Assignment

1. Balance of Payments

a. Of what is the current account generally composed?

b. Of what is the capital account generally composed?

2. Exchange Rate Effects on Trade

a. Explain why a stronger dollar could enlarge the U.S. balance-of-trade deficit. Explain why a weaker dollar could affect the U.S. balance-of-trade deficit.

b. It is sometimes suggested that a floating exchange rate will adjust to reduce or eliminate any current account deficit. Explain why this adjustment would occur.

c. Why does the exchange rate not always adjust to a current account deficit?

3. Evolution of Floating Rates Briefly describe the historical developments that led to floating exchange rates as of 1973.

4. Foreign Exchange You just came back from Canada, where the Canadian dollar was worth $.70. You still have C$200 from your trip and could exchange them for dollars at the airport, but the airport foreign exchange desk will only buy them for $.60. Next week, you will be going to Mexico and will need pesos. The airport foreign exchange desk will sell you pesos for $.10 per peso. You met a tourist at the airport who is from Mexico and is on his way to Canada. He is willing to buy your C$200 for 1,300 pesos. Should you accept the offer or cash the Canadian dollars in at the airport? Explain.