© 2013 Pearson
International Finance
34
CHECKPOINTS
© 2013 Pearson
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Checkpoint 34.1
Checkpoint 34.2
Problem 1
Problem 1
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Problem 2
Problem 2
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version
In the news
Problem 3
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version
In the news 1
In the news 2
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CHECKPOINT 34.1
Imports of goods and services:
$2,000 billion
Practice Problem 1
The table set out an economy’s
transactions in in 2008.
Calculate
• The current account balance
• The capital account balance
• The official settlements
account balance
• Exports of goods and services
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Interest paid to the rest of the
world: $500 billion
Interest received from the rest of
the world: $400 billion
Decrease in official U.S. reserves:
$10 billion
Government sector balance: $200
billion
Saving: $1,800 billion
Investment: $2,000 billion
Net transfers: zero.
CHECKPOINT 34.1
Solution
The current account balance
equals net exports plus net
interest from abroad (–$100
billion) plus net transfers (zero).
Net exports equal the
government sector balance
($200 billion) plus the private
sector balance.
Imports of goods and services:
$2,000 billion
Interest paid to the rest of the
world: $500 billion
Interest received from the rest of
the world: $400 billion
Decrease in official U.S.
reserves: $10 billion
Government sector balance:
$200 billion
Saving: $1,800 billion
Investment: $2,000 billion
Net transfers: zero.
© 2013 Pearson
CHECKPOINT 34.1
The private sector balance
equals saving ($1,800 billion)
minus investment ($2,000
billion.
The private sector balance is
–$200 billion.
Imports of goods and services:
$2,000 billion
Interest paid to the rest of the
world: $500 billion
Interest received from the rest of
the world: $400 billion
Decrease in official U.S.
reserves: $10 billion
Net exports equal the
government sector balance
($200 billion) plus the private
sector balance (–$200 billion).
Government sector balance:
$200 billion
So net exports are zero.
Net transfers: zero.
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Saving: $1,800 billion
Investment: $2,000 billion
CHECKPOINT 34.1
The current account balance
equals net exports (zero) plus
net interest from abroad (–$100
billion) plus net transfers (zero).
The current account balance is
–$100 billion.
Imports of goods and services:
$2,000 billion
Interest paid to the rest of the
world: $500 billion
Interest received from the rest of
the world: $400 billion
Decrease in official U.S.
reserves: $10 billion
Government sector balance:
$200 billion
Saving: $1,800 billion
Investment: $2,000 billion
Net transfers: zero.
© 2013 Pearson
CHECKPOINT 34.1
The capital account balance is
the negative of the sum of the
current account and official
settlements account balances,
which is $90 billion.
Imports of goods and services:
$2,000 billion
Interest paid to the rest of the
world: $500 billion
Interest received from the rest of
the world: $400 billion
The official settlements account
balance is a surplus of $10
billion.
Decrease in official U.S.
reserves: $10 billion
Exports equal net exports (zero)
plus imports ($2,000 billion),
which equals $2,000 billion.
Saving: $1,800 billion
Government sector balance:
$200 billion
Investment: $2,000 billion
Net transfers: zero.
© 2013 Pearson
CHECKPOINT 34.1
Practice Problem 2
Is the economy a debtor or
a creditor nation in 2008?
Imports of goods and services:
$2,000 billion
Interest paid to the rest of the
world: $500 billion
Interest received from the rest of
the world: $400 billion
Decrease in official U.S.
reserves: $10 billion
Government sector balance:
$200 billion
Saving: $1,800 billion
Investment: $2,000 billion
Net transfers: zero.
© 2013 Pearson
CHECKPOINT 34.1
Solution
The economy is a debtor
nation in 2008 because it
pays more in interest to the
rest of the world than it
receives in interest from the
rest of the world.
Imports of goods and services:
$2,000 billion
Interest paid to the rest of the
world: $500 billion
Interest received from the rest of
the world: $400 billion
Decrease in official U.S.
reserves: $10 billion
Government sector balance:
$200 billion
Saving: $1,800 billion
Investment: $2,000 billion
Net transfers: zero.
© 2013 Pearson
CHECKPOINT 34.1
In the news
Something has got to give
As the recovery takes hold, the U.S. government must
reduce its expenditure to trim its huge budget deficit. To
keep aggregate demand growing, consumption,
investment, or exports must grow. U.S. consumers are
burdened with debt, U.S. firms have unused capital, so
exports must grow.
Source: USA Today, September 3, 2009
Explain why a cut in government expenditure to trim the
budget deficit will require exports to grow.
© 2013 Pearson
CHECKPOINT 34.1
Solution
The link between the government sector balance and the
private sector balance is given by the equation:
(X – M) = (S – I) + (NT – G)
Rewrite the equation as
(NT – G) = (S – I) – (X – M)
A cut in G will decrease the left side of the equation. If
consumption does not increase, then S will increase.
To make the right side of the equation decrease, X must
increase.
© 2013 Pearson
CHECKPOINT 34.2
Practice Problem 1
Suppose that yesterday, the U.S. dollar was trading
on the foreign exchange market at 100 yen per
dollar.
Today, the U.S. dollar is trading at 105 yen per
dollar.
Which of the two currencies (the dollar or the yen)
has appreciated, and which has depreciated today?
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CHECKPOINT 34.2
Solution
Because the price of the U.S. dollar is a larger
number of yen, the U.S. dollar has appreciated.
The yen has depreciated because it buys fewer U.S.
dollars.
© 2013 Pearson
CHECKPOINT 34.2
Study Plan Problem
Suppose that yesterday, the U.S. dollar was trading on
the foreign exchange market at 100 yen per dollar.
Today, the U.S. dollar is trading at 105 yen per dollar.
Which of the two currencies (the dollar or the yen) has
appreciated and which has depreciated today?
A.
B.
C.
D.
Both currencies depreciated.
Both currencies appreciated.
The dollar appreciated and the yen depreciated.
The dollar depreciated and the yen appreciated.
© 2013 Pearson
CHECKPOINT 34.2
Practice Problem 2
Suppose that yesterday, the U.S. dollar was trading on the
foreign exchange market at 100 yen per dollar.
Today, the U.S. dollar is trading at 105 yen per dollar.
List the events that could have caused today’s change in
the value of the U.S. dollar on the foreign exchange market.
Did these events on your list change the demand for U.S.
dollars, the supply of U.S. dollars, or both the demand for
and supply of U.S. dollars?
© 2013 Pearson
CHECKPOINT 34.2
Solution
The main events might be
• An increase in the U.S. interest rate
• A decrease in the Japanese interest rate
• A rise in the expected future exchange rate of the U.S.
dollar.
The events listed change both the demand for and supply
of U.S. dollars.
These events increase the demand for and supply of U.S.
dollars.
© 2013 Pearson
CHECKPOINT 34.2
Study Plan Problem
The value of the U.S. dollar on the foreign exchange
market rose from 100 yen 105 yen per dollar. _____
could have caused this rise because ______ U.S.
dollars changed.
A. A fall in the U.S. interest rate and a fall in the expected future
exchange rate of the U.S. dollar; only the demand for.
B. A rise in the expected future exchange rate of the U.S. dollar and
a fall in the U.S. interest rate; both the demand and supply of.
C. A rise in the expected future exchange rate of the U.S. dollar and
a rise in the U.S. interest rate; both the demand and supply of.
D. A rise in the U.S. interest rate and a fall in the expected future
exchange rate of the U.S. dollar; only the supply of.
© 2013 Pearson
CHECKPOINT 34.2
Practice Problem 3
Suppose that yesterday, the U.S. dollar was trading on
the foreign exchange market at 100 yen per dollar.
Today, the U.S. dollar is trading at 105 yen per dollar.
If the Fed had tried to stabilize the value of the U.S. dollar
at 100 yen per dollar, what action would the Fed have
taken?
What effect would the Fed’s actions have had on U.S.
official reserves?
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CHECKPOINT 34.2
Solution
To stabilize the value of the U.S. dollar, the Fed would have
sold U.S. dollars to increase the supply of U.S. dollars in
the foreign exchange market.
When the Fed sells U.S. dollars, it buys foreign currency.
U.S. official reserves would have increased.
© 2013 Pearson
CHECKPOINT 34.2
Study Plan Problem
The value of the U.S. dollar on the foreign exchange
market rose from 100 yen 105 yen per dollar.
If the Fed tried to stabilize the value of the U.S. dollar at
100 yen per dollar, it would _______. U.S. official
reserves would _________.
A.
B.
C.
D.
E.
buy both dollars and yen; increase
sell dollars and buy yen; decrease
buy dollars and sell yen; increase
sell dollars and buy yen; increase
buy dollars and sell yen; decrease
© 2013 Pearson
CHECKPOINT 34.2
In the news
Dollar up vs euro and yen after Fed signals higher
interest rate
The dollar rose against the euro and the yen, bouyed by
the appeal of higher short-term interest rates after the
Fed chose tnot to increase the money supply.
Source: Reuters, September 20, 2011
Did the dollar appreciate or depreciate against the euro
and the Japanese yen?
Did the euro and the yen appreciate or depreciate against
the dollar?
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CHECKPOINT 34.2
Solution
Because the dollar buys more euros, the euro has
depreciated and the dollar has appreciated.
Because the dollar buys more yen, the dollar appreciated
against the yen and the yen depreciated against the dollar.
© 2013 Pearson
CHECKPOINT 34.2
In the news
Dollar up vs euro and yen after Fed signals higher
interest rate
The dollar rose against the euro and the yen, bouyed by
the appeal of higher short-term interest rates after the
Fed chose tnot to increase the money supply.
Source: Reuters, September 20, 2011
What actions in the foreign exchange market produced
the depreciation of the dollar?
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CHECKPOINT 34.2
Solution
As the Fed signaled that U.S. short-term interest rates
would rise, the U.S. interest rate differential increased.
The demand for U.S. dollars increased and the supply of
U.S. dollars on the foreign exchange market decreased.
The value of the U.S. dollar on the foreign exchange market
increased.
© 2013 Pearson