debits for the \"domestic economy\"? (Hint: list only the numbers of the transactions) What is the relation between them in this economy? Is there a decit or a surplus in the balance of payments of this economy (before the ofcial reserves adjustment)? (b) How the total balance of payments account becomes equal to zero? Explain what happens to the o'icial reserves. How this change in ofcial reserves is recorded in the balance of payments? Explain your answer. Show what happens on the exchange market. (c) Draw the balances of payments for the \"domestic economy\