Question 1

If the net international investment position of the U.S. equals $100 billion, this means Americans hold $100 billion worth of foreign issued assets.

Accepted Answer

The net international investment position (NIIP) of a country is the difference between the value of its foreign assets and its foreign liabilities. A positive NIIP means that a country's foreign assets are greater than its foreign liabilities, indicating that the country is a net creditor to the rest of the world. Therefore, if the NIIP of the U.S. equals $100 billion, this means that the U.S. holds $100 billion more in foreign liabilities (i.e. owes $100 billion more to foreigners) than it holds in foreign assets.

Question 2

Explain what effect a reduction in the U.S. interest rate would have on the exchange rate.

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Question 3

What is the multilateral real exchange rate? What is the effect in the U.S. of an increase in its multilateral real exchange rate?

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Question 4

Suppose that a U.S. dollar buys more gold in Mexico than it buys in Japan. What does the Law of One Price imply will happen?

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Question 5

In the following series of questions explain how the situations affect the United States' balance of payments.
(a) A U.S. defense contractor sells its consulting services to a company in France.
(b) Your investment club decides to buy 100 shares of a promising Korean automobile manufacturer.
(c) A consortium of European investors decides to build a large manufacturing facility in Montana.

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Question 6

When people in different countries (with different currencies) buy from and sell to each other, an exchange of currencies almost always also take place.

Accepted Answer

When people from different countries engage in trade, they often have to exchange their respective currencies in order to complete the transaction. For example, if someone in the United States wants to buy a product from someone in Japan, they may need to exchange their US dollars for Japanese yen in order to pay for the product. This exchange of currencies is a common occurrence in international trade.

Question 7

According to the Law of One Price, in the long run what would happen to the exchange rate if the price of a computer in the United States is $1,000, the price of a computer in Russia is 2,000,000 rubles, and the current exchange rate was $1.00 = 1,000 rubles?

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Question 8

If the current account is in deficit, we know that the capital account is in deficit.

Accepted Answer

The current account and capital account are two separate components of a country's balance of payments. A deficit in the current account (i.e. net outflow of goods, services, and income) does not necessarily mean there is a deficit in the capital account (i.e. net inflow/outflow of financial capital). It is possible for a country to finance a current account deficit with inflows of foreign capital, resulting in a surplus in the capital account.

Question 9

Explain what the current account measures.

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Question 10

Explain what is meant by purchasing power parity.

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Question 11

Explain why the supply of foreign currency in the foreign exchange market is upward sloping and the demand for foreign currency in the foreign exchange market is downward sloping.

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Question 12

In the balance of payments accounts, what does the statistical discrepancy measure? What causes a statistical discrepancy to emerge?

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Question 13

Suppose that the law of one price holds and that a pineapple costs 15 dirham in Morocco and $1.50 in the United States. If the nominal exchange rate is 10 dirham per U.S. dollar, what is the real exchange rate?

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Question 14

Explain the law of one price.

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Question 15

Explain how the Mexican central bank used up $50 billion in its attempt to unsuccessfully defend its currency.

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Question 16

Identify whether each of the following would lead to an appreciation or depreciation of the dollar. In each case, explain why the currency either appreciates or depreciates.
(a) U.S. citizens switch from buying stock in British companies to buying stock in U.S. companies.
(b) The inflation rate in the United States increases relative to the inflation rate in England.
(c) The money supply is increased in the United States.

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Question 17

All else equal, what will happen to the real exchange rate in the United States under each of the following circumstances?
(a) the nominal exchange rate for the U.S. dollar depreciates
(b) domestic prices in the U.S. increase
(c) prices in the rest of the world rise

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Question 18

Recall Application 1, "The Chinese Yuan and Big Macs," to answer the following questions:
-The real exchange rate is the rate at which a person can trade the currency of one country for goods and services in another country.

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Question 19

How do the nominal exchange rate and the real exchange rate differ?

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Question 20

Explain what effect an increase in the U.S. price level have on the U.S. dollar- Japanese yen exchange rate. Make sure you identify which currency appreciates.

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Quiz 19: The World of International Finance