B.O.P.
What happens to the trade balance and equilibrium income (Y) in the short run if consumers buy more imported goods and fewer domestic goods?
The trade balance moves toward deficit, and equilibrium income decreases.
If the exchange rate between the United States dollar ($) and the British pound (£) changed from $2 per £1 to $3 per £1, and domestic prices in both countries stayed the same, then the United States dollar would have (appreciated / depreciated) and US imports from Britain would become (more / less) expensive.
dollar depreciates, making United States imports from Britain more expensive
How does an increase in Japan’s government budget deficit affect the real interest rate in the short run in Japan? Explain.
It raises the real interest rate (loanable funds diagram explanation).
If the real interest rate in Country X increases relative to the real interest rate in Country Y and there are no trade barriers between the two countries, then for Country X what happens to its capital flow, the value of its currency, and its exports?
capital flow: inflow
the value of its currency: apreciates
exports: decrease
Suppose that Country A is experiencing high inflation relative to Country B, which is enjoying steady growth with a stable price level. what will happen in the foreign exchange market?
A depreciation of Country A’s currency
How is the sale of common stock to foreign households recorded, in the balance of payments? (debit/credit? / CA/FA?)
credit entry in a nation’s capital and financial account
Assume that there is an increase in real interest rates in the United States, but not in France. How will this affect the value of the dollar to the Euro? Why?
The dollar will appreciate v. the Euro because Euro holders will seek to change Euros to dollars to take advantage of the higher interest rates in the US.
The United States and South Korea are trading partners, and the United States has a zero current account balance. Assume now that the inflation rate in the United States decreases relative to the inflation rate in South Korea.
Based on the decrease in the inflation rate in the United States, will United States exports to South Korea increase or decrease?
How will an increase in a government’s deficit spending most likely affect a nation in an open economy when it comes to capital inflow and the value of its currency?
The economy will experience financial capital inflows, and its currency will appreciate.
The current exchange rate of the Mexican peso and the Brazilian real is 0.20 real per peso, and the equilibrium exchange rate is 0.18 real per peso.
Is there a surplus or shortage of pesos?
How will the value of the peso change, going forward?
There is a surplus of pesos and the peso will depreciate.
How is United States automobile manufacturer building a steel plant in Russia recorded in the BOP? (debit/credit? / CA/FA?)
This is an example of foreign direct investment. It is a debit to the capital/financial account.
Y (income) rises in the United States relative to Japan. How will trade change between the two countries? Through this trade, will the dollar (appreciate / depreciate / remain the same) against the yen?
The implementation of an expansionary monetary policy by the Canadian central bank will result in which of the following changes in the short run in Canadian interest rates and the value of the Canadian dollar itself?
interest rate: decrease
dollar: depreciate
What changes will occur to the demand for United States dollars and the international value of the dollar in the short run if investors in the United States and abroad increase their purchases of United States government bonds?
Demand for Dollar: increase
Value of dollar: increase
If the price of the Swedish krona changes from 12 Japanese yen per krona to 13 Japanese yen per krona, then what will happen to the value of the yen? How will the cost of Swedish goods change for residents of Japan?
Yen: depreciate
cost of swedish goods to Japanese residents: Increase
If country Z’s rate of inflation increases relative to its trading partners, how will Country Z’s imports and exports most likely change? (decrease/increase)
Imports: Increase
Exports: Decrease
Which of the following is most likely to benefit from an appreciation in the United States dollar in the short run?
A - United States investors holding European bonds
B - Importers in foreign countries seeking raw inputs at a lower price
C - United States exporters selling capital equipment
D - United States tourists traveling to foreign countries
E - European consumers buying United States goods
D - United States tourists traveling to foreign countries
DAILY DOUBLE! - PLAY ALONE . . . .
Draw a correctly labeled graph of the foreign exchange market for the Japanese yen, showing the effect of a decrease in Japanese government borrowing on the value of the Japanese yen relative to the United States dollar.
[see slide 2] Japanese i-rates drop making yen less attractive to foreign investors. Yen is supplied on foreign exchange market to be exchanged and therefore able to chase higher i-rates overseas. :. yen depreciates
DAILY DOUBLE - PLAY ALONE! (bet up to your total points so far)
The peso has changed because Americans’ demand for Mexican goods and services decreased. Draw the ER diagram for the peso
- see slides for answer
How will a depreciation of the United States dollar in foreign exchange markets affect aggregate demand in the USA, and why?
aggregate demand will increase because imports will decrease. (x-m) increases in value
How would an increase in the value of foreign currency relative to the United States dollar affect the United States balance-of-trade deficit?
reduce it.
Assume that the real interest rate in both the United States and the European Union equals 4.5 percent.
Assume that the real interest rate in the United States falls to 3.75 percent.
How will the flow of financial capital between the United States and the European Union be affected? Explain.
financial capital will flow from US to Europe to seek higher interest rates.
Assume that the Federal Reserve pursues a contractionary monetary policy. Based on the resulting change in the interest rate, what will happen to the international value of the dollar, United States imports, and United States exports?
international value of the dollar. - INCREASE, United States imports - INCREASE, and United States exports - DECREASE?