14. With flexible exchange rates, central banks do not have to finance cur- rent account deficits because balance of payments equilibrium is re- stored by changes in exchange rates.
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- If foreign investors buy more U.S. stocks and bonds, how would that show up in the current account balance?Consider a country with a flexible exchange rate, and which initially has a current account surplus of zero. Then, suppose there IS an anticipated InCrease in tuture total tactor productivity. a) Determine the eauilibrium etects on the domestic economv in the case where there are no capita. controls. In particular, show that there will be a current account dehicit when arms and consumers anticipate the increase in future total factor productivity. b) Now, suppose that the government dislikes current account deficits, and that It imposes capital controls in an attempt to reduce the current account deficit. With the anticipated increase in future total factor productivity, what will be the equilibrium efects on the economy? Do the capital controls have the desired efect on the current account deficit? Do capital controls dampen the effects of the shock to the economy on output and the exchange rate? Are capital controls sound macroeconomic policy in this context? Why or why not?Suppose the United States decides to subsidize theexport of U.S. agricultural products, but it does notincrease taxes or decrease any other governmentspending to offset this expenditure. Using a threepanel diagram, show what happens to nationalsaving, domestic investment, net capital outflow, theinterest rate, the exchange rate, and the trade balance.Also explain in words how this U.S. policy affects theamount of imports, exports, and net exports.
- How does the appreciation of a currency affect the balance of payments? a. Appreciation of a currency decreases current accounts as exports fall and imports rise O b. Appreciation of a currency decreases current accounts as both exports and imports fall O c. Appreciation of a currency increases current accounts as both exports and imports rise O d. Appreciation of a currency increases current accounts as exports fall and imports rise All of the following fall under the Philippines' capital account except for a. OFW remittances O b. Cash aid from the US for families affected by typhoon Odette O c. Stocks O d. All of the aboveThe 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?Suppose that Americans decide to increase theirsaving.a. If the elasticity of U.S. net capital outflow withrespect to the real interest rate is very high, willthis increase in private saving have a large orsmall effect on U.S. domestic investment?b. If the elasticity of U.S. exports with respect to thereal exchange rate is very low, will this increase inprivate saving have a large or small effect on theU.S. real exchange rate?
- A case study in the chapter analyzed purchasingpower parity for several countries using the pricc ofBig Macs. Here arc data for a few more countries: a. For each country, compute the predicted exchangerate of the local currency per U.S. dollar. (Recallthat the U.S. price o( a Big Mac was $4.93.)b. According to purchasing-power parity, what is thepredicted exchange rate between the Hungarianforint and the Canadian dollar? What is the actualexchange rate?c. How well docs the theory of purchasing-powerparity explain exchange rates?Determine which account of the Balance-of-Payments is affected the following transaction: A local parent sends 500 Euros to his/her son who is studying engineering at a German university. Select one: O a. Capital Account Foreign Direct Investment O b. Current Account Transfers O c. Capital Account Portfolio Investment O d. Current Account Imports O e. Current Account - Exports re to searchOn the DD curve, exchange rate depreciation causes output to because it affects a component of aggregate demand. O rise; consumption O rise; the current account O fall; investment fall; the current account
- Consider the balance-of-payments accounting information for Lalaland in 2010 as shown in the table below. All values are in billions of dollars and any variables not provided below have a value of zero. Exports 560 Imports Net foreign-investment income Capital outflows Capital inflows 350 - 50 255 95 What is the current account balance for Lalaland in 2010? ..... O A. $160 billion O B. $260 billion OC. - $260 billion O D. - $160 billion O E. $0The cha pter notes that the rise in the U.S. tradede ficit during the I 980s was due largely to therise in the U.S. budget deficit. On the other hand,the popular press sometimes claims that theincreased trade deficit resulted from a decline inthe quality of U.S. produc ts relative to foreignproducts.a. Assume that U.S. products d id decline in rela tivequality during the 1980s. How did this affect netexports at any given exchange mte?b. Draw a three-panel diagram to show the effect ofthis shift in net exports on the U.S. real exchangerate and trade balance.c. Is the claim in the popular press consist,:,nt withthe model in this chapter? Docs a decline in thequality of U.S. products ha vc any effect on ourstandard of living? (Hin I: Wh,:,n we sell our goodsto foreigners, what do we receive in rcrurn?)What is the difference between depreciation and devaluation? O There is no difference. O Depreciation refers to a fixed exchange rate, while devaluation refers to a floating exchange rate. O Depreciation refers to a floating exchange rate, while devaluation refers to a fixed exchange rate.
