Principles of Macroeconom homework

QUESTION SET #4: Use the Balance of Payments (BoP) 2011 and Graph Set #4 provided to answer these questions. Answer them on your own and upload them to your team's file exchange by Monday, December 1. Read the uploads of your team members. On Team Day in class (Wednesday, December 3) you will discuss your answers and send a final, agreed upon set of answers to me by email. It is not necessary for all members of the team to agree on a single answer, but if team members hold different opinions you should be able to state those opinions with their supporting rationale.

All of these questions should be answerable in one word, or in one or a few short sentences.

1. The Balance of Payments shows the flow of money in and out of our country. The money moves in the opposite direction from the goods and services, so when we import goods we have a negative money flow, and when we export goods we have a positive money flow.

Look at the Current Account on our BoP for 2011. Using only the bold numbers which represent totals (lines 1, 18, and 35), calculate the balance on Current Account for 2011. (You can check your answer on line 77.)

2. Does the BoP for 2011 indicate a trade deficit or a trade surplus?

3. Will the currect accounts balance in 2011 put downward (depreciating) or upward (appreciating) pressure on our currency exchange rate?

4. Look at the Capital Accounts (also called Financial Accounts) in line 40 and 55. Although foreign owned assets in the US exceed US owned assets abroad, the trend from 2010 to 2011 is for our loss of foreign holdings to decrease while the increase in US holdings abroad is slowing down. In other words, there has been a shift of asset ownership back toward the US. Will this put downward (depreciating) or upward (appreciating) pressure on our currency exchange rate?

5. Look at US official reserve assets in line 41. This is the balancing account of the BoP. Are our reserve asset increasing or decreasing from 2010 to 2011? And will this put downward (depreciating) or upward (appreciation) pressure on our currency?

Answer one of the following two questions in your individual uploads. If both have been answered by different members of the team you may include both answers in your team submission.

6. Give one reason why a country might wish to have a slightly overvalued currency, as Great Britain and the United States have relative to the European Monetary Union and other trading partners.

7. Give one reason why a country might wish to have a slightly undervalued currency, as China does relative to its trading partners.