Question

1)Which of the following items would be listed on the US current account?
a) A house in the United States sold to a Canadian citizen;
b) a pair of shoes made in Spain, but sold in the United States;
c) tuition payments made by foreign citizens attending a university in the United States
d) a car made in Michigan (United States), but sold in Canada;
e) the value of Canadian government debt owned by US banks

2)Go to the website of the IMF: www.imf.org . What are some of the projects the IMF is currently working on?

3)If we expect our currency to appreciate with respect to the currency of our northern neighbour and the interest rates are the same in both nations, in which nation does it make sense for us to invest? Show your work.

4)What does a nation give up by having a fixed exchange rate? What do they get?

Answer 1

Current account

• actual transactions
• short-term transactions
• real impact on output, income, and, employment through the movements of services, and, goods in the economy.

In constitutes investment income, exports, imports, unilateral transfers. Export, and, import of goods is the visible trade; export & import of services is the invisible trade.

All except (e)

a) investment income

b) import

c) Transfers

2) Projects that IMF is currently working on:

IMF facilitates international trade, sustainable economic growth, and, monetary cooperation.

• Crackdown on illicit diamond trade in Africa
• Improvement in External Sector Statistics in West, and, Central African Countries; project funded by Japan
• Ethernet architecture to collect user-defined agent information
• A reusable cell tower program to collect cipher journalist data

3. Real interest rates are higher if interest rates are higher, and, inflation lower.

Invest in the currency that is strong with respect to the international reserve currency. Do not invest in the northern neighbour.

4.

• Fixed exchange rate supports the competitiveness of a nation's goods
• With the currency valued lower, the earnings on exports are higher, for instance, China & Vietnam
• Supports higher economic growth, and, an improved standard of living for its citizens

Cons

• Currency reserves are required for maintaining the fixed exchange rate
• A large amount of funds (money supply) capital can lead to higher inflation
• Exposed domestically due to the inability to defend the underlying fixed rate