User Account

All Pages

What will be the impact on the trade balance

Assignment Help Macroeconomics
Reference no: EM131089317

Public Affairs 854 Fall 2014 - Problem Set 1

Q1. Balance of payments identities

Recalling the balance of payments identity, CA + FA + ORT ≡ 0, answer the following questions.

1.1 If CA < 0 and the central bank is neither accumulating nor decumulating foreign exchange reserves, what must be true about private capital inflows?

1.2 If foreigners are purchasing more U.S. securities (T-bills, corporate bonds and stocks) than U.S. residents are purchasing of foreign securities, then what is the value of FA? (Ignore direct investment for purposes of this question).

1.3 If a country maintains a pegged exchange rate and runs a balance of payments deficit, then what must be true about ORT? Explain what this means in words.

Download the most recent issue of Economic Indicators, compiled by the Council of Economic Advisers and published by the Joint Economic Committee. There is a link to this at https://www.whitehouse.gov/cea. Go to the "Economic" link.

1.4 Calculate FA for 2013, using the data in Economic Indicators, "U.S. International Transactions".

1.5 Calculate ORT for 2013. Due to a reorganization of the tables in the Economic Indicators, you will need to go BEA (Table 5, toward the bottom of the webpage)

https://www.bea.gov/iTable/iTable.cfm?ReqID=62&step=1#reqid=62&step=2&isuri=1&6210=1, to retrieve the relevant data.

Q2. The foreign exchange market

Using a supply and demand diagram, and defining the US as the home country and either euro area as the foreign, show what happens in the following situations (assuming a flexible exchange rate regime).

2.1 US demand for French cheese increases.

2.2 French demand for American stocks declines.

Access The Economist's "Economic Indicators" page, https://www.economist.com/indicators. Indicate the data at which you access the website!

2.3 Has the US dollar (USD) appreciated or depreciated against the yen over the past year? By what amount has the USD appreciated/depreciated (in percentage terms)?

2.4 How many US dollars does it take to buy a single Australian dollar (AUD) now? How many did it take a year ago? Has the US dollar appreciated or depreciated?

2.5 What is the exchange rate of Japanese yen (JPY) for Australian dollars (AUD) (i.e., how many Japanese yen does it take to purchase a single Australian dollar)?

Q3. Elasticities approach

3.1 Suppose that each one percent depreciation in the US dollar induces a 0.75 increase in exports and a 0.25 decrease in imports. Starting from a position where exports equals imports, what will be the impact on the trade balance?

3.2 Suppose the US experiences the exchange rate depreciation while running a large trade deficit. What will happen to the trade balance?

3.3 Suppose that instead of the elasticities being constant, they are smaller in the short run, and larger in the long run. What is the time path of the trade balance over time (starting from initial balance)?

Q4. Equilibrium income and multipliers

Consider the following model of the economy (where there are no taxes):

Eq.No. Equation                              Description

(1) Y = AD                                     Output equals aggregate demand, an equilibrium condition

(2) AD ≡ C + I + G + EX - IM          Definition of aggregate demand

(3) C = (CO)- + cY                         Consumption function, c is the MPC

 (6) I = (IN)-                                  Investment function

(7) G = G-O-                                  Government spending on goods and services

(9) EX = E-(XP)-                             Export spending

(10) IM = (IMP)- + mY                    Import spending

4.1 Solve for Y, setting A- = C-O- + (IN)- + (GO)-.

4.2 Calculate the change in income for a given change in (autonomous) exports. Show your work!

4.3 Calculate the change in income for a given change in government spending. Show your work!

4.4 Calculate the change in the trade balance for a given change in autonomous exports. Hint: TB ≡ EX - IM, so ΔTB = ΔEXP - ΔIMP - ΔmY. Show your work!

4.5 In words, explain why the change in the trade balance is not equal to the change in autonomous exports.

Reference no: EM131089317

Questions Cloud

Vehicle expected life of three years as delivery vehicle : You are trying to pick the least-expensive car for your new delivery service. You have two choices: the Scion xA, which will cost $18,000 to purchase and which will have OCF of –$2,000 annually throughout the vehicle’s expected life of three years as..
Regarding corporate capital structure are relaxed : When the assumptions of Modigliani and Miller’s Irrelevance Hypothesis regarding corporate capital structure are relaxed so that they are more consistent with real-world conditions, i.e. there are corporate taxes (and interest payments are tax deduct..
Produce after-tax cash flows : You are presented a proposal for a project. The project costs $10 million and will produce after-tax cash flows of $2 million at the end of year 1, $4 million at the end of year 2, and $8 million at the end of year 3. What is the NPV of this project ..
The floating rate side of the swap : Boeing has entered into a 10 year interest rate swap with Bank America with a notional principal of $500 million. Boeing has agreed to pay LIBOR – the floating rate side of the swap. Bank America has agreed to pay a fixed rate of 7%. Assume that next..
What will be the impact on the trade balance : Public Affairs 854 Fall 2014 - Problem Set 1. Suppose that each one percent depreciation in the US dollar induces a 0.75 increase in exports and a 0.25 decrease in imports. Starting from a position where exports equals imports, what will be the imp..
What should be the price of symantec stock today : Symantec does not currently pay a dividend, however, in 4 years you expect they will pay their first dividend and it will be $2 per share. The dividend is expected to grow at a rate of 5% and investors’ required rate of return for Symantec stock is 1..
Straight line depreciation and expected overseas sales : Your firm is considering an overseas expansion. Below is the information that you have been given regarding the project: Initial Equipment Cost: $100m. Life of System: 5 years. Depreciation method: Straight line Depreciation. Expected overseas sales:..
Agreed to pay libor-floating rate side of the swap : Boeing has entered into a 10 year interest rate swap with Bank America with a notional principal of $500 million. Boeing has agreed to pay LIBOR – the floating rate side of the swap. Bank America has agreed to pay a fixed rate of 7%. Assume that next..
The stock of verde enviro-systems : The stock of Verde Enviro-Systems has a beta of 1.2. If the current risk-free rate is 3% and the market risk premium is 5% then according to the Capital Asset Pricing Model, what should be the required rate of return.

Reviews

Write a Review

Macroeconomics Questions & Answers

  Inflation targeting be a good policy

Why might it be difficult for the Fed to formally adopt inflation targeting?  Would inflation targeting be a good policy for the Fed in the present economic environment

  In using the taylor rule

In using the Taylor Rule as a guideline for monetary policy, what are the pros and cons of using forecasted values of inflation and output rather than observed values of these variables?

  Describe the present economic crisis situation in europe

Describe the present economic crisis situation in Europe.  Why has it been so difficult for the Europeans to find a solution to this problem?   Comment on what implications the crisis may have for the rest of the world if Europeans are not able to ag..

  Long-term federal government budget problems

Question:. Explain why there are long-term Federal government budget problems. Explain why the base-line forecast of the CBO is misleading.

  Derive and compare demand curve

Question based on Derive and compare demand curve,  Derive Ambrose's demand function for peanuts. How does it compare with Johnny's demand curve for peanuts?

  Problem based on utility function

Problem based on  Utility Function - Problem,  Answer and explain the following using a diagram which is completely labeled.

  Laffer curve : tax rate and tax revenue

Question based on Laffer Curve : Tax Rate and Tax Revenue,  Do raising tax rates necessarily raise tax revenue? What factors affect how tax revenue changes when tax rates change?

  Problem - income elasticity of demand

Problem - Income Elasticity of Demand,  Interpret the following Income Elasticities of Demand (YED) values for the following and state if the good is normal or inferior; YED= +0.5 and YED= -2.5

  Positive balance of payment

Question Positive Balance of Payment: "Things will look good for the US if we could just get to where we are consistently running a positive Balance of Payments."

  Effect of recession on the investment curve

Comment on the effect of a recession on the investment curve (only) and on the level of savings, investment, and the equilibrium real interest rate in the financial crisis that hits United States first starting in fall 2007.

  Affect of falling domestic investment on trade surplus and

How will a fall in domestic investment affect the trade surplus and net capital outflows in the domestic economy, the trade deficit and capital inflows in the rest of the world.

  Crises in the banking sector and bank run

Banking crises crisis decreases depositors' confidence in the banking system. What would be the effect of a rumor about a banking crisis on checkable deposits in such a country?

Free Assignment Quote

Assured A++ Grade

Get guaranteed satisfaction & time on delivery in every assignment order you paid with us! We ensure premium quality solution document along with free turntin report!

Submit Assignment

Academics

Major Subjects

Majors

Get In Touch

whatsapp: +1-415-670-9521

Phone: +1-415-670-9521

Email: [email protected]

TERMS & POLICIES

HELP & SUPPORT

All rights reserved! Copyrights ©2019-2020 ExpertsMind IT Educational Pvt Ltd