equilhbrated. But the e to change until the market This can help us understa for
ID: 1124280 • Letter: E
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equilhbrated. But the e to change until the market This can help us understa for many years now). It means that we must have had capital account surpluses. That is, the only way the US has been able to sustain trade deficits for many consecutive years is that foreigners have been willing to lend the US money (i.e., foreign investment in the US) on a large scale! This is why some analysts are not that worried about the US foreign trade deficit. On the other hand, many are concerned about the trade deficit because they believe that it is a sign of weakness for our export sector and therefore a threat to jobs in that sector. d some of the implication of international trade deficits (which the US has run Ch. 13: Practice Questions 1. Suppose the US is running a trade surplus. According to our simplified model of exchange rate determination and balance of payments, we must have had a situation of a the US investing Giacial nvestment, e) n c n(GB) than they invesed in the US b. a currency that is appreciating. c. the US importing more than it is exporting. d. GB investing more in the US than the US is investing in GB. e. none of the above. 2. Think of the U.S. as the domestic country and Great Britain (GB) as the foreign country. Let "e" stand for the domestic price of one unit of the foreign currency. Ife-1.55, then a. a guitar in GB listed at £1,550 would cost $1,000. b. a guitar in the US listed at $2,100 would cost £1,354.84. c. $1 would cost £0.55. d. $1 would cost approximately £1.55. e. none of the above. 3. Consider our simple Supply and Demand model of exchange rate determination. Think of the U.S. as the domestic country and Great Britain (GB) as the foreign country. Let "e" stand for the domestic price of one unit of the foreign currency. If we had an exogenous increase in the number of US exports GB consumers wish to buy, we would expect a. an increase (i.e., rightward shift) in the demand for f and an increase in e. b. a decrease (i.e., leftward shift) in the demand for £ and an increase in e. c. an increase in the supply of £ and an increase in e. d. a decrease in the supply of £ and an increase in e. e. an increase in the supply of £ and a decrease in e. 18Explanation / Answer
1). b). A currency that is appreciating. A favourable trade surplus means that a country is exporting more than what it is importing from foreign countries. In the event of having a strong trade surplus, the domestic currency appreciates as against the foreign currency since the value of domestic products has assumed to increased in the foreign market as is evident from positive trade balance.
2). b). The guitar in the US for $2100 will be for pound 1354.84 in GB. This is merely done by dividing 2100/1.55, which shows the relative price of US currency as against the pound sterling.
3). e). An increase in the supply of pound and a reduction of e. This is because when American goods become popular in British market, more Britishers will be exchanging pound sterling for dollar. This will increase the supply of Pound, thereby lowering its value against American Dollar.
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