5. Do current account deficits necessarily indicate problems in the economy (a)

Question

5. Do current account deficits necessarily indicate problems in the economy (a) Yes, a deficit is always a bad thing (b) Yes, current account deficits are always caused by government budget deficits. ( No, a curen account deficit can come from an increase n domestic investment opportuities. (d) No, current account deficits are never caused by problems in the economy such as low savings rates. 6. In 2009, U.S. liabilities were dollar-denoinated corporate and official debt for the most part, while U.S. external assets were mostly equies, bank loans, government debt, and foreign direct investment, denominated in foreign currencies. When the dollar fell in the wake of the financial crisis, what net effect was there on U.S. external wealth (a) No change occurred because the change in currency value affects everything equally (b) External wealth rose since the value of liabilities was already in dollars and changed but assets denominated in foreign currencies increased in valu little, (c) External wealth declined since the dollar fell and US assets were not worth as much (d) External wealth declined since the weak dollar forced the US to default on loans Question 7-10 Consider two countries, Japan and Korea. In 1996, Japan experienced relatively slow output growth (1%), whereas Korea had relatively robust output growth (6%). Suppose the Bank of Japan allowed the money supply to grow by 2% each year, whereas the Bank of Korea chose to maintain relatively high money growth of 12% per year. For the qons 15-18, use the simple monetary mo re L is constant). You will find it easiest to treat Korea as the home country and Japan as the oreign country 7. What is the inflation rate in Korea? In Japan? What is the expected rate of change in the Korea won relative to the Japanese yen? (a) 6%; 1%,5% depreciation (b) 12%: 2%: 10% depreciatio (c) 6%; 1%; 5% appreciation (d) 12%; 2%-10% appreciation 8. Supse e Bank of Korea wants to maintan an exchange rate peg with the Japanese yen What money growth rate would the Bank of Korea have to choose to keep the value of the won fixed relative to the yen? (a) The Bank of K d have to choos the same money growth rate as Japan of 2% (b) The Bank of Korea would have to choose a money growth rate that matches their output growth of 6% (c) The Bank of Korea would have to choose a money growth rate of 7%. (d) The Ballk of Koren w Duld have lo chaisie a ?naney growth rale of 12%.

Explanation / Answer

5) Current account deficit implies imports of an economy is more than its export during a period of time. But it does not necessairly mean that the economy is in problem. When investment comes in that is foriegn inflow takes place then also this deficit occur. Such investment is sign of growing economy.

Thus option (c) is correct.

6) When dollar depreciated then still the dollar denominated liabilities remian unchanged implying debt service in dollar relative to the size of the economy doe snot change. External wealth declines as weak dollar forced to default on loan.

Hence option (d)

7)

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