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- Imagine that the economy of Germany finds itself in the following situation: the government budget has a surplus of 1 of Germanys GDP; private savings is 20 of GDP; and physical investment is 18 of GDP. Based on the national saving and investment identity, what is the current account balance? If the government budget surplus falls to zero, how will this affect the current account balance?Why would a nation “dollarize”—that is, adoptanother country’s currency instead of having its own?For each of the following, identify in which part ofthe balance-of-payments account the transaction isrecorded (current account, capital account, or netchange in international reserves) and whether it is areceipt or a payment.a. A British subject’s purchase of a share of Johnson &Johnson stockb. An American citizen’s purchase of an airline ticketfrom Air Francec. The Swiss government’s purchase of U.S. Treasury billsd. A Japanese citizen’s purchase of California orangese. $50 million of foreign aid to Hondurasf. A loan from an American bank to Mexicog. An American bank’s borrowing of eurodollars
- If the government wants to O decrease; contractionary O increase; expansionary O increase; only rules-based O decrease: expansionary the value of its currency in the foreign exchange market, it can use monetary policy.Q.1.10 Which of the following statements is correct? (2)(1) When a British firm invests in a bicycle manufacturing facility in South Africa,the amount concerned is entered as an inflow on the current account of theSouth African balance of payments.(2) When someone purchases a second‐hand car, the transaction is included inthe calculation of GDP in the year the sale took place.(3) A deficit on the current account of the balance of payments indicates thatthe country exported more than it imported during the period in question.(4) In the base year, the value of nominal GDP is equal to the value of real GDP.The nation of Narnia had a current account deficitof $423 million and a nonreservefinancial account surplus of $360 million in year3695. a.What was the balance of payments of Pecunia in thatyear? What happenedto the country’s net foreign assets? b.If there is a sudden increase in sales of goods andservices to foreigners,what effect do you expect in the Balance of Paymentaccount? c.How would the increase in domestic interest rate inyear 3695 affect thebalance of payment?
- 4. Net capital outflow and net exports An open economy interacts with the rest of the world through involvement in world financial markets, and also world markets for goods and services. Despite the fact that this involvement often results in an imbalance in these markets, the following identity must hold: Net Capital Out flow = Net Exports That is, any transaction that affects the left side of this equation must also affect the right side. The following problem provides a scenario that illustrates why this identity must remain true. Suppose you work as the purchasing manager for a national chain of buffet restaurants in the United States, and it is time to place your annual order of hot chili oil. You pay $2,500,000 for a shipment of chili oil from a producer in South Korea. Determine the effects of this transaction on exports, imports, and net exports in the U.S. economy, and direction of change is "No change," enter "0" in the Magnitude of Change column. Hint: The magnitude of…QUESTION 2Consider a country with a flexible exchange rate. If the central bank of this country raises its interest rate by 0.5%-points, whereas observers had anticipated an increase of only 0.25%-points, one can expect that: Bond prices and stock prices rise, the country’s currency depreciatesBond prices rise, stock prices fall, the country’s currency appreciatesBond prices fall, stock prices rise, the country’s currency depreciatesBond prices and stock prices fall, the country’s currency appreciates4. Net capital outflow and net exports An open economy interacts with the rest of the world through its involvement in world markets for goods and services and world financial markets. Although it can often result in an imbalance in these markets, the following identity must remain true: Net Capital Outflow = Net Exports In other words, if a transaction directly affects the left side of this equation, then :must also affect the right side. The following problem will help you understand why this identity must hold. Suppose you are a fashion designer living in the United States, and a trendy boutique in Bangkok just purchased your entire inventory for THB 90,000. Determine the effects of this transaction on exports, imports, and net exports in the U.S. economy, and enter your results in the following table. If the direction of change is "No change," enter "0" in the Magnitude of Change column. Hint: The magnitude of change should always be positive, regardless of the direction of change.…
- Q3-14 If a country's currency's external value is tied or pegged to the currency values of the country's leading trading partners, this arrangement is known as a Select one: a. peg against the SDR. b. managed float. c. peg against a "basket" of currencies or a "composite." d. currency board.Select and drag answers to each step to describe the following process in the correct order: The process by which the current account may adjust when the government of a country, Tradavia, stimulates aggregate demand by increasing government spending, assuming the country has a floating exchange rate. Step 1 Step 2 Step 3 Step 4 The exchange rate falls Demand for exports falls Current account position may be unchanged Consumption, including consumption of imports, rises Demand for exports increases The exchange rate rises PHILIPSIdentify whether each attribute in the following table is an advantage or disadvantage of sharing a currency across country boundaries. Attribute Greater risk of macroeconomic shocks Elimination of exchange fluctuations Lower protectionism Greater certainty for investors Dependent monetary policy Advantage Disadvantage OO Which of the following are reasons the European Union is considered Wage rigidity Labor immobility No legal or cultural barriers to labor mobility across borders a suboptimal A single monetary policy that is equally effective across borders an optimal currency area? Check all that apply.
