Question

. In 2009, U.S. liabilities were dollar-denominated corporate and official debt for the most part, while U.S. external assets were mostly equities, bank loans, government debt, and foreign direct investment, denominated in foreign currencies. When the dollar fell in the wake of the financial crisis, what net effect was there on U.S. external wealth? a. External wealth declined since the weak dollar forced the United States to default on loans. b. External wealth declined since the dollar fell and U.S. assets were not worth as much. c. No change occurred because the change in currency value affects everything equally. d. External wealth rose since the value of liabilities was already in dollars and changed little, but assets denominated in foreign currencies increased in value.

Answer 1

The answer is d.

i.e. External wealth rose since the value of liabilities was already in dollars and changed little, but assets denominated in foreign currencies increased in value.

Appreciation of a nation’s currency against that of other nations will decrease the value of both foreign-currency denominated assets and liabilities, while depreciation will increase the value of these overseas assets and liabilities. Thus, if the nation is a net debtor, currency depreciation will increase its foreign-currency debt burden.