Lesson 12 Concept Test

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South Piedmont Community College *

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102

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Economics

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Feb 20, 2024

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Lesson 12 ConcepTest 1) Based on the following information, what is the balance on the Current Account and the Financial Account? Exports of goods and services = $8 billion Imports of goods and services = $6 billion Net income on investments = -$1 billion Net transfers = -$2 billion Increase in foreign holdings of assets in the United States = $7 billion Increase in US holdings of assets in foreign countries = -$6 billion The current account would be equal to 8 billion minus 6 billion minus 1 billion minus 2 billion which would leave you with -1 billion. The financial account would be equal to 7 billion minus 6 billion which leaves you with 1 billion. 2) Suppose that the US government deficit causes interest rates in the United States to rise relative to those in the European Union. a. Assuming all else remains constant, explain how this would impact the supply and demand for US dollars. This would have an impact on the su pply and demand for US dollars. This would be due to the interest rate increasing and attracting other countries to the US because their return will be high on their investment.

b. Show this change on the graph below using the market for foreign exchange. c. What can you conclude about the exchange rate? When the interest rate in the United States rises, overseas investors are drawn to the country because they can receive better rates of return on their investments in US dollars. 3) If the price level in the US is 110, the price level in Britain is 115, and the nominal exchange rate is 1.5 pounds (Britain’s currency) per dollar, what is the real exchange rate from the US perspective? What is the real exchange rate from the British perspective? From the British Perspective it is equal to 1.5 multiplied by 115 over 110 which would give you approximately 1.56. The exchange rate from the US perspective is going to be 1.5 multiplied by 110 over 115 which would give you approximately 1.43

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