Exam 3
The Balance of Payments, Exchange Rates, and Trade Deficits
REVIEW QUESTIONS
1. Do all international financial transactions necessarily involve exchanging one nation’s distinct currency for another? Explain. Could a nation that neither imports goods and services nor exports goods and services still engage in international financial transactions?
Answer: The answer is almost certainly a yes. Only in rare cases would you find barter exchanges (goods and services for other goods and services). Yes, they could engage in financial transactions (the exchange of assets across countries).
2. Explain: “U.S. exports earn supplies of foreign currencies that Americans can use to finance imports.” Indicate whether each of the following creates a demand for or a supply of European euros in foreign exchange markets:
a. A U.S. airline firm purchases several Airbus planes assembled in France.
b. A German automobile firm decides to build an assembly plant in South Carolina.
c. A U.S. college student decides to spend a year studying at the Sorbonne in Paris.
d. An Italian manufacturer ships machinery from one Italian port to another on a Liberian freighter.
e. The U.S. economy grows faster than the French economy.
f. A U.S. government bond held by a Spanish citizen matures, and the loan amount is paid back to that person.
g. It is widely expected that the euro will depreciate in the near future.
Answer: American exports lead to an increase in the foreigncurrency bank deposit holdings of Americans. These holdings will be decreased through American purchases of imports. Hence, the foreigncurrency assets earned through exports can be used to finance imports.
(a) A demand for euros: The U.S. airline must purchase euros before purchasing the Airbus planes.
(b) A supply of euros: The German automobile firm must purchase U.S. dollars, or supply euros, before building the plant.
(c) A demand for euros: The U.S. college student must purchase euros before studying
REVIEW QUESTIONS
1. Do all international financial transactions necessarily involve exchanging one nation’s distinct currency for another? Explain. Could a nation that neither imports goods and services nor exports goods and services still engage in international financial transactions?
Answer: The answer is almost certainly a yes. Only in rare cases would you find barter exchanges (goods and services for other goods and services). Yes, they could engage in financial transactions (the exchange of assets across countries).
2. Explain: “U.S. exports earn supplies of foreign currencies that Americans can use to finance imports.” Indicate whether each of the following creates a demand for or a supply of European euros in foreign exchange markets:
a. A U.S. airline firm purchases several Airbus planes assembled in France.
b. A German automobile firm decides to build an assembly plant in South Carolina.
c. A U.S. college student decides to spend a year studying at the Sorbonne in Paris.
d. An Italian manufacturer ships machinery from one Italian port to another on a Liberian freighter.
e. The U.S. economy grows faster than the French economy.
f. A U.S. government bond held by a Spanish citizen matures, and the loan amount is paid back to that person.
g. It is widely expected that the euro will depreciate in the near future.
Answer: American exports lead to an increase in the foreigncurrency bank deposit holdings of Americans. These holdings will be decreased through American purchases of imports. Hence, the foreigncurrency assets earned through exports can be used to finance imports.
(a) A demand for euros: The U.S. airline must purchase euros before purchasing the Airbus planes.
(b) A supply of euros: The German automobile firm must purchase U.S. dollars, or supply euros, before building the plant.
(c) A demand for euros: The U.S. college student must purchase euros before studying