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. What is the peso value of Argentina's total external wealth?
A) -60 billion pesos
B) -150 billion pesos
C) -0 billion pesos
D) -90 billion pesos

Question

Quizplus · Accepted Answer

To calculate the peso value of Argentina's total external wealth, we need to convert dollar-denominated external assets and liabilities into pesos using the fixed exchange rate of P1 = $US1.

Dollar-denominated external assets in pesos = $10 billion * P1 = 10 billion pesos 
Dollar-denominated external liabilities in pesos = $100 billion * P1 = 100 billion pesos

Peso-denominated external assets = 50 billion pesos 
Peso-denominated external liabilities = 50 billion pesos

Total external assets in pesos = 10 billion pesos + 50 billion pesos = 60 billion pesos 
Total external liabilities in pesos = 100 billion pesos + 50 billion pesos = 150 billion pesos

Therefore, the peso value of Argentina's total external wealth is (total external assets - total external liabilities) = 60 billion pesos - 150 billion pesos = -90 billion pesos. Hence, the best choice is D.

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