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Exam 20: Open-Economy Macroeconomics: the Balance of Payments and Exchange Rates

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Question 1

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In 1971, what did most countries do to the exchange rate system in place at the time?

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They essentially gave up tryin...

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Question 2

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How are the exports of a country handled on a country's balance of payments?

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Exports bring foreign exchange to a country, and thus they are registered as credit in the balance of payments.

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-Using the table above calculate the balance on capital account.

-Using the above graph to answer the following question. Assume the demand and supply of pounds are D1 and S1. If the demand shifts to D2 and supply remains unchanged at S1 What will happen to the value of the dollar and the quantity of pounds?

Write out the equation for the open-economy multiplier.

If the current account is in surplus what must be true about the capital account? Why?

What are a country's export prices generally a function of and how does this affect exportable and nonexportable goods for that country?

If two countries don't trade, what should we expect will happen to the price level in one country when the other country's price level rises?

Compare the current account position of the U.S. prior to the mid 1970s with what transpired after that and up to the present. Also discuss what happened to its net wealth position in these two time periods.

Compare and contrast a country's balance sheet with its balance of payments.

What is the economic meaning of having a positive balance in the capital account for a country?

What would you predict would happen to U.S. exports if the dollar were to depreciate?

If there are no errors of measurement in the data collection, to what must the balance on capital account always be equal? Why is this true?

How is any transaction that causes foreign exchange to leave a country handled on a country's balance of payments?

How are the imports of a country handled on a country's balance of payments?

Explain the trade feedback effect.

Identify whether each of the following would lead to an appreciation or depreciation of the dollar. In each case, explain why the currency either appreciates or depreciates. (a) U.S. citizens switch from buying stock in British companies to buying stock in U.S. companies. (b) The inflation rate in the United States increases relative to the inflation rate in England. (c) The money supply is increased in the United States. (d) Income in the United States increases.

Explain why the depreciation of a country's currency tends to increase its price level.

Consider the purchase of a Japanese car by a U.S. citizen. Say that the yen/dollar exchange rate is 100 yen to a dollar and that the yen price of the car is 2.0 million yen, which is $20,000. The U.S. citizen (probably an automobile dealer) takes $20,000, buys 2.0 million yen, and then buys the car. Explain what happends to U.S. imports and the capital account after this transaction and the net wealth position of the United States.

Compare and contrast the impact on the economy of an increase in government spending in a closed economy to that of an open economy. Explain.