Suppose that Argentina's dollar-denominated external assets and liabilities are $10 billion and $100 billion, respectively, and its Argentine peso-denominated external assets and liabilities are each 50 billion pesos (P). Suppose further that Argentina fixes its exchange rate at P1 = $US1. Suppose that Argentina changes its exchange rate to P3 = $US1. Now what is the peso value of Argentina's total external wealth?
A) -270 billion pesos
B) -150 billion pesos
C) 0
D) -210 billion pesos

Question

Quizplus · Accepted Answer

When the exchange rate changes to P3 = $US1, the dollar-denominated liabilities increase in peso terms. The liabilities become 300 billion pesos (100 billion dollars * 3 pesos/dollar), while the dollar-denominated assets become 30 billion pesos (10 billion dollars * 3 pesos/dollar). The peso-denominated assets and liabilities remain at 50 billion pesos each. Therefore, the total external wealth is (30 + 50) - (300 + 50) = -270 billion pesos.

Suppose That Argentina's Dollar-Denominated External Assets and Liabilities Are $10