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126Suggestedanswerstoquestionsandproblems(inthetextbook)Chapter22.Disagree,atleastasageneralstatement.Onemeaningofacurrentaccountsurplusisthatthecountryisexportingmoregoodsandservicesthanitisimporting.Onemighteasilyjudgethatthisisnotgood—thecountryisproducinggoodsandservicesthatareexported,butthecountryisnotatthesametimegettingtheimportsofgoodsandservicesthatwouldallowitdomoreconsumptionanddomesticinvestment.Inthiswayacurrentaccountdeficitmightbeconsideredgood—theextraimportsallowthecountrytoconsumeandinvestdomesticallymorethanthevalueofitscurrentproduction.Anothermeaningofacurrentaccountsurplusisthatthecountryisengaginginforeignfinancialinvestment—itisbuildingupitsclaimsonforeigners,andthisaddstonationalwealth.Thissoundsgood,butasnotedaboveitcomesatthecostofforegoingcurrentdomesticpurchasesofgoodsandservices.Acurrentaccountdeficitisthecountryrunningdownitsclaimsonforeignersorincreasingitsindebtednesstoforeigners.Thissoundsbad,butitcomeswiththebenefitofhigherlevelsofcurrentdomesticexpenditure.Differentcountriesatdifferenttimesmayweighthebalanceofthesecostsandbenefitsdifferently,sothatwecannotsimplysaythatacurrentaccountsurplusisbetterthanacurrentaccountdeficit.4.Disagree.Ifthecountryhasasurplus(apositivevalue)foritsofficialsettlementsbalance,thenthevalueforitsofficialreservesbalancemustbeanegativevalueofthesameamount(sothatthetwoaddtozero).Anegativevalueforthisassetitemmeansthatfundsareflowingoutinorderforthecountrytoacquiremoreofthesekindsofassets.Thus,thecountryisincreasingitsholdingsofofficialreserveassets.6.ItemeisatransactioninwhichforeignofficialholdingsofU.S.assetsincrease.Thisisapositive(credit)itemforofficialreserveassetsandanegative(debit)itemforprivatecapitalflowsastheU.S.bankacquirespoundbankdeposits.ThedebititemcontributestoaU.S.deficitintheofficialsettlementsbalance(whilethecredititemisrecordedbelowtheline,permittingtheofficialsettlementsbalancetobeindeficit).Allothertransactionsinvolvedebitandcredititemsbothofwhichareincludedintheofficialsettlementsbalance,sothattheydonotdirectlycontributetoadeficit(orsurplus)intheofficialsettlementsbalance.8.a.Merchandisetradebalance:$330-198=$132Goodsandservicesbalance:$330-198+196-204=$124Currentaccountbalance:$330-198+196-204+3-8=$119Officialsettlementsbalance:$330-198+196-204+3-8+102-202+4=$23b.Changeinofficialreserveassets(net)=-officialsettlementsbalance=-$23.Thecountryisincreasingitsnetholdingsofofficialreserveassets.12710.a.Internationalinvestmentposition(billions):$30+20+15-40-25=$0.Thecountryisneitheraninternationalcreditornoradebtor.Itsholdingofinternationalassetsequalsitsliabilitiestoforeigners.b.Acurrentaccountsurpluspermitsthecountrytoaddtoitsnetclaimsonforeigners.Forthisreasonthecountry'sinternationalinvestmentpositionwillbecomeapositivevalue.Theflowincreaseinnetforeignassetsresultsinthestockofnetforeignassetsbecomingpositive.Chapter32.Exportsofmerchandiseandservicesresultinsupplyofforeigncurrencyintheforeignexchangemarket.Domesticsellersoftenwanttobepaidusingdomesticcurrency,whiletheforeignbuyerswanttopayintheircurrency.Intheprocessofpayingfortheseexports,foreigncurrencyisexchangedfordomesticcurrency,creatingsupplyofforeigncurrency.Internationalcapitalinflowsresultinasupplyofforeigncurrencyintheforeignexchangemarket.Inmakinginvestmentsindomesticfinancialassets,foreigninvestorsoftenstartwithforeigncurrencyandmustexchangeitfordomesticcurrencybeforetheycanbuythedomesticassets.Theexchangecreatesasupplyofforeigncurrency.Salesofforeignfinancialassetsthatthecountry'sresidentshadpreviouslyacquired,andborrowingfromforeignersbythiscountry'sresidentsareotherformsofcapitalinflowthatcancreatesupplyofforeigncurrency.4.TheU.S.firmobtainsaquotationfromitsbankonthespotexchangerateforbuyingyenwithdollars.Iftherateisacceptable,thefirminstructsitsbankthatitwantstousedollarsfromitsdollarcheckingaccounttobuy1millionyenatthisspotexchangerate.ItalsoinstructsitsbanktosendtheyentothebankaccountoftheJapanesefirm.Tocarryoutthisinstruction,theU.S.bankinstructsitscorrespondentbankinJapantotake1millionyenfromitsaccountatthecorrespondentbankandtransfertheyentothebankaccountoftheJapanesefirm.(TheU.S.bankcouldalsouseyenatitsownbranchifithasabranchinJapan.)6.Thetraderwouldseekoutthebestquotedspotrateforbuyingeuroswithdollars,eitherthroughdirectcontactwithtradersatotherbanksorbyusingtheservicesofaforeignexchangebroker.Thetraderwouldusethebestratetobuyeurospot.Sometimeinthenexthourorso(or,typicallyatleastbytheendoftheday),thetraderwillentertheinterbankmarketagain,toobtainthebestquotedspotrateforsellingeurosfordollars.Thetraderwillusethebestspotratetosellherpreviouslyacquiredeuros.Ifthespotvalueoftheeurohasrisenduringthisshorttime,thetradermakesaprofit.8.a.Thecrossratebetweentheyenandthekroneistoohigh(theyenvalueofthekroneistoohigh)relativetothedollar-foreigncurrencyexchangerates.Thus,inaprofitabletriangulararbitrage,youwanttosellkroneratthehighcrossrate.Thearbitragewillbe:Usedollarstobuykronerat$0.20/krone,usethesekronertobuyyenat25yen/krone,andusetheyentobuydollarsat$0.01/yen.F