HW1_solution

HW1_solution - Answers to Homework 1 Chapter 12 3 a The...

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Answers to Homework # 1 Chapter 12 3. a. The purchase of the German stock is a debit in the U.S. financial account. There is a corresponding credit in the U.S. 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. This is a case in which an American trades one foreign asset for another. b. Again, there is a U.S. financial account debit as a result of the purchase of a German stock by an American. The corresponding credit in this case occurs when the German seller deposits the U.S. check in its German bank and that bank lends the money to a German importer (in which case the credit will be in the U.S. current account) or to an individual or corporation that purchases a U.S. asset (in which case the credit will be in the U.S. financial account). Ultimately, there will be some action taken by the bank which results in a credit in the U.S. balance of payments. c. The foreign exchange intervention by the French government involves the sale of a U.S. asset, the dollars it holds in the United States, and thus represents a debit item in the U.S. financial account. The French citizens who buy the dollars may use them to buy American goods, which would be an American current account credit, or an American asset, which would be an American financial account credit. d. Suppose the company issuing the traveler’s check uses a checking account in France to make payments. When this company pays the French restaurateur for the meal, its payment represents a debit in the U.S. current account. The company issuing the traveler’s check must sell assets (depleting its checking account in France) to make this payment. This reduction in the French assets owned by that company represents a credit in the American financial account. e. There is no credit or debit in either the financial or the current account since there has been no market transaction. f. There is no recording in the U.S. Balance of Payments of this offshore transaction. 5. a. Since non-central bank financial inflows fell short of the current account deficit by $500 million, the balance of payments of Pecunia (official settlements balance) was –$500 million. The country as a whole somehow had to finance its $1 billion current account deficit, so Pecunia’s net foreign assets fell by $1 billion. b. By dipping into its foreign reserves, the central bank of Pecunia financed the portion of the country’s current account deficit not covered by private financial inflows. Only if foreign central banks had acquired Pecunian assets could the Pecunian central bank have avoided using $500 million in reserves to complete the financing of the current account. Thus, Pecunia’s central bank lost $500 million in reserves, which would appear as an official financial inflow (of the same magnitude) in the country’s balance of payments accounts.
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c. If foreign official capital inflows to Pecunia were $600 million, the Central Bank now
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HW1_solution - Answers to Homework 1 Chapter 12 3 a The...

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