For each of the following transactions, explain what happens to the merchandise trade balance, current account balance, and financial account balance in both the United States and Mexico. The exchange rate is 2 Mexican pesos per U.S. dollar.

(a) A Mexican firm spends 4 million pesos to buy radiology equipment from a U.S. firm.

(b) A U.S. firm buys 20,000 sombreros at 20 pesos each.

(c) Mexican computer firms send 200 programmers to universities in the United States, paying tuition and expenses of $3000 each.

(d) A Mexican entrepreneur gives 50,000 pesos to the United Way of San Antonio, Texas.

(e) Mexican investors buy $10 million worth of 30-year U.S. Treasury bonds.

5. a) What, exactly, is “contractionary” monetary policy? Please describe each of the 5 steps of contractionary monetary policy. 5.b) It has been argued that ‘contractionary’ monetary policy is “stronger” than ‘expansionary’ monetary policy. How may this be true?   6. What is the “Fed”, exactly? 7. Why is it that many economists argue that the Fed may ASK the U.S. banking system to EXPAND the supply of loans, but the Fed may FORCE the U.S. banking system to CONTRACT the supply of loans? 8. WHAT SPECIFIC STEPS HAS THE FED TAKEN RECENTLY TO HELP THE U.S. ECONOMY? Please list and discuss four specific actions. 9. Why have they done this? What has happened recently to the U.S. economy?

USAco is a wholly-owned U.S. subsidiary of ForCo, a foreign corporation. USAco's only assets are cash of $400,000, accounts receivable of $400,000, and its U.S. manufacturing plant with a value of $1 million. In addition, USAco has carried a mortgage on the manufacturing plant of $600,000 for the last 10 years. ForCo sells its shares to a buyer for $1,800,000. Which of the following best describes the tax implications?

Question 20 options:

1. Chase Manhattan has purchased a 7 million one-year Canadian dollar loan that pays 8.5% interest annually. The spot rate of U.S. dollars for Canadian dollars is 0.70. It has funded this loan by accepting a Euro-denominated deposit for the equivalent amount and maturity at an annual rate of 7%. The current spot rate of U.S. dollars for Euros is 1.25. Note: Banks earn interest on loans and pay interest on deposits.
   1. What is the loan amount in dollars?

2. What is the deposit amount in Euros?

3. What is the interest income earned in US dollars on this one-year transaction if the spot rate of U.S. dollars for Canadian dollars and U.S. dollars for Euros at the end of the year are 0.67 and 1.30, respectively?

4. What is the interest expense in dollars?

You have just been appointed to be a U.S. Foreign Service Officer (FSO), employed by the United States Agency for International Development (USAID). Your first assignment is working overseas in an embassy where you may give out millions of dollars in foreign aid loans to an important nation.

This nation has two types of loans from the United States government.

Type I loans for $2,000,000,000 and Type II loans for $34,000,000,000. Type I loans are listed by country in congressional reports, while

Type II loans are buried in one line with other country's repayments and defaults. If the U.S. Congress is clearly informed of a loan default, it will not give out any new loans to that country.

The U.S. Ambassador knows that this country is going to default on all loans to the United States government. However, if the country makes a small payment of $1,000,000 on the Type I loan, the U.S. Congressional report will appear as if the country is in good financial condition. This will make him look good.

You have been instructed by the Ambassador to set up an appointment with the Minister of Finance. During the meeting, you are told to tell the Minister to make the $1,000,000 payment on schedule for the Type I loan. If the nation does make the payment the U.S. Embassy will request another $30,000,000,000 appropriation from the U.S. Congress, which the Ambassador knows he can receive.

The Ambassador believes he will be appointed the next U.S. Secretary of State if this plan is accomplished.

Questions:

What should you do to maintain the LOSS RESERVE?

What are the ethical issues involved here regarding non-payment of loan?

What are the financial issues involved here and how does this related to loan defaulter or fraudulent?

What would you do with this information if you were in charge?

Do you really want this Ambassador as the U.S. Secretary of State?

Case study

You have just been appointed to be a U.S. Foreign Service Officer (FSO), employed by the United States Agency for International Development (USAID). Your first assignment is working overseas in an embassy where you may give out millions of dollars in foreign aid loans to an important nation.

This nation has two types of loans from the United States government.

Type I loans for $2,000,000,000 and Type II loans for $34,000,000,000. Type I loans are listed by country in congressional reports, while

Type II loans are buried in one line with other country's repayments and defaults. If the U.S. Congress is clearly informed of a loan default, it will not give out any new loans to that country.

The U.S. Ambassador knows that this country is going to default on all loans to the United States government. However, if the country makes a small payment of $1,000,000 on the Type I loan, the U.S. Congressional report will appear as if the country is in good financial condition. This will make him look good.

You have been instructed by the Ambassador to set up an appointment with the Minister of Finance. During the meeting, you are told to tell the Minister to make the $1,000,000 payment on schedule for the Type I loan. If the nation does make the payment the U.S. Embassy will request another $30,000,000,000 appropriation from the U.S. Congress, which the Ambassador knows he can receive.

The Ambassador believes he will be appointed the next U.S. Secretary of State if this plan is accomplished.

Questions:

What should you do to maintain the LOSS RESERVE?

What are the ethical issues involved here regarding non-payment of loan?

What are the financial issues involved here and how does this related to loan defaulter or fraudulent?

What would you do with this information if you were in charge?

Do you really want this Ambassador as the U.S. Secretary of State?

You have just been appointed to be a U.S. Foreign Service Officer (FSO), employed by the United States Agency for International Development (USAID). Your first assignment is working overseas in an embassy where you may give out millions of dollars in foreign aid loans to an important nation.

This nation has two types of loans from the United States government.

Type I loans for $2,000,000,000 and Type II loans for $34,000,000,000. Type I loans are listed by country in congressional reports, while

Type II loans are buried in one line with other country's repayments and defaults. If the U.S. Congress is clearly informed of a loan default, it will not give out any new loans to that country.

The U.S. Ambassador knows that this country is going to default on all loans to the United States government. However, if the country makes a small payment of $1,000,000 on the Type I loan, the U.S. Congressional report will appear as if the country is in good financial condition. This will make him look good.

You have been instructed by the Ambassador to set up an appointment with the Minister of Finance. During the meeting, you are told to tell the Minister to make the $1,000,000 payment on schedule for the Type I loan. If the nation does make the payment the U.S. Embassy will request another $30,000,000,000 appropriation from the U.S. Congress, which the Ambassador knows he can receive.

The Ambassador believes he will be appointed the next U.S. Secretary of State if this plan is accomplished.

Questions:

What should you do to maintain the LOSS RESERVE?

What are the ethical issues involved here regarding non-payment of loan?

What are the financial issues involved here and how does this related to loan defaulter or fraudulent?

What would you do with this information if you were in charge?

Do you really want this Ambassador as the U.S. Secretary of State?

Problem 10-22A Accept or Reject a Special Order [LO10-4]

Problem 10-22A Accept or Reject a Special Order [LO10-4] Polaski Company manufactures and sells a single product called a Ret. Operating at capacity, the company can produce and sell 38,000 Rets per year. Costs associated with this level of production and sales are given below: Unit Total Direct materials $ 25 $ 950,000 Direct labor 8 304,000 Variable manufacturing overhead 3 114,000 Fixed manufacturing overhead 9 342,000 Variable selling expense 4 152,000 Fixed selling expense 6 228,000 Total cost $ 55 $ 2,090,000 The Rets normally sell for $60 each. Fixed manufacturing overhead is constant at $342,000 per year within the range of 31,000 through 38,000 Rets per year. Required: 1. Assume that due to a recession, Polaski Company expects to sell only 31,000 Rets through regular channels next year. A large retail chain has offered to purchase 7,000 Rets if Polaski is willing to accept a 16% discount off the regular price. There would be no sales commissions on this order; thus, variable selling expenses would be slashed by 75%. However, Polaski Company would have to purchase a special machine to engrave the retail chain’s name on the 7,000 units. This machine would cost $14,000. Polaski Company has no assurance that the retail chain will purchase additional units in the future. Determine the impact on profits next year if this special order is accepted. 2. Refer to the original data. Assume again that Polaski Company expects to sell only 31,000 Rets through regular channels next year. The U.S. Army would like to make a one-time-only purchase of 7,000 Rets. The Army would pay a fixed fee of $1.60 per Ret, and it would reimburse Polaski Company for all costs of production (variable and fixed) associated with the units. Because the army would pick up the Rets with its own trucks, there would be no variable selling expenses associated with this order. If Polaski Company accepts the order, by how much will profits increase or decrease for the year? 3. Assume the same situation as that described in (2) above, except that the company expects to sell 38,000 Rets through regular channels next year. Thus, accepting the U.S. Army’s order would require giving up regular sales of 7,000 Rets. If the Army’s order is accepted, by how much will profits increase or decrease from what they would be if the 7,000 Rets were sold through regular channels?