1. Question 19.11

   How would the following transactions be categorized in the U.S. balance of payments accounts? Would they be entered in the current account (as a payment to or from a foreigner) or the financial account (as a sale of assets to or purchase of assets from a foreigner)? How will the balance of payments on the current and financial accounts change?

   1. A French importer buys a case of California wine for $500.

   2. An American who works for a French company deposits her paycheck, drawn on a Paris bank, into her San Francisco bank.

   3. An American buys a bond from a Japanese company for $10,000.

   4. An American charity sends $100,000 to Africa to help local residents buy food after a harvest shortfall.

2. Question 19.12

   The accompanying diagram shows foreign-owned assets in the United States and U.S.-owned assets abroad, both as a percentage of foreign GDP. As you can see from the diagram, both increased around fivefold from 1980 to 2013.

   

   Sources: IMF; Bureau of Economic Analysis.

   1. As U.S.-owned assets abroad increased as a percentage of foreign GDP, does this mean that the United States, over the period, experienced net capital outflows?

   2. Does this diagram indicate that world economies were more tightly linked in 2013 than they were in 1980?

3. Question 19.13

   In the economy of Scottopia in 2014, exports equaled $400 billion of goods and $300 billion of services, imports equaled $500 billion of goods and $350 billion of services, and the rest of the world purchased $250 billion of Scottopia’s assets. What was the merchandise trade balance for Scottopia? What was the balance of payments on current account in Scottopia? What was the balance of payments on financial account? What was the value of Scottopia’s purchases of assets from the rest of the world?

4. Question 19.14

   In the economy of Popania in 2014, total Popanian purchases of assets in the rest of the world equaled $300 billion, purchases of Popanian assets by the rest of the world equaled $400 billion, and Popania exported goods and services equal to $350 billion. What was Popania’s balance of payments on financial account in 2014? What was its balance of payments on current account? What was the value of its imports?

5. Question 19.15

   Suppose that Northlandia and Southlandia are the only two trading countries in the world, that each nation runs a balance of payments on both current and financial accounts equal to zero, and that each nation sees the other’s assets as identical to its own. Using the accompanying diagrams, explain how the demand and supply of loanable funds, the interest rate, and the balance of payments on current and financial accounts will change in each country if international capital flows are possible.

   

6. Question 19.16

   Based on the exchange rates for the first trading days of 2013 and 2014 shown in the accompanying table, did the U.S. dollar appreciate or depreciate during 2014? Did the movement in the value of the U.S. dollar make American goods and services more or less attractive to foreigners?

   October 1, 2013	October 1, 2014
   US$1.62 to buy 1 British pound sterling	US$1.62 to buy 1 British pound sterling
   29.51 Taiwan dollars to buy US$1	30.43 Taiwan dollars to buy US$1
   US$0.97 to buy 1 Canadian dollar	US$0.89 to buy 1 Canadian dollar
   98.04 Japanese yen to buy US$1	109.31 Japanese yen to buy US$1
   US$1.35 to buy 1 euro	US$1.26 to buy 1 euro
   0.91 Swiss franc to buy US$1	0.96 Swiss franc to buy US$1

7. Question 19.17

   Go to http://fx.sauder.ubc.ca. Using the table labeled “The Most Recent Cross-Rates of Major Currencies,” determine whether the British pound (GBP), the Canadian dollar (CAD), the Japanese yen (JPY), the euro (EUR), and the Swiss franc (CHF) have appreciated or depreciated against the U.S. dollar (USD) since October 1, 2014. The exchange rates on October 1, 2014, are listed in the table in Problem 6.

8. Question 19.18

   From January 1, 2001, to June 2003, the U.S. federal funds rate decreased from 6.5% to 1%. During the same period, the marginal lending facility rate at the European Central Bank decreased from 5.75% to 3%.

   1. Considering the change in interest rates over the period and using the loanable funds model, would you have expected funds to flow from the United States to Europe or from Europe to the United States over this period?

   2. The accompanying diagram shows the exchange rate between the euro and the U.S. dollar from January 1, 2001, through September 2008. Is the movement of the exchange rate over the period January 2001 to June 2003 consistent with the movement in funds predicted in part a?

      

      Source: Federal Reserve Bank of St. Louis.

9. Question 19.19

   In each of the following scenarios, suppose that the two nations are the only trading nations in the world. Given inflation and the change in the nominal exchange rate, which nation’s goods become more attractive?

   1. Inflation is 10% in the United States and 5% in Japan; the U.S. dollar–Japanese yen exchange rate remains the same.

   2. Inflation is 3% in the United States and 8% in Mexico; the price of the U.S. dollar falls from 12.50 to 10.25 Mexican pesos.

   3. Inflation is 5% in the United States and 3% in the euro area; the price of the euro falls from $1.30 to $1.20.

   4. Inflation is 8% in the United States and 4% in Canada; the price of the Canadian dollar rises from US$0.60 to US$0.75.

10. Question 19.20

    Starting from a position of equilibrium in the foreign exchange market under a fixed exchange rate regime, how must a government react to an increase in the demand for the nation’s goods and services by the rest of the world to keep the exchange rate at its fixed value?

11. Question 19.21

    Suppose that Albernia’s central bank has fixed the value of its currency, the bern, to the U.S. dollar (at a rate of US$1.50 to 1 bern) and is committed to that exchange rate. Initially, the foreign exchange market for the bern is also in equilibrium, as shown in the accompanying diagram. However, both Albernians and Americans begin to believe that there are big risks in holding Albernian assets; as a result, they become unwilling to hold Albernian assets unless they receive a higher rate of return on them than they do on U.S. assets. How would this affect the diagram? If the Albernian central bank tries to keep the exchange rate fixed using monetary policy, how will this affect the Albernian economy?

    

12. Question 19.22

    Your study partner asks you, “If central banks lose the ability to use discretionary monetary policy under fixed exchange rates, why would nations agree to a fixed exchange rate system?” How do you respond?

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