Homework1-ANSWERS - Economics 431/531 Ruxandra Prodan...

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Economics 431/531 International Finance, Fall 2005 Ruxandra Prodan Problem Set 1 - answers 1. Saving is defined as disposable income that is not spent. The national income identity is Y = C + I + G (closed economy). Since Y is both output and income, subtract consumption (C) and government purchases (G) to get savings. Thus, savings equals capital investment, S = Y – C - G S = I. The open economy national income identity is: Y = C + I + G + X – M, where X and M stand for exports and imports respectively. Rewriting this in terms of savings, S = Y – C - G S = I + X – M. 2. a) The purchase of a German stock is a debit in the US Financial Account (increase in the US assets held abroad). There is a corresponding credit in the US Financial Account when the American pays with a check on his Swiss bank account because his claims on Switzerland fall by the amount of the check (decrease in the US assets held abroad). This is the case in which an American trades a foreign asset for another. b) Again, there is a US Financial Account debit as a result of the purchase of a German stock by an American (increase in US assets held abroad). The corresponding credit occurs when the German seller deposits the US check in its German bank. (increase in foreign assets in US). c) The foreign exchange intervention by the French government involves the sale of a US
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Homework1-ANSWERS - Economics 431/531 Ruxandra Prodan...

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