E303

Lab “Balance of payments and exchange rate”

True or False Questions:

1. A negative net foreign investment on this year’s balance of payments accounts means a country is
a net debtor.
2. A nation running current account surplus is accumulating foreign assets.
3. Because the balance of payments accounts must balance, sub-accounts like the capital account
must balance, too.
4. If GDP, consumption, and domestic investment are all constant, when government spending rises
relative to taxes, the country will run a trade deficit.
5. An increase in U.S. imports from France will give rise to a supply of euros in exchange for dollars.
6. If Americans suddenly refuse to lend money to Mexico, we would expect the dollar to appreciate
relative to the peso.

Problems and Short Answer Questions:

1. Can you think of reasons why a government can be concerned about a large current account deficit
or surplus? Why might a government be concerned about its official settlements balance?
2. “A country is better off running the current account surplus rather than a current account deficit”.
Do you agree or disagree? Explain.
3. Is it possible for a country to have a current account deficit and at the same time it has a surplus in
its capital account? Explain your answer.
4. National savings can be used domestically or internationally. Explain the basis for this statement,
including the benefits to the nation of each use of its saving.
5. You are given the following information about a country’s international transactions during a year:
Entries Amount, $
Merchandise exports 330
Merchandise imports 198
Service imports 204
Service exports 196
Unilateral transfers, net -5
Increase in the country’s holding of foreign 202
assets, net (excluding official reserve
assets)
Increase of the country’s foreign holdings 102
of the country’s assets, net (excluding
official reserve assets)
Statistical discrepancy, net 4

a. Calculate the values of the country’s merchandise trade balance, goods and services balance, and
current account balance.
b. What is the value of the change in official reserve assets (net)? Is the country increasing or
decreasing its net holdings of official reserve assets?

6. Suppose the dollar exchange rates of the euro and the pound sterling are equally variable. The
euro, however, tends to depreciate unexpectedly against the dollar when the return on the rest of
your wealth is unexpectedly high, while the pound tends to appreciate unexpectedly in the same
circumstances. As a U.S. resident, which currency, the euro or the pound, would you consider
riskier?