Business Review-Economics by Walter J. Wessels

Author:Walter J. Wessels
Language: eng
Format: epub
Publisher: Barron's Educational Series
Published: 2017-03-18T04:00:00+00:00

ANSWERS

KNOW THE CONCEPTS

1.A physical asset is the actual capital, such as a machine or plant. Financial capital is a claim to the output of physical assets.

2.No. The United States is selling more goods than it is buying. However, when currency markets clear, its sale of goods and assets equals the goods and assets it is buying back from the world.

3.The demand for the dollar equals the demand by foreigners for U.S. goods and assets since they need dollars to buy these items. The supply of dollars equals the supply by U.S. citizens for foreign goods and assets since they need foreign currency to buy these items. The net demand for the dollar equals demand minus supply. When the currency market for the dollar clears, net exports plus net outgoing assets equals zero.

4.The exchange rate.

5.No, it can have only two of the three. For example, no exchange controls (where money moves freely in and out of the country) plus a fixed exchange rate means it will have to buy and sell dollars to keep the exchange from changing. Consequently, its monetary policy will depend on the exchange rate. With flexible exchange rates, it can have an independent monetary policy because it is not restricted to using its money supply to prop up its currency.

6.They are demanding loanable funds.

7.Demand equals Supply.

Domestic Investment + Government Deficit + Net Foreign Investment = Private Savings.

I + NFI = Private Savings + Government Surplus = S

8.When the dollar appreciates, the price of U.S. exports to foreigners will go up (as it takes more of their own currency to buy a dollar). The dollar price of imports will fall (as it takes fewer dollars to buy a unit of foreign currency). Net exports will likely fall.

9.To make the answer concrete, suppose there is capital flight from Mexico. Capital flight means foreigners want to hold less of Mexico’s financial assets (stocks and bonds). They sell the assets for pesos and then try to sell the pesos for dollars (or for the currency they want). Capital flight causes a run on the peso (run as in to run down). The value of the peso will fall.

10.If the world markets set the nation’s interest rates, most governments can do little to change it (although the U.S. government is large enough to have an effect). This reduces the effect of fiscal policy in open economies.

PRACTICAL APPLICATION

1. Event A:Demand, Right, Increase.

Event B:Supply, Right, Decrease.

Event C:Demand, Right, Increase.

Event D:Demand, Right, Increase.

Event E:Demand, Right, Increase.

Event F:Demand, Left, Decrease; Supply, Right, Decrease.

Event G:Supply, Right, Decrease.

2. a.1.11 $/£ and .00384 $/yen.

b.10,800 pounds and 3,120,000 yen.

c.British suit: $222.22. Japanese suit: $79.92.

3. a.1.25 $/£ and .00333 $/yen.

b.9,600 pounds (it is cheaper than in Question 2). 3,600,000 yen (it is more expensive than in Question 2).

c.British suit: $250 (it is more expensive than in Question 2).Japanese suit: $66.67 (it is cheaper than in question 2).

d.Against the pound, the dollar has depreciated. Against the yen, the dollar has appreciated. Note the effect on import and export prices!

4. a.When the factory is shipped to France, it is counted as an export.

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