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. How was Argentina's net external wealth affected as a result of the devaluation of the peso (from P1 = $US1 to P3 = $US1)?
A) Net external wealth rose.
B) Net external wealth fell.
C) Net external wealth was not affected.
D) One cannot determine how net external wealth was affected with the information provided.

Question

Quizplus · Accepted Answer

The devaluation of the peso means that the Argentine peso-denominated external assets and liabilities are now worth less in dollar terms. Assuming no change in the dollar value of the external assets and liabilities, Argentina's net external wealth will fall because the peso-denominated assets and liabilities constitute a larger portion of its external balance sheet.

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