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Chapter 21: Q8. (page 451)
If the economy booms in the United States while going into recession in other countries, the US trade deficit will tend to ________.
a. increase
b. decrease
c. remains the same
The correct option is option (a): increase.
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What have been the major causes of the large U.S. trade deficits in recent years? What are the major benefits and costs associated with trade deficits? Explain: "A trade deficit means that a nation is receiving more goods and services from abroad than it is sending abroad." How can that situation be considered "unfavorable"?
Explain why the U.S. demand for Mexican pesos slopes downward and the supply of pesos to Americans slopes upward. Assuming a system of flexible exchange rates between Mexico and the United States, indicate whether each of the following will cause the Mexican peso to appreciate or depreciate, other things equal:
a. The United States unilaterally reduces tariffs on Mexican products.
b. Mexico encounters severe inflation.
c. Deteriorating political relations reduce American tourism in Mexico.
d. The U.S. economy moves into a severe recession.
e. The United States engages in a high-interest-rate monetary policy.
f. Mexican products become more fashionable to U.S. consumers.
g. The Mexican government encourages U.S. firms to invest in Mexican oil fields.
h. The rate of productivity growth in the United States diminishes sharply.
What do the plus signs and negative signs signify in the U.S. balance-of-payments statement? Which of the following items appear in the current account and which appear in the capital and financial account: U.S. purchases of assets abroad, U.S. services imports, foreign purchases of assets in the United States, U.S. goods exports, U.S. net investment income? Why must the current account and the capital and financial account sum to zero?
China had a $49.1 billion overall current account surplus in 2018. Assuming that China鈥檚 net debt forgiveness was zero in 2018 (its capital account balance was zero), by how much did Chinese purchases of financial and real assets abroad exceed foreign purchases of Chinese financial and real assets?
ADVANCED ANALYSIS Return to problem 3 and assume that the exchange rate is fixed at 110. In year 1, what is the minimum initial size of the U.S. reserve of loonies such that the United States can maintain the peg throughout the year? What is the minimum initial size that is necessary at the start of year 2? Next, consider only the data for year 1. What peg should the United States set if it wants the fixed exchange rate to increase the domestic money supply by $1.2 trillion?
| Qd | P | Qs | Q's |
| 10 | 125 | 30 | 20 |
| 15 | 120 | 25 | 15 |
| 20 | 115 | 20 | 10 |
| 25 | 110 | 15 | 5 |
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