Econ 2035 Ch. 16 Hw
Why must the current account balance plus the financial account balance equal zero?
Each international transaction is two-sided, representing an exchange of goods, services, or assets among households, businesses, or governments.
Did countries that ran trade deficits experience gold inflows or gold outflows?
Gold outflows
The Fed sells $10 billion of foreign assets and sells $10 billion of Treasury securities.
Monetary base decreases by $20 billion.
The Fed sells $10 billion of foreign assets and purchases $10 billion of Treasury securities.
Monetary base does not change.
What effect does each of the following have on the U.S. monetary base? The Fed purchases $10 billion of foreign assets.
Monetary base increases by $10 billion.
What is pegging?
The decision by a country to keep the exchange rate fixed between its currency and another country's currency.
Why do the balance-of-payment accounts include a "statistical discrepancy"? What do many economists believe explains the large statistical discrepancies found in many countries' balance-of-payment accounts?
The statistical discrepancy is included to show how much the current account balance and the financial account balance differ from each other. This can be caused by hidden capital flows due to illegal activities or capital flight.
In what sense can a country run a balance-of-payments surplus or a balance-of-payments deficit?
This can occur when the official settlements balance is excluded from the financial account.
What was the economist likely referring to by "doesn't bode well for the U.S. balance of payments"?
This disparity means that the United States may become even more reliant on savings from abroad
Was the Gold Standard a fixed exchange rate system or a flexible exchange rate system?
a fixed rate system
What are the disadvantages of imposing capital controls?
-A heightened reluctance of multinational firms to expand operations in countries with capital controls. -Increased government corruption with bribes to government officials. -Impetus is given to the formation of a black market for the currency so entities can evade the capital controls.
How would leaving the gold standard in the 1930s lead to an increase in a country's output and employment?
-The country was free to pursue expansionary monetary policy. -The country's central bank would not have to take actions to remain on the gold standard that contracted production and employment, such as raising interest rates.
Which of the following are advantages of pegging?
-protection for firms that have taken out loans in foreign currencies. -reduced exchange rate risk
How does a sterilized central bank intervention affect the supply curve for a country's currency?
A sterilized central bank intervention does not affect the supply curve for a country's currency.
To reduce the foreign exchange value of its currency, would a central bank buy or sell foreign assets? What would be the effect on the monetary base? What would be the effect on domestic interest rates? To reduce the foreign exchange rate, the central bank would _____________ foreign assets, which would ____________________ the monetary base, and ___________________ domestic interest rates.
buy; raise; reduce
Suppose that a U.S. firm buys 14 BMW autos for $28,000 each. How is this transaction recorded in the balance-of-payments accounts for the United States? The purchase of the 14 BMW autos would be recorded in the ______________ account as a $________ payment to _______________, which is recorded as a ________________number.
current; 392000(28000x14); foreigners; negative
How would a gold outflow affect a country's monetary base?
decrease
The Fed sells $6.5 billion in Italian government bonds, denominated in euros. What happens to the Fed's international reserves and the monetary base? Is this a sterilized or an unsterilized foreign exchange intervention? The Fed's international reserves ___________________, and the monetary base ______________________. This is___________________ intervention.
decrease by 6.5 billion; decrease by 6.5 billion; an unsterilized
If the U.S. current account surplus is $310 billion, and if the statistical discrepancy is zero, what is the financial account balance? The financial account balance would be a _____________ of $310 billion.
deficit
How does a sterilized central bank intervention affect the demand curve for a country's currency?
does not affect the demand curve
The Fed buys $2.2 billion in French government bonds, denominated in euros, and, at the same time, conducts an open market sale of $2.2 billion of U.S. Treasury securities. What happens to the monetary base? Is this a sterilized or an unsterilized foreign exchange intervention? The monetary base ____________________. This is ___________________ intervention.
does not change; a sterilized
Later, the German company uses the money to buy a $392,000 U.S. Treasury bond at a Treasury auction. How is this transaction recorded in the balance-of-payments accounts for the United States? The purchase of the U.S. Treasury bond would be recorded in the ____________ account as a ______________ receipt from _____________, which is recorded as a _____________ number.
financial; $392000; foreigners; positive
How would a gold inflow affect a country's inflation rate?
increase
The Fed conducts a sterilized foreign exchange intervention
monetary base does not change
Were countries able to pursue active monetary policies?
no
Does this financial account balance represent a net capital outflow or a net capital inflow? The financial account balance would represent a net capital _________________.
outflow
During the Great Depression, how did the gold standard hinder economic recovery? During the Great Depression, the gold standard
required some countries to pursue a contractionary monetary policy to maintain the gold standard, theryby making the reduction of unemployment difficult to achieve.
"The U.S. usually runs a deficit in goods and a surplus in services such as medical care, higher education, royalties and payments processing." The article noted that the pandemic was having a large negative effect on U.S. exports of services but having a much smaller effect on U.S. imports of manufactured goods. It quoted an economist at a consulting firm observing that this result "doesn't tend to bode well for the U.S. balance of payments because we tend to export a lot of services and import a lot of goods." In which component of the balance-of-payments account would U.S. exports of services and imports of manufactured goods appear?
the current account
What is the controversy over China's pegging the value of the yuan? The value of the yuan is _______________, making Chinese exports ______________and imports into China _________________.
undervalued; cheaper; more expensive
Why might a country impose capital controls?
Because currency crises are fueled in part by sharp inflows and outflows of financial investments.
What are capital controls?
-Government-imposed restrictions on foreign investors buying domestic assets. -Government-imposed restrictions on domestic investors buying foreign assets.
Is it possible for the United States to run a balance-of-payments deficit?
Yes, it is possible to run a deficit if the official settlements balance is excluded from the financial account.