Deck 18: Part B: The Balance of Payments and Exchange Rates

Question 1

Explain how the dollar price of an imported good may change even though the foreign production cost of that product remains unchanged.

Answer 1

The dollar price depends on two things: the price of that product in the foreign country and the price of that country's currency in terms of dollars.If the price of the product remains the same in the country, the dollar price of the product may still rise because the price of that country's currency in dollar terms might rise.If the value of the dollar has depreciated against that country's currency, it will take more dollars to purchase the product even though its domestic price is unchanged.

Question 2

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.Assume that there is no Statistical Discrepancy. (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?

Answer 2

(a) Goods exports are +$90 billion and goods imports are -$79 billion, so the balance of trade is +$11 billion.(b) Goods and service exports are $100 billion ($90 + $10).Goods and service imports are $107 billion ($79 + $28).The balance on goods and services is -$7 billion ($100 - $107).(c) The balance on goods and services (-$7 billion) plus net investment income (-$15 billion) plus net transfers (+$17 billion) equals the current account balance.Therefore, the current account balance is -$5 billion.(d) The capital account balance is +$1 billion ($48 - $47).(e) The current account balance is -$5 billion and the capital account balance is +$1 billion.There is a balance of payments deficit of -$4 billion.Therefore, $4 billion in official reserves will be needed to settle the net difference.

Question 3

What happens in the foreign exchange market when there is a Canadian import transaction?

Answer 3

A Canadian company that purchases an import must pay for it in foreign currencies.The increased domestic demand for foreign currencies is met by exchanging Canadian dollars for the foreign currencies for a fee from a Canadian bank.This action reduces the supply of foreign currency held by Canadian banks and available for Canadian consumers.

Question 4

What is meant by currency appreciation?

Question 5

What happens in the foreign exchange market when there is a Canadian export transaction?

Question 6

What is the official settlement account and how is it used in the balance of payments?

Question 7

What were the Current Account Balance, the Capital Account Balance, and the Official Settlement Accounts Balance in Canada for the year 2016? Use Table 18-1.

Question 8

The table below contains hypothetical international balance of payments data for Canada.All figures are in billions.Assume that there is no Statistical Discrepancy.Compute with the appropriate sign (+ or -) and enter in the table the eight missing items.What is the condition of the balance of payments in Canada?

Question 9

What is a balance of payments deficit? What is a balance of payments surplus?

Question 10

The table below contains hypothetical international balance of payments data for Canada.All figures are in billions.Assume that there is no Statistical Discrepancy.Compute with the appropriate sign (+ or -) and enter in the table the eight missing items.What is the condition of the balance of payments in Canada?

Question 11

What are the major components of the current account in the balance of payments? How is the current account balance determined?

Question 12

If a nation's balance of payments is always in balance, why isn't it also always in equilibrium?

Question 13

Is a balance of payments deficit undesirable?

Question 14

What is the difference between a fixed exchange rate system and a flexible (floating) exchange rate system?

Question 15

List and explain the major determinants of the demand for, and supply of, the money of a foreign nation.

Question 16

Answer the next five questions on the basis of the following hypothetical data for a nation Malthusia.All numbers are in billions of dollars.Assume that there is no Statistical Discrepancy. (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?

Question 17

Explain how a nation might persistently import more goods than it exports and still maintain equilibrium in its balance of payments.

Question 18

Explain the relationship between the current account and the capital account in the balance of payments.

Question 19

What role does the foreign exchange market play in facilitating the trade of goods?

Question 20

Explain how the exchange rate gets determined in a flexible exchange rate system.

Question 21

In the table below are the supply and demand schedules for Russian roubles. (a) What will be the rate of exchange for the Russian rouble and for the Canadian dollar? (b) What would happen if the Canadian and Russian governments wanted to use currency intervention to fix or "peg" the price of a rouble at $0.60?

Question 22

How does a fixed exchange rate system work? How can a nation maintain its fixed exchange rate?

Question 23

In the table below are the supply and demand schedules for Malaysian ringgits. (a) What will be the rate of exchange for the Malaysian ringgit and for the Canadian dollar? (b) What would happen if the Canadian and Malaysian governments wanted to use currency intervention to fix or "peg" the price of a ringgit at $0.50?

Question 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?

Question 25

What is the "managed float"?

Question 26

The graph below shows a change in the demand for Swiss 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?

Question 27

Explain how China used the inflationary peg to move it's economy from a communist system to a capitalist system.

Question 28

How are flexible exchange rates used to eliminate a balance of payments deficit or surplus?

Question 29

Describe the three major disadvantages of flexible exchange rates.

Question 30

Explain the problems with exchange rate controls.