Macroeconomics

Paul Krugman, Robin Wells

Chapter 19

Open-Economy Macroeconomics - all with Video Answers

Educators

Chapter Questions

Problem 1

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?
a. A French importer buys a case of California wine for $\$ 500$.
b. An American who works for a French company deposits her paycheck, drawn on a Paris bank, into her San Francisco bank.
c. An American buys a bond from a Japanese company for $\$ 10,000$.
d. An American charity sends $\$ 100,000$ to Africa to help local residents buy food after a harvest shortfall.

Jennifer Stoner

Jennifer Stoner

Numerade Educator

Problem 2

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

Jennifer Stoner

Jennifer Stoner

Numerade Educator

Problem 3

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?

Jennifer Stoner

Jennifer Stoner

Numerade Educator

Problem 4

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?

Jennifer Stoner

Jennifer Stoner

Numerade Educator

Problem 5

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.

Jennifer Stoner

Jennifer Stoner

Numerade Educator

Problem 6

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?

Jennifer Stoner

Jennifer Stoner

Numerade Educator

Problem 7

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.

Mary Brese

Numerade Educator

Problem 8

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 $3 \%$.
a. 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?
b. 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?

Jennifer Stoner

Jennifer Stoner

Numerade Educator

Problem 9

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?
a. Inflation is $10 \%$ in the United States and $5 \%$ in Japan; the U.S. dollar-Japanese yen exchange rate remains the same.
b. 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.
c. Inflation is $5 \%$ in the United States and $3 \%$ in the euro area; the price of the euro falls from $\$ 1.30$ to $\$ 1.20$.
d. Inflation is $8 \%$ in the United States and $4 \%$ in Canada; the price of the Canadian dollar rises from US\$ 0.60 to US $\$ 0.75$.

Tanner Fonjweng

Tanner Fonjweng

Numerade Educator

Problem 10

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?

Jennifer Stoner

Jennifer Stoner

Numerade Educator

Problem 11

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?

Jennifer Stoner

Jennifer Stoner

Numerade Educator

Problem 12

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?

Jennifer Stoner

Jennifer Stoner

Numerade Educator

Problem 13

Suppose the United States and Japan are the only two trading countries in the world. What will happen to the value of the U.S. dollar if the following occur, other things equal?
a. Japan relaxes some of its import restrictions.
b. The United States imposes some import tariffs on Japanese goods.
c. Interest rates in the United States rise dramatically.
d. A report indicates that Japanese cars last much longer than previously thought, especially compared with American cars.

Jennifer Stoner

Jennifer Stoner

Numerade Educator