Answers to End of Chapter 2 Questions

Answers to End of Chapter 2 Questions - Answers to End of...

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Answers to End of Chapter 2 Questions 1. Balance of Payments. a. What is the current account generally composed of? ANSWER: The current account balance is composed of (1) the balance of trade, (2) the net amount of payments of interest to foreign investors and from foreign investment, (3) payments from international tourism, and (4) private gifts and grants. b. What is the capital account generally composed of? ANSWER: The capital account is composed of all capital investments made between countries, including both direct foreign investment and purchases of securities with maturities exceeding one year. 2. Inflation Effect on Trade. a. How would a relatively high home inflation rate affect the home country’s current account, other things being equal? ANSWER: A high inflation rate tends to increase imports and decrease exports, thereby increasing the current account deficit, other things equal. b. Is a negative current account harmful to a country? Discuss. ANSWER: This question is intended to encourage opinions and does not have a perfect solution. A negative current account is thought to reflect lost jobs in a country, which is unfavorable. Yet, the foreign importing reflects strong competition from foreign producers, which may keep prices (inflation) low. 3. Government Restrictions. How can government restrictions affect international payments among countries? ANSWER: Governments can place tariffs or quotas on imports to restrict imports. They can also place taxes on income from foreign securities, thereby discouraging investors from purchasing foreign securities. If they loosen restrictions, they can encourage international payments among countries. 4. IMF. a. What are some of the major objectives of the IMF? ANSWER: Major IMF objectives are to (1) promote cooperation among countries on international monetary issues, (2) promote stability in exchange rates, (3) provide temporary funds to member countries attempting to correct imbalances of international payments, (4) promote free mobility of capital funds across countries, and (5) promote free trade. b. How is the IMF involved in international trade? ANSWER: The IMF in involved in international trade because it attempts to stabilize international payments, and trade represents a significant portion of the international payments.
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5. Exchange Rate Effect on Trade Balance. Would the U.S. balance of trade deficit be larger or smaller if the dollar depreciates against all currencies, versus depreciating against some currencies but
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Answers to End of Chapter 2 Questions - Answers to End of...

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