Log in
Economics
1
answer
0
watching
399
views

2 a) Describe two reasons why a country may be facing a Balance of Payments (BOP) deficit. (20 points)

2 b) What is the Official Reserves Account (ORA) and why is it more important for countries under a fixed exchange rate regime than for those under a floating exchange rate regime? (20 points)

Watch
1
answer
0
watching
399
views

For unlimited access to Homework Help, a Homework+ subscription is required.

Joshua Stredder
Joshua StredderLv10
28 Sep 2019

Unlock all answers

Get 1 free homework help answer.
Already have an account? Log in
Share

Related textbook solutions

Principles of Economics
2nd Edition, 2017
Openstax
ISBN: 9781947172364
Principles of Macroeconomics
2 Edition,
Openstax
ISBN: 9781947172388
Principles of Microeconomics
2 Edition,
Openstax
ISBN: 9781947172340

Related questions

Question 7

(a) “A floating exchange rate can insulate a country from foreign trade disturbances, while a fixed exchange rate can insulate a country from internal monetary disturbances.” Explain. (4 marks)

(b) “If an economy is experiencing a tendency towards a Balance of Payments deficit its real exchange rate will have to increase”. Compare and contrast the way that this is brought about under a fixed and a flexible exchange rate regime. (4 marks)

(c) Why could a system of flexible exchange rates be inflationary? (2 marks)

Which of the following most accurately describe the operation of the Bretton Woods system of adjustable pegged exchange rates? Check all that apply.

Countries can always reach their domestic stabilization objectives by devaluing their currencies.

A semi-fixed exchange rate system ties currencies to each other to provide stable exchange rates for commercial and financial transactions.

Countries can devalue or revalue its currency so as to restore payments balance.

Adjustable pegged rates enable estimates of the equilibrium rate to which a currency should be re-pegged.

Why do nations use a crawling peg exchange rate system?

To make small but frequent exchange rate adjustments promoting payments balance

To enable short-term volatility and longer-term swings in exchange rates that overshoot values justified by fundamental conditions

To make significant exchange rate adjustments promoting payments balance

To implement par value changes in a small number of large steps

Use the following categorization table to indicate the case for and the case against a system of floating exchange rates.

 

For or

Against
It enables continuous adjustments of payments balances.      
It reduces the need for international reserves.      
It leads to disorderly exchange markets.      
It may be inflationary.    

In this module, we have learned that the trade balance, interest rates, and exchange rates are all related in an economic and fiscal policy. For decades, the United States and China have traded products through imports and exports, and for the most part, China is able to produce items at a lesser cost than the United States. Americans love a good value, but they also want quality. China, on the other hand, has grown dramatically and continued with “industrializing” the country, which has cost the government billions of dollars. Throughout this course, we will investigate the ongoing trade between these two countries, the costs of multinational companies that expand or complete business through the import and export exchange, and how the ongoing practice may create economic changes and instability for the individual organization.

Research the balance of trade in the United States and China and relate how historical changes in exchange and interest rates have affected imports and exports between the two countries.

Specifically address the following:

Explain how trade balance, interest rates, and exchange rates are related, and cite an example of how a rise or fall in one changes the others.

Does a deficit in China or the United States change the overall advantage or disadvantage of trade? Why?

Explore how the cost and quantity of imports and exports, such as electronic equipment, may be challenged by the rise and fall of these rates.

Incorporate the fluctuations of supply and demand into the costs incurred and decide ways management calculates estimations for further product needs.

Explain the philosophy of “international crowding out,” citing an example of how this may occur, and describe how excessive borrowing in one country has affected interest rates in the United States.

As an example, China and the United States “borrow” from each other to finance needs by purchasing government-backed securities from the other country. This practice provides one country with additional funds and also gives the purchasing country more control over interest rates or “borrowing costs” in the future. How does this influence interest rates in the domestic country and foreign country? Can one country gain control over another financially by continually financing another country’s debt?

Weekly leaderboard

Home
Homework Help 3,900,000
Economics 400,000
Start filling in the gaps now
Log in