Ch.19,20 practice problems_ans_wi2017

Ch.19,20 practice problems_ans_wi2017 - Econ171...

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1 Econ171 International Finance – Ch.19 & 21 Practice Problems Winter 2015 I. True, False, Uncertain Explain briefly your answer in a couple of sentences no matter which choice you make (true, false, or uncertain). 1. When the U.S. permanently increases its money supply, its trade partner Japan would experience an increase in aggregate demand and output in the short run. False/Uncertain. An increase in U.S. output and income would raise demand for Japanese products, thereby increasing aggregate demand and output in Japan. A depreciation of the U.S. dollar (equivalently, an appreciation of the yen), on the other hand, lowers demand for Japanese products, thereby decreasing aggregate demand and output in Japan. The net effect of the above two for Japan is ambiguous . 2. A country is less vulnerable to a financial crisis if its debt is in the form of foreign direct investment (FDI) rather than bank loans. True. The debtor country must repay the bank loan regardless of its own economic circumstances. Foreign owners of FDI, on the other hand, have a claim to a share of its return, not a claim to a fixed stream of money payments. Adverse economic events in the host country thus result in an automatic fall in the earnings of direct investments and in the dividends paid to foreigners. 3. Under a fixed exchange rate regime, a country can generally attain internal and external balance using only fiscal policy. False. Referring to the internal-external balance diagram, internal and external balances generally require using both expenditure reducing policy (fiscal policy) and expenditure switching policies (devaluation).
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