Section 8

Module 41

100

Define financial capital.

Funds from savings that are available for investment spending.

200

The balance of payments on the current account plus the balance of payments on the financial account is equal to 

a. zero.

b. one. 

c. the trade balance. 

d. net capital flows. 

e. the size of the trade deficit.

a. Zero

300

What will cause an increase in the demand for loanable funds in a country?

Economic growth.

400

Where does the demand for U.S dollar come from?

1. Foreign firms and households wanting to U.S buy goods and services.

2.Wanting to invest in U.S physical or financial assets.

3.Currency traders believing the value of the U.S dollar will rise.

500

1. a. How would a decrease in real income in the United States affect the U.S. current account balance? Explain.

b. Suppose China financed a huge program of infra- structure spending by borrowing. How would this borrowing affect the U.S. balance of payments? Explain.

The current account balance would increase (or move toward a surplus). The decrease in income would cause imports to decrease.

The increase in infrastructure spending in China would reduce the surplus in the U.S. financial account and reduce the deficit in the U.S. current account.Because China is financing the program by borrowing, the demand for loanable funds in China would increase, causing an increase in the interest rate. It is likely that other countries would increase their lending to China, decreasing their lending

to the United States. These capital outflows from the United States would reduce the U.S. surplus in the financial account and reduce the deficit in the current account.

Module 42

100

Define equilibrium exchange rate.

Is the exchange rate at which a quantity of a currency demanded is the foreign exchange market is equal to the quantity supplied.

200

The balance of payments account divides the international transactions into two types, what are they?

1. Current account 

2.Financial account

300

Which of the following will decrease the supply of U.S. dollars in the foreign exchange market? 

a. U.S. residents increase their travel abroad. 

b. U.S. consumers demand fewer imports.

c. Foreigners increase their demand for U.S. goods.

 d. Foreigners increase their travel to the United States. 

e. Foreign investors see increased investment opportunities in the United States.

b. U.S. consumers demand fewer imports.

400

suppose the aggregate price level in Mexico decreases relative to that in the U.S what is the effect of this price level change on the demand and on the exchange rate for Mexican pesos?

Demand for pesos:Increases

Exchange rate: Appreciates

500

Draw a correctly labeled graph of the foreign exchange market showing the effect on the equilibrium exchange rate between the US and Japan (the number of yen per U.S. dollar) if capital flows from Japan to the United States decrease due to a change in the preferences of Japanese investors. Has the U.S. dollar appreciated or depreciated?

 The U.S. dollar has depreciated