SOLUTIONS MANUAL - Macroeconomics Second Edition Roger LeRoy Mille...

SOLUTIONS MANUAL

for

Economics Today:

A Canadian Perspective, Macroeconomics Second Edition Roger LeRoy Miller James Higginson Mushtaq Ahmad Igor Siljanoski This is the On ly Original Solutions Manual for 2 nd Edition, All other Files in the Market are Fake/Old/Wrong Edition. All Chapters 1-19, 1 00% Original Verified, A+ Grade.

All Chapters Arranged Reverse: Ch

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Chapter 19 Exchange Rates and the Balance of Payments  Answers to Questions for Critical Analysis

BALANCE OF PAYMENTS CRISIS

Imagine a country which has been experiencing large current account deficits due to heavy reliance on imported goods and decreasing export revenues. Its foreign exchange reserves have been steadily declining as the government tries to defend its currency's value. Given this situation, what measures can this country take to prevent a full-blown balance of payments crisis? Consider both short-term fixes and long-term solutions in your answer.

To critically analyze this scenario, consider the following:

• Risks: The sustained current account deficit and declining reserves suggest that the country is at risk of a balance of payments crisis, which could lead to currency depreciation and economic instability, potentially harming your investment.• Benefits: The government's policies to correct the trade imbalance could, if successful, lead to an improved balance of payments, currency stabilization, and a more favourable investment climate.• Additional Information Needed: Details on the specific policies implemented, their expected impact on the trade balance, historical success of similar policies in other contexts, and any support from international organizations like the IMF could help in assessing the potential success of the government's efforts and the overall investment risk.

THE NON-U.S. DERIVED DEMAND FOR AND SUPPLY OF U.S. DOLLARS

How might the fact that 30 to 60 percent of other nations’ holdings of various bonds and other financial assets are denominated in dollars also contribute to non-U.S. derived demand for and supply of U.S. dollars? (Hint: Another source of the derived demand for and supply of U.S.dollars involves dollar-denominated assets outside the United States.) In order to buy bonds and financial assets denominated in dollars, foreign residents must demand dollars and supply foreign currency. Therefore, the demand for U.S. dollars is also derived from the demand for dollar-denominated assets outside the United States.

AFRICAN GOVERNMENTS WITH DOLLAR-DENOMINATED DEBTS CONFRONT FOREIGN

EXCHANGE DEPRECIATIONS

Who ultimately has to finance the higher payments that the African governments must make to obtain dollars to pay foreign holders of their public debts? (Hint: Who always provides the funds that governments spend?) Taxpayers finance the higher payments because taxpayers provide the funds that governments spend.

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ISM for Miller et al • Macroeconomics, Second Canadian Edition

AI:

FOREIGN EXCHANGE MARKETS INVOLVING REALLY BIG DATA

How can individuals or firms holding large quantities of multiple currencies be exposed to foreign exchange risks even if they are not actively trading currencies in foreign exchange markets from day to day?If individuals or firms hold large quantities of multiple currencies, any change in the price of those currencies includes some foreign exchange risk. For example, let’s say I have 1 million euros that I purchased at $1 per euro. If tomorrow the price of the euro depreciates to $0.50 per

euro, I have basically lost half of my wealth just by holding euros. Economics in Your Life THE

HONG KONG MONETARY AUTHORITY ACTS TO KEEP ITS CURRENCY’S EXCHANGE RATE

FIXED For Critical Thinking Why does the HKMA’s capability of keeping the exchange rate fixed as demand for Hong Kong dollars drops depend on having a sufficient number of U.S. dollars in reserves to continue buying Hong Kong dollars?When the demand for Hong Kong dollars drops, the exchange rate of the Hong Kong dollar

(relative to the U.S. dollar) falls. The HKMA must decrease the supply of Hong Kong dollars to raise the exchange rate to its original level. To decrease the supply, they must buy up Hong Kong dollars in the foreign exchange market using U.S. dollars, so they require a

sufficient number of U.S. dollars in reserves.Real Application Let’s say that you are going to take a month’s trip to a Latin American country that has a relatively stable economy. Are you better off exchanging your dollars for that nation’s currency as soon as you know that you are going to make the trip, or should you wait to buy that foreign currency just before you leave Canada?Interestingly, if you believe in efficient markets, it really does not matter when you purchase that nation’s currency with your Canadian dollars. Why? Because in an efficient market, all

relevant information is included in the current price of any asset, including a foreign currency.For you to think that you will have a better sense of when to buy a foreign currency means that you believe you are better at predicting the value of this asset than the computer

programs and millions of individuals who are involved in the foreign exchange market.After all, if you could predict better than the experts about the future value of a particular foreign

currency, you could become a billionaire quite rapidly. International Example

NAVIGATING

ARGENTINA'S EXCHANGE RATE MAZE: ECONOMIC POLICY AND MARKET

DYNAMICS

Given the complexity of Argentina's exchange rate system, what might be the potential impacts on international trade and foreign investment in Argentina? Discuss how these multiple exchange rates can affect Argentina's economic stability and growth..

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Chapter 19 Exchange Rates and the Balance of Payments

The multiple exchange rate system in Argentina could have several impacts on international trade and foreign investment. Firstly, the discrepancy between the official and parallel rates can deter foreign investors, who may fear currency risks and potential losses from an unfavorable official exchange rate when repatriating profits. Secondly, exporters might be incentivized to underreport their earnings to capitalize on the higher parallel market rate, reducing the foreign currency entering the official reserves. This can lead to a scarcity of foreign exchange, hampering the ability to import goods and further exacerbating economic instability. For economic stability and growth, the dual rates can create uncertainty and reduce the effectiveness of monetary policy, as the central bank struggles to control inflation and maintain the value of the peso. Overall, while the parallel rate may offer short-term relief for some economic actors, the long-term impacts can hinder sustainable economic growth and stability. Issues & Applications

HOW CHANGING A FIXED EXCHANGE RATE TO TRY TO ABSORB SHOCKS EVENTUALLY CAN

CAUSE SHOCKS

For Critical Thinking What do you suppose happened to Venezuelan import spending following the massive bolivar devaluation? Explain your reasoning.After the massive bolivar devaluation, the prices of foreign goods skyrocketed. This large increase in prices caused fewer purchases of foreign goods, so import spending declined drastically.Real Application Assume that you have been hired as an economist for the Venezuelan government. What recommendations might you make to improve that country’s situation?You could argue in favour of simply eliminating the local currency in favour of using U.S.dollars. Some small countries, including neighbouring Ecuador, have done this in the past.Alternatively, you could recommend that the country’s central bank dramatically reduce its rate of growth of the money supply in circulation.In addition, you could recommend that government-owned natural resources be sold to private companies to promote investment and re-establish profitable production in these industries. Answers to End-of-Chapter Questions 19-1. Suppose that during a recent year for Canada, merchandise imports were $2 trillion, net secondary income was –$0.2 trillion, service exports were $0.2 trillion, service imports were $0.1 trillion, net primary income was –$0.3 trillion, the capital account balance was $0, and merchandise exports were $1.4 trillion.

• What was the merchandise trade deficit?
• What was the balance on goods and services?
• What was the current account balance?

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