Review Questions for Week 8B:
1)"A balance of trade deficit must always be offset by net capital inflows from abroad." Agree or
disagree with this statement and explain.
2)Suppose a Japanese firm buys a 1 year treasury bill with a face value of $10,000 today for $9400.
If the value of the dollar declined from 110 to 105 yen during the year, what rate of return does the
Japanese firm earn on its investment?
3)Draw a supply-
demand diagram of the foreign exchange market for the dollar (valued in “euros”).
Show the effects of the following events on the exchange rate. Explain your reasoning!
(see diagram below)
a)the release of data showing stronger than expected RGDP growth in Germany.