Question

In the open economy macroeconomic model which of the following is included in the demand for U.S. dollars in the market for foreign-currency?
(x) A retail outlet in Canada wants to buy computers from a U.S. computer manufacturer.
(y) ABC Securities, a U.S. stock brokerage, wants to purchase stock issued by a French corporation.
(z) A United States bank that has branch offices in Mexico and Canada loans dollars to Tom, a resident of the United States, who wants to purchase a new car that was made in the United States.
A. (x), (y) and (z) B. (x) and (y) only
C. (x) and (z) only D. (y) and (z) only
E. (x) only

In the open economy macroeconomic model, which of the following is included in the supply of U.S. dollars in the market for foreign-currency?
(x) Nebraska Life, a U.S. life insurance company, wants to buy a Japanese government bond.
(y) ABC Securities, a U.S. stock brokerage, wants to purchase stock issued by a French corporation.
(z) Tony, a U.S. citizen, wants to hold more currency in case of emergencies.
A. (x), (y) and (z) B. (x) and (y) only
C. (x) and (z) only D. (y) and (z) only
E. (x) only

Answer 1

1. The correct answer is E. (x) only because of following reasons:

1.1 Option (x) is correct because a retail outlet in Canada would need US dollars during import of US made computers and would supply Canadian dollars in exchange of US dollars which would increase demand for US dollars and decrease supply of Canadian dollars in foreign exchange market under open macro economy

1.2 Option (y) is incorrect because if ABC Securities, a U.S stock brokerage would purchase a stock of French corporation than it would need to purchase Euro (French currency) in exchange for US dollars and thus would increase demand for Euro and decrease supply for US dollars in foreign exchange market under open macro economy

1.3 Option (z) is incorrect because Tom is a US resident and is borrowing US dollars from US bank to buy a car made in USA so there is no cross-border exchange of any goods/services/stocks with other countries and hence no effect on either demand or supply of US dollars in foreign exchange market under open macro economy

2. The correct answer is B. (x) and (y) only because of following reasons:

2.1 Option (x) is correct because when Nebraska Life, a U.S. life insurance company will buy a Japanese government bond, it has to exchange US dollars for Japanese Yen (Japan’s currency) in foreign exchange market which will decrease supply of US dollars and increase demand of Japanese Yen in foreign exchange market under open macro economy

2.2 Option (y) is correct because when ABC Securities, a U.S stock brokerage would purchase a stock of French corporation than it would need to purchase Euro (French currency) in exchange for US dollars and thus would increase demand for Euro and decrease supply for US dollars in foreign exchange market under open macro economy

2.3 Option (z) is incorrect because if Tony, U.S. citizen decides to hold more currency (US dollars) for emergencies then it will only reduce the domestic circulation and supply of US dollars within US but will have no direct effect on either the supply or demand of US dollars in foreign exchange market under open macro economy as it does not involve any exchange of any products or securities with any other country by USA