Download chapter 38 - Spring Branch ISD

CHAPTER 38
Exchange Rates, the Balance of Payments,
and Trade Deficits
A. Short-Answer, Essays, and Problems
1. What happens in the foreign exchange market when there is a U.S. export transaction?
2. What happens in the foreign exchange market when there is a U.S. import transaction?
3. What are the major components of the current account in the balance of payments?
How is the current account balance determined?
4. Explain the relationship between the current account and the capital account in the
balance of payments.
5. What is the official reserves account and how is it used in the balance of payments?
6. What is a balance of payments deficit? What is a balance of payments surplus?
7. If a nation’s balance of payments is always in balance, why isn’t it also always in
equilibrium?
8. Answer the next five questions on the basis of the following hypothetical data for a
nation Malthusia (M.). All numbers are in billions of dollars.
Goods exports
+$45
Goods imports
–51
Service exports
+15
Service imports
–6
Net investment income
–10
Net transfers
+12
Foreign purchases of Malthusia assets +25
Malthusia purchases of assets abroad
–33
(a) What was the balance of trade?
(b) What was the balance on goods and services?
(c) What was the balance on the current account?
(d) What is the balance on the capital account?
(e) What official reserves will be needed to settle the balance of payment accounts?
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9. Answer the next five questions on the basis of the following hypothetical data for a
hypothetical nation Economia. All numbers are in billions of dollars.
Goods exports
+$90
Goods imports
–79
Service exports
+10
Service imports
–28
Net investment income
–15
Net transfers
+17
Foreign purchases of Economia assets +48
Economia purchases of assets abroad
47
(a) What is the balance of trade?
(b) What is the balance on goods and services?
(c) What is the balance on the current account?
(d) What is the balance on the capital account?
(e) What official reserves will be needed to settle the balance of payment accounts?
10. The table below contains the international balance of payments data for the United
States in a past year. All figures are in billions. Compute with the appropriate sign (+
or –) and enter in the table the six missing items. What was the condition of the balance
of payments in the United States?
Current account
(1) U.S. goods exports
(2) U.S. goods imports
(3)
Balance of trade
(4) U.S. exports of services
(5) U.S. imports of services
(6)
Balance on services
(7)
Balance on goods and services
(8) Net investment income
(9) Net transfers
(10) Balance on current account
Capital account
(11) Foreign purchases of assets in the U.S.
(12) U.S. purchases of assets abroad
(13) Balance on capital account
(14) Current and capital account balance
(15) Official reserves
$+390
–498
_____
+133
–107
_____
_____
+12
–22
_____
+117
–59
_____
_____
_____
$_____
11. The table below contains hypothetical international balance of payments data for the
United States. All figures are in billions. Compute with the appropriate sign (+ or –)
and enter in the table the six missing items. What was the condition of the balance of
payments in the United States?
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Exchange Rates, the Balance of Payments, and Trade Deficits
Current account
(1) U.S. goods exports
(2) U.S. goods imports
(3)
Balance of trade
(4) U.S. exports of services
(5) U.S. imports of services
(6)
Balance on services
(7)
Balance on goods and services
(8) Net investment income
(9) Net transfers
(10) Balance on current account
Capital account
(11) Foreign purchases of assets in the U.S.
(12) U.S. purchases of assets abroad
(13) Balance on capital account
(14) Current and capital account balance
(15) Official reserves
$+367
–284
_____
+33
–107
_____
_____
+25
–12
_____
+49
–64
_____
_____
_____
$_____
12. Explain how a nation might persistently import more than it exports and still maintain an
equilibrium in its balance of payments.
13. Suppose that Mexico devalues the peso. What objectives would prompt the
devaluation? Be specific.
14. Explain how the dollar price of an imported good may change even though the foreign
production cost of that product remains unchanged.
15. List and explain the major determinants of the demand for, and supply of, the money of
a foreign nation.
16. Explain how the exchange rate gets determined in a flexible exchange rate system.
17. How are flexible exchange rates used to eliminate a balance of payments deficit or
surplus?
18. Describe the three major disadvantages of flexible exchange rates.
19. How does a fixed exchange rate system work? How can a nation maintain its fixed
exchange rate?
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20. In the table below are the supply and demand schedules for German marks.
Quantity of
marks supplied
800
700
600
500
400
300
200
Quantity of
marks demanded
200
400
600
800
1,000
1,200
1,400
Price
$0.80
0.75
0.70
0.65
0.60
0.55
0.50
(a) What will be the rate of exchange for the German mark and for the U.S. dollar?
(b) What would happen if the U.S. and German governments wanted to fix or “peg” the
price of a mark at $0.60?
21. In the table below are the supply and demand schedules for Malaysian ringgits.
Quantity of
ringgits supplied
700
600
500
400
300
200
100
Quantity of
ringgits demanded
100
200
300
400
500
600
700
Price
$0.55
0.50
0.45
0.40
0.35
0.30
0.25
(a) What will be the rate of exchange for the Malaysian ringgit and for the U.S. dollar?
(b) What would happen if the U.S. and Malaysian governments wanted to fix or “peg”
the price of a ringgit at $0.50?
22. The graph below shows a change in the demand for French francs from D1 to D2. What
would happen when D1 shifted to D2 under a flexible exchange rate system compared to
a fixed exchange rate system?
23. Explain the problems with exchange rate controls.
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Exchange Rates, the Balance of Payments, and Trade Deficits
New 24. What domestic macroeconomic adjustments would be necessary to maintain fixed
exchange rates when there are persistent balance of payments deficits? What are the
problems with these adjustments?
25. What was the gold standard?
26. What was the major problem with an international gold standard?
27. What were the key features of the Bretton Woods system?
28. Explain the factors that led to the demise of the Bretton Woods system.
29. What is the “managed float”?
30. What are the advantages and disadvantages of the managed float system of exchange
rates?
31. What effects do U.S. trade deficits have on the U.S. economy?
32. Explain the major causes of the persistent trade deficits in the United States in the
1990s.
33. What have been the principal effects of the persistent trade deficits of the 1990s?
New 34. (Last Word) What are two positive roles that speculators play in currency markets?
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