Macroeconomics

David Colander

Chapter 20 International Financial Policy - all with Video Answers

Educators

Chapter Questions

00:59

Problem 1

If a country is running a balance of trade deficit, will its current account be in deficit? Why? LO1

Kaylee Mcclellan

Numerade Educator

02:26

Problem 2

When someone sends 100 British pounds to a friend in the United States, will this transaction show up on the financial and capital account or current account? Why? LO1

Gokul R Nair

Numerade Educator

00:58

Problem 3

Support the following statement: "It is best to offset a capital and financial account surplus with a current account deficit." LO1

Kaylee Mcclellan

Numerade Educator

00:58

Problem 4

Support the following statement: "It is best to offset a capital and financial account deficit with a current account surplus." LO1

Kaylee Mcclellan

Numerade Educator

Will the following be suppliers or demanders of U.S. dollars in foreign exchange markets?
a. A U.S. tourist in Latin America.
b. A German foreign exchange trader who believes that the dollar exchange rate will fall.
c. A U.S. foreign exchange trader who believes that the dollar exchange rate will fall.
d. A Costa Rican tourist in the United States.
c. A Russian capitalist who wants to protect his wealth from expropriation.
f. A British investor in the United States. LO1

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03:03

Problem 6

State whether the following will show up on the current account or the capital and financial account:
a. IBM's exports of computers to Japan.
b. IBM's hiring of a British merchant bank as a consultant.
c. A foreign national living in the United States repatriates money.
d. Ford Motor Company's profit in Hungary.
c. Ford Motor Company uses that Hungarian profit to build a new plant in Hungary. LO1

Rashmi Sinha

Numerade Educator

00:42

Problem 7

In the early $2000 \mathrm{~s}$, China was running a large current account surplus.
a. What did this suggest about its financial and capital account?
b. China's private balance of payments was in surplus. What does this suggest about its exchange rate regime?
c. What actions was the Chinese central bank likely undertaking in the foreign exchange markets? Demonstrate the situation with supply and demand graphs.
d. If the Chinese central bank pulled out of the forex market, what would likely happen to the yuan?
c. In May 2004, inflation picked up in China; what effect did that likely have on the value of the yuan? LO2

Erwin Antoni

Numerade Educator

01:05

Problem 8

Draw the fundamental analysis of the supply and demand for the British pound in terms of dollars. Show what will happen to the exchange rate with those curves in response to each of the following events:
a. The U.K. price level rises.
b. The United States reduces tariffs.
c. The U.K. economy experiences a boom.
d. The U.K. interest rates rise. $\mathrm{LO} 2$

Erwin Antoni

Numerade Educator

Problem 9

The government of Never-Never Land, after much deliberation, finally decides to switch to a fixed exchange rate policy. It does this because the value of its currency, the neverback, is so high that the trade deficit is enormous. The finance minister fixes the rate at $$\$ 10$$ a neverback, which is lower than the equilibrium rate of $$\$ 20$$ a neverback.
a. What trade or traditional macro policy options could accomplish this lower exchange rate?
b. Using the laws of supply and demand, show graphically how possible equilibria are reached. $\mathrm{LO} 2$

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Problem 10

You've been hired as an economic adviser to Yamaichi Foreign Exchange Traders. What buy or sell recommendations for U.S. dollars would you make in response to the following news?
a. Faster economic growth in the EU.
b. Expectations of higher interest rates in the United States.
c. The U.S. interest rate rises, but less than expected.
d. Expected loosening of U.S. monetary policy.
e. Higher inflationary predictions for the United States.
f. The U.S. government imposes new trade restrictions on imports. $\mathrm{LO}_2$

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00:44

Problem 11

In Figure 36-2, a foreign government chooses to maintain an equilibrium market exchange rate of U.S. $$\$ 1.30$$ per unit of its own currency. Discuss the implications of the government trying to maintain a higher fixed rate-say at $$\$ 1.50$$. LO3

Jennifer Stoner

Numerade Educator

Problem 12

From 2001 through 2008 , the U.S. trade gap widened, spurred by a surge of imports. What was likely happening to income in the U.S. economy? LO3

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Problem 13

Draw the schematics to show the effect of expansionary monetary policy on the exchange rate. LO3

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Problem 14

What effect on the U.S. trade deficit and exchange rate would result if Japan ran an expansionary monetary policy? LO3

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02:03

Problem 15

What would be the effect on the U.S. exchange rate if Japan ran a contractionary fiscal policy? LO3

Pragya Ahuja

Numerade Educator

Problem 16

If expansionary monetary policy immediately increases inflationary expectations and the price level, how might the effect of monetary policy on the exchange rate be different than that presented in this chapter? LO3

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02:42

Problem 17

What effect will a combination of expansionary fiscal policy and contractionary monetary policy have on the exchange rate? LO3

Kaylee Mcclellan

Numerade Educator

Problem 18

Ms. Economist always tries to travel to a country where the purchasing power parity exchange rate is lower than the market exchange rate. Why? LO5

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02:03

Problem 19

If U.S. inflation is 4 percent and Japan's inflation is 1 percent, and the nominal U.S. dollar exchange rate falls by 3 percent relative to the yen, what happens to the real exchange rate? LO5

Anand Jangid

Numerade Educator

01:08

Problem 20

A Wall Street Joumal article, "As Fear of Deficits Falls, Some See a Larger Threat," describes the following threat of a high U.S. budget deficit:
[T] he investors who finance our deficits by buying Treasury bonds and bills, especially the foreigners who buy a larger share of them than ever, will question our ability to repay them, and balk at lending moretriggering a big drop in the dollar and much higher interest rates.
a. Why would a drop in foreign confidence in the U.S. ability to repay debt lead to a drop in the dollar and much higher interest rates?
b. In what way are higher interest rates and a lower value of the dollar bad for the U.S. economy? LO5

Erwin Antoni

Numerade Educator

02:38

Problem 21

Which is preferable: a fixed or a flexible exchange rate? Why? LO6

Sanchit Jain

Numerade Educator

Problem 22

If currency traders expect the government to devalue a currency, what will they likely do? Why? LO6

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00:52

Problem 23

A country eliminates all tariffs. Would you expect the value of its currency to rise or fall? Explain your answer. LO6

Majid Borumand

Numerade Educator

Problem 24

In mid-1994 the value of the dollar fell sufficiently to warrant coordinated intervention among 17 countries. Still, the dollar went on falling. One economist stated, "[The intervention] was clearly a failure . . . It's a good indication something else has to be done." Why would the United States and foreign countries want to keep up the value of the dollar? LO6

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Problem 25

What are three advantages of the euro for Europe? LO7

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Problem 26

What are two disadvantages of the euro for Europe? LO7

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