Name Professor Course Date Macroeconomics SECTION ONE: a) Wanda, in America, wants to buy a bottle of French wine. The wine costs 1000 euro’s. Pierre, a Frenchman, wants to buy an American computer that costs $2000. The exchange rate is ‘1 euro=$1.08’…
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b) Assume the exchange rate changes. Now, ‘1 euro=$1.20’. Showing all work, what does Wanda pay for the wine? What does Pierre pay for the computer? In this case, there is a change in the individual rates of exchange between the euro and the dollar. Currently, ‘1 euro=$1.20’ hence Wanda will spend (1000*1.20) 1200 dollars on a bottle of French wine. On the other hand, Pierre will spend (2000/1.20) 1,666.67 Euros on the purchase of an American computer. c) Which currency appreciated? Explain. Taking a closer look at the two currencies, it is evident that the Euro appreciated against the dollar. According to macroeconomic theory, appreciation of a currency refers to the increase in the value of one international currency against the other in the sense that the appreciating currency is able to purchase more of the other currency (Krugman & Wells 100). In the above mentioned case, the dollar and the Euro are international currency that had an initial exchange rate of ‘1 euro=$1.08.’ However, there was a change in the exchange rates and the current rate stands at ‘1 euro=1.20.’ This means that the dollar has to fetch more additional units to purchase a single unit of a Euro. This is evident in the case of an American purchasing a bottle of wine and has to pay an initial price of 1080 dollars. Since the euro has appreciated, the American will have to pay a higher price of 1200 for the same bottle of French wine. Consumers using the Euro have a higher purchasing power compared to those using the dollar. SECTION TWO: a) In this section, you will set up a balance of payments table. Please read chapter 26. A BOP has three accounts. You will need to place each item in its proper account and have a dollar value for the total of each account. The table will be in billions. Please indicate, plus or minus, for each number. Credits ‘000,000 ($) Debits ‘000,000 ($) A. Current Account (1) Exports (2) Imports (3) Net Transfers (4) Net Interest Income Balance B. Capital Account (5) Foreign Investments in the U.S. (6) U.S. Investments Abroad Balance (7) Statistical Discrepancies Overall Balance C. Official Reserve Account +2,421 +150 +220 +1150 +250 +30 -2,971 -180 -900 -40 -30 b) What does the official settlements number indicate? Be precise in explaining this. Based on the above table, the official settlements number is -30 and this indicates that the US has an increase in its foreign reserves and that there is also a decrease in the dollar reserves held by foreign central banks (Krugman & Wells 113). The decrease in dollar reserves among foreign central banks count as debits in the Balance Of Payments account. SECTION THREE: a) Under what conditions would the Fed sell government securities? The Fed would sell government securities under conditions such as inflation, employment and national output. Under such cases, the Fed does not have control but can only influence such conditions to its favor. The Fed can create an effect on such conditions by increasing or reducing the short term rate interest especially through open market operations. Some of the government securities used during open market operations includes treasury bills, bonds and notes (Krugman & Wells 119). The control of money supply offers tangible solutions to the conditions mentioned above. When the Fed is targeting to increase the supply of money in the economy, there will be the purchase of securities. On the
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