1、A country is a net creditor when its claims on foreign nations exceed foreign claims on it. The nation is a net debtor when foreign nations claims on it exceed its claims on foreign nations.ESSAY1. How do we measure the international investment position of the United States at any point in time? How
2、 did the U.S. become a net debtor nation so rapidly?The international investment position of the United States is measured by the monetary value of U.S. assets abroad versus foreign assets in the United States. Unlike the balance of payments, which is a flow concept, the balance of international ind
3、ebtedness is a stock concept. The reason for the U.S. becoming a net debtor nation is that foreign investors have placed more funds in the United States than the U.S. residents have invested abroad. The United States has been considered attractive to foreign investors.2. What does a current account
4、deficit mean?When a country realizes a deficit in its current account, it has an excess of imports over exports of goods, services, income, and unilateral transfers. This leads to an increase in net foreign claims upon the home country. The home country becomes a net demander of funds from abroad, t
5、he demand being met through borrowing from other countries or liquidating foreign assets. The result is a worsening of the home countrys net foreign investment position.1. What foreign exchange transactions do banks typically engage in?Banks typically engage in spot, forward, and swap transactions.2
6、. How is the equilibrium rate of exchange determined?The equilibrium rate of exchange in a free market is determined by the intersection(交集) of the supply and demand schedules of foreign exchange.1. Is it possible to trade foreign exchange in the futures market? How does such trading differ from the
7、 forward market?Yes. In the futures market, contracting parties agree to future exchanges of currencies and set applicable exchange rates in advance. The futures market is distinguished from the forward market in that only a limited number of leading currencies are traded; moreover, trading takes pl
8、ace in a standardized contract amount and in a specific geographic location.2. Where are foreign currency options traded?Foreign-currency options are traded in a variety of currencies in Europe and the United States. The bank market for foreign-currency options consists of large U.S. banks that writ
9、e options for their corporate customers. In addition, the Amsterdam, Montreal, and Philadelphia exchanges provide centralized trading floors devoted to foreign-currency-option trading.1. What is the purchasing power parity approach to exchange rate determination?The purchasing power parity approach
10、asserts that changes in relative national price levels determine changes in exchange rates over the long run. A currency maintains its purchasing power parity if it depreciates (appreciates) by an amount equal to the excess of domestic (foreign) inflation over foreign (domestic) inflation.2. What is
11、 exchange rate overshooting?An exchange rate is said to overshoot when its short-run response to a change in market fundamentals is greater than its long-run response.1. In a free market, what determines exchange rates in the long run and the short run?The long-run determinants of exchange rates inc
12、lude market fundamentals such as consumer preferences for domestic and foreign goods, government trade policies, productivity levels, and relative price levels. In the short run, exchange rates are determined by interest rate differentials and market expectations concerning economic growth, inflatio
13、n rates, and interest rates.2. What is the asset market approach to exchange rate determination?Over short periods of time, decisions to hold domestic or foreign financial assets play a much greater role in exchange rate determination than the demand for imports and exports does. According to the as
14、set market approach, investors consider two key factors when deciding between domestic and foreign investments: relative interest rates and expected changes in exchange rates. Changes in these factors, in turn, account for fluctuations in exchange rates that we observe in the short run.1. Compared t
15、o classical economists, how did Keynesian economics change the discussion of trade adjustment?Keynesian economics put a greater emphasis on the income effects of trade in explaining trade adjustment. The classical economists emphasized price and interest rate adjustments.2. What is the foreign reper
16、cussion effect?It refers to a situation in which a change in one nations macroeconomic variables relative to another nation will induce a chain reaction in both nations economies. The consequence is that a rise in income of a nation with a balance-of-payments surplus and the fall in income of the na
17、tion with a balance-of-payments deficit are dampened.1. Explain David Humes theory of automatic adjustment for balance of payments disequilibria.David Humes theory provided an explanation of the automatic adjustment process that occurred under the gold standard. Starting from a condition of payments
18、 balance, any surplus or deficit would automatically be eliminated by changes in domestic price levels. Nations with a payments surplus would experience inflation; this would lead to a loss of competitiveness, a decrease in net exports, and a fall in the surplus. The opposite applies to nations with
19、 a payments deficit.2. Is the monetary approach to the balance-of-payments part of the traditional adjustment theories?The monetary approach to the balance of payments is presented as an alternative, rather than a supplement to traditional adjustment theories. It maintains that, over the long run, p
20、ayments disequilibria are rooted in the relationship between the demand for and the supply of money. Adjustment in the balance of payments is viewed as an automatic process.1. How do demand elasticities influence a countrys trade position when exchange rates change?According to the elasticities appr
21、oach, currency depreciation leads to the greatest improvement in a countrys trade position when demand elasticities are high. This is because the response of trade volumes to exchange-rate changes is highest when demand is elastic.2. How is the absorption approach used for analyzing the effects of c
22、urrency devaluation?The absorption approach provides insights about the changes in the trade balance by considering the impact of devaluation on the spending behavior of the domestic economy and the influence of domestic spending on the trade balance.1. What is a pass-through relationship?The extent
23、 to which exchange-rate changes lead to changes in import prices and export prices is known as the pass-through relationship. Complete (partial) pass-through occurs when a change in the exchange rate brings about a proportionate (less than proportionate) change in export prices and import prices. Em
24、pirical evidence suggests that pass-through tends to be partial rather than complete.2. How do movements in exchange rates affect domestic costs, in the presence of foreign sourcing?Manufacturers often obtain inputs from abroad whose costs are denominated in terms of a foreign currency. As foreign-c
25、urrency-denominated costs become a larger portion of a producers total costs, an appreciation of the domestic currency leads to a smaller increase in the foreign-currency cost of the firms output and a larger decrease in the domestic cost of the firms output, compared to the cost changes that occur
26、when all input costs are denominated in the domestic currency. The opposite applies for currency depreciation.1. Which nations use multiple exchange rates the most and why?Multiple exchange rates are used primarily by the developing nations who wish to ensure that necessary goods are imported and le
27、ss essential goods are discouraged.2. What is an SDR?The SDR is a currency basket composed of five currencies established by the International Monetary Fund. Nations desiring exchange-rate stability are attracted to the SDR as a currency basket against which to anchor their currency values.1. What i
28、s the difference between the crawling peg and adjustable pegged exchange rates?Under the adjustable peg, currencies are tied to a par value that changes infrequently but suddenly, usually in large jumps. The crawling peg allows a nation to make small changes in par values, perhaps several times a ye
29、ar, so that they creep along slowly in response to evolving market conditions.2. How can currency boards and dollarization prevent currency crises?A currency board is a monetary authority that issues notes and coins convertible into a foreign currency at a fixed exchange rate. The most vital contrib
30、ution a currency board can make to exchange-rate stability is to impose discipline on the process of money creation. This results in greater stability on domestic prices which, in turn, stabilizes the value of the domestic currency. Dollarization occurs when residents of a county use the U.S. dollar alongside or instead of their own currency. Dollarization is seen as a way to protect a countrys growth and prosperity from bouts of inflation, currency depreciation, and speculative attacks against the local currency.PTS: 11. What policy instrument should be used when demand-
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