Latin american and the global economic#1 - Assignment Example

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This was majorly due to the financial crisis in the periods of 2000s. Thus, nations that were less affected had more reserves that they invested into…
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Task LATIN AMERICA AND GLOBAL ECONOMIC Question 2 Increased global supply savings is where majority of the countries have increased their capital inflows into the United States. This was majorly due to the financial crisis in the periods of 2000s. Thus, nations that were less affected had more reserves that they invested into the US economy. As a result, there have been increased imports than exports that have led to deter rioting balance of trade resulting in current deficits.
Furthermore, interest rate is a factor of supply of demand. Increased credit leads to more money supply into the economy. This results in more credit to lend which lowers the interest rate, in the long run.
Question 3
During war, for instance, local wars, there are usually major causalities to the population while the government, on the other hand, fights hard to contain the situation. To do so, there is usually increased spending on both the government part and the citizens on basic commodities. This creates an increased demand into the economy with less supply. Thus for an open economy, there would be an influx of goods from a foreign market {Berman, Nicolas, Philippe and Thierry, 2012}. This will make the imports exceed exports hence creating unfavorable balance of trade. As a result, there will be current deficits that eventually will lower the value of the local currency.
Question 4
China has progressively growing technology and will be able to produce more units of television with time. More TV produced will make the sets to cheaper in the future. Production of vodka, on the other hand, will reduce significantly. Thus, china will have a comparative advantage over Russia {Berman, Nicolas, Philippe, and Thierry,2012}. Thus, Russia will have to spend more bottles of vodka if they are to acquire a single television set since the balance of trade does not favor them.
China will also export more TVs to Russia than the number of bottles of vodka to them. Thus, this will make Yuan be of more value than the Russian currency. Rubbles would depreciate since the country would need more of it if they were to acquire Yuan to import TVs.
Question 5
i} when the fed lowers interest rates, commercial banks will be able to borrow more from the central bank. Thus, they will have excess credit to lend to the public. To attract more borrowers, they will have to charge low-interest rate. Thus, the interest rates will reduce in the market as a whole.
Ii} lowering the interest rate will increase the amount of money into the economy. This will result in increased spending by the population leading to increased demand in the economy. This will force the government to import more to meet the increases shock so as to avoid inflations. In the process, imports exceed exports that lead to deficits hence depreciation in the local currency.
Iii} in the long run, there will be more investments due to its inverse relationship with interest rates. Hence, firms within the economy will be able to produce more, that exceeds demand and increases its exports leading to a favorable balance of trade, and the nominal currency will appreciate in value.
Iv} The economy will produce more; hence exports will be more than imports. This will lead to a positive balance of trade that will reduce the credit account deficits.
Work cited
Berman, Nicolas, Philippe Martin, and Thierry Mayer. "How do different exporters react to exchange rate changes?." The Quarterly Journal of Economics 127.1 (2012): 437-492. Read More
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