Looking for Quiz 20 :
Macro Policy in a Global Setting
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According to Gary North in Priorities and Dominion: An Economic Commentary on Matthew, in the book of Matthew, Jesus teaches about the rate of exchange between earthly wealth and eternal wealth.
a. Would Jesus argue for a high orb. Do wealthy people believe the exchange rate is high orc. Do you believe the perceived exchange rate falls or rises as one approaches death? (Religious)
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(a) Jesus would argue for a(b) Wealthy people would believe that exchange rate for earthly riches should be high.
The reason for this is that the mental makeup of wealthy people is such that they are naturally attracted to the earthly riches and thus would insist on high exchange rate when told to give up the earthly riches in favor of eternal wealth.
(c) The perceived exchange rate for earthly riches falls as one approaches death because in that scenario attraction for earthly riches is on a declining trend.
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One of the basic laws of economics is the law of one price. It says that given certain assumptions one would expect that if free trade is allowed, the prices of goods in multiple countries should converge. This law underlies purchasing power parity.
a. What are the three assumptions likely to be?
b. Should the law of one price hold for labor also? Why or why not?
c. Should it hold for capital more so or less so than for labor? Why or why not?
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Balance of payments is like a financial report on the international trade which gives the insight on the financial status of the economy with respect to financial transactions. It is divided into current account, financial and capital account.
The law of one price states that when the price of a good is displayed in same currency then the price of the same good in every country will be same.a.The three assumptions of law of one price are as follows:
• Tax structure between countries is same,
• No transportation costs,
• And the goods are capable of being traded.
b.If there are no border problems between two countries and all the above three conditions are fulfilled then there is no reason that the law of one price is not applicable for labor as well.
c.This law will hold truer for capital because labor move with emotional and social baggage so it is difficult for them to move, while the mobility of capital is high. So, the law will be more applicable to capital.
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If a country is running a balance of trade deficit, will its current account be in deficit? Why?
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Balance of payments is like a financial report on the international trade which gives the insight on the financial status of the economy with respect to financial transactions. It is divided into current account, financial and capital account.
The balance of trade is the difference between the exports and imports, and it is one of the components of current account. Now when the imports are more than exports then there will be balance of trade deficit but this deficit is just one part of current account but if there is surplus in other parts of current account more than the deficit then overall currenct account will be in surplus.
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During the 1995-96 Republican presidential primaries, Patrick Buchanan wrote an editorial in The Wall Street Journal beginning, "Since the Nixon era the dollar has fallen 75 percent against the yen, 60 percent against the mark." What trade policies do you suppose he was promoting? He went on to outline a series of tariffs. Agree or disagree with his policies.
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In the early 1980s, the U.S. economy fell into a recession (the government faced the problem of both a high federal deficit and a high trade deficit, called the twin deficits), and the dollar was very strong. Can you provide an explanation for this sequence of events?
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Support the following statement: "It is best to offset a capital and financial account surplus with a current account deficit."
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State whether the following will show up on the current account or the capital and financial account:
a. IBM's exports of computers to Japan.
b. IBM's hiring of a British merchant bank as a consultant.
c. A foreign national living in the United States repatriates money.
d. Ford Motor Company's profit in Hungary.
e. Ford Motor Company uses that Hungarian profit to build a new plant in Hungary.
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Should Canada, the United States, and Mexico adopt a common currency? Why or why not?
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Support the following statement: "It is best to offset a capital and financial account deficit with a current account surplus."
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Draw the fundamental analysis of the supply and demand for the British pound in terms of dollars. Show what will happen to the exchange rate with those curves in response to each of the following events:
a. The U.K. price level rises.
b. The United States reduces tariffs.
c. The U.K. economy experiences a boom.
d. The U.K. interest rates rise.
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In an op-ed article, Paul Volcker, former chairman of the Board of Governors of the Federal Reserve, asked the following question: "Is it really worth spending money in the exchange markets, modifying monetary policy, and taking care to balance the budget just to save another percentage or two [of value of exchange rates]?" What's your answer to this question?
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In the early 2000s, China was running a large current account surplus.
a. What did this suggest about its financial and capital account?
b. China's private balance of payments was in surplus. What does this suggest about its exchange rate regime?
c. What actions was the Chinese central bank likely undertaking in the foreign exchange markets? Demonstrate the situation with supply and demand graphs.
d. If the Chinese central bank pulled out of the forex market, what would likely happen to the yuan?
e. In May 2004, inflation picked up in China; what effect did that likely have on the value of the yuan?
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Will the following be suppliers or demanders of U.S. dollars in foreign exchange markets?
a. A U.S. tourist in Latin America.
b. A German foreign exchange trader who believes that the dollar exchange rate will fall.
c. A U.S. foreign exchange trader who believes that the dollar exchange rate will fall.
d. A Costa Rican tourist in the United States.
e. A Russian capitalist who wants to protect his wealth from expropriation.
f. A British investor in the United States.
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Most economists favora. Who has it right?
b. Is financial liberalization a good or bad policy, especially for developing countries? (Radical)
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When someone sends 100 British pounds to a friend in the United States, will this transaction show up on the financial and capital account or current account? Why?
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Nobel Prize-winning economist James Tobin has suggested that a method of decreasing unwanted sudden capital flows among countries would be to place a small tax on such flows. Post-Keynesian economist Paul Davidson argued against doing so because it won't solve the problem, suggesting that it is like using a pebble when a boulder is needed. What might Davidson's argument be? (Hint: It is related to the role of expectations.) (Post-Keynesian)
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Dr. Dollar Bill believes price stability is the main goal of central bank policy. Is the doctor more likely to prefer fixed or flexible exchange rates? Why?
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If all currencies were on a gold standard, there would be no exchange rates between currencies and we would not face the difficulties presented by fluctuating exchange rates.
a. What would be the benefit of having all currencies on a gold standard?
b. What would be the cost? (Austrian)
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