Question

1.Explain how each of the entries below generates a debit and credit entry in the US

balance of payments accounts. Identify whether each entry is classified under the

capital or current account.

a.

An American buys stocks of BMW, paying with a check drawn from

Citibank.

b.

A tourist from New York buys a meal in London, paying with a travelers’

check.

c.

Ford Motor Co. (USA) sells Ford Focuses to the UK, and uses t

he revenue

it generates ($100 million) to buy Jaguar X-12’s.

2.Suppose that you have the following information on the values of some Mexican

economic variables for last year, in million pesos:

Exports: 17,000

Government Deficit: 6,000

Investment: 28,000

Capital Account: 3,000

GNP: 70,000

Taxes: 22,000

Use your national income identities to compute the following:

a.

Consumption

b.

Imports

c.

Private Savings

3.Illustrate how each of the following affects the price and quantity of euro (€)

using an exchange rate supply and demand diagram. Assume that the exchange

rate in terms of US dollars per euro, and that the currency regime is floating.

Identify if the euro is appreciating or depreciating.

a.

BM

W (a German

–

manufactured automobile) sales in the US decline.

b.

More Germans go to the US during the holidays.

c.

Germany experiences an economic boom, and their demand for US goods

increases.

d.

Germans decide they will buy more German made automobiles, and less

US

made automobiles.

e.

Interest Rates on US bonds increase, while German bonds remain unchanged.

f.

Germany experiences inflation rates twice higher than the US.

4.Suppose you have $100,000 to invest. Options are to invest in US, Japanese or

French Treasury bills. The interest rate and the spot and expected future

exchange rates are as follows:

Country

T

reasury

bill rates

Spot exchange rate

Expected future spot rate

US

6%

n.a.

n.a.

Japan

3%

$1: 120 yen

$1: 113 ye

n

France

12%

$1: 1 euro

$1: 1.10 euro

a.

Which of the following currencies appreciated against the dollar?

b.

In which country’s asset would you choose to invest? Show all

how much you

would end up with after 1 year if you invested in each asset.

Answer 1

PART-1)

a. A debit in the Financial Account and a credit in the U.S. current account

Explanation: The financial account is debited with purchase of foreign goods and as the bank is in an American bank thus U.S. current account will be credited

b. A debit in the Current Account and a credit to the Financial Account

Explanation: The current account is debited with purchase of foreign goods and financial account is credited because these will come back to U.S

c. BoP accounts of the US will not be affected in this case

Explanation: The U.S. balance of payment will not be affected when Ford Motor Co. (USA) and use uses local earnings to buy Jaguar X-12’s