Answers I

Chapter 10

1.

a.  Debit, current account

b.  Credit, financial account

c.  Credit, current account

d.  Debit, current account

e.  Debit, current account

f.  Debit, current account

g.  Credit, current account

h.  Debit, current account

i.  Debit, current account

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Chapter 11

2.  In the first case, the dollar appreciated and the pound depreciated.  In the second case, the dollar depreciated and the pound appreciated.

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3.  A foreign exchange arbitrager could take US$169 and buy £100 in New York, then sell the £100 in London for US$171.  In the process, the increase in the supply of the dollar and the increase in the demand for the pound in New York raised the value of the pound there, while the increase in the supply of the pound in London and the increase in the demand for the dollar in London reduced the value of the pound there.  With the exchange rates moving towards one another, there will eventually be a single price, maybe at US$1.70 = £1.

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4. 

a.  The importer could arrange a three month forward contract with a bank, which would lock in a payment of US$35,000 for £20,000 in three months.

b.  Instead of paying US$34,000 now to get £20,000 or US$35,000 for the forward contract, the importer would have to pay US$36,000.

c.  Premium = (US$1.75 - US$1.70) / US$1.70 * (12/3) = 0.1176 or 11.76%

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5.  US$1,000,000 = 3,000,000 francs = 9,000,000 schillings = US$2,250,000

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Chapter 12

6.  It's difficult to do graphs here, so they won't be included.  You should be able to illustrate each situation graphically.

a.  Demand for yen decreases, supply of yen increases => value of yen decreases

b.  Net increase in imports in Japan => supply of yen increases => value of yen decreases

c.  Demand for yen decreases, supply of yen increases => value of yen decreases

d.  Demand for yen decreases => value of yen decreases

e.  Demand for yen increases => value of yen increases

f.  Demand for yen decreases, supply of yen increases => value of yen decreases

g.  Demand for yen decreases => value of yen decreases

h.  Should read "The Japanese government . . ."  => demand for yen increase => value of yen increases

i.  Higher costs of production => higher prices => demand for yen decreases, supply of yen increases => value of yen decreases

j.  Supply of yen increases => value of yen decreases

k.  No change

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7. 

a.  New rate = 1 RMB = $0.153 (1.10 / 1.00) = $0.168

b.  New rate = 1 RMB = $0.153 (1.10 / 1.20) = $0.140

c.  New rate = 1 RMB = $0.153 (0.90 / 1.05) = $0.131

d.  New rate = 1 RMB = $0.153 (0.90 / 0.85) = $0.162

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8. 

a. 

r_US = i_US - inflation = 8 - 10 = -2

r_EZ = i_EZ - inflation = 6 - 4 = 2

b.  Investments would flow out of the U.S. and into the Eurozone.

c.  You need to be able to show this graphically.  Demand for U.S. dollar decreases, supply of U.S. dollar increase => value of dollar decreases

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Chapter 14

9.  The firm would be less competitive in Mexico, where the price of cars would increase by 50 percent in peso terms.  If  the dollar had depreciated, the firm would have become more competitive as the peso price would decline.

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10.  The firm would still be less competitive, but the price of cars would go up by less than 50 percent in peso terms in this case.  With a depreciation, the firm would be more competitive, but the price would not have decreased by as much as in the previous question.

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11. 

a. 

Export receipts = 1,000 * US$3,000 = US$3,000,000

Import payments = 150 * £10,000 * US$2 / £1 = US$3,000,000

Trade balance = US$3,000,000 - US$3,000,000 = US$0

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b.  Depreciation would improve the trade balance because the sum of the demand elasticities is greater than 1 => 3.0 + 2.0 = 5.0  > 1

c.  Depreciation would worsen the trade balance because the sum of the demand elasticities is less than 1 => 0.3 + 0.2 = 0.5 < 1