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.