Can you think of reasons why a government might be concerned about a large current account deficit or surplus? Why might a government be concerned about its official settlements balance (that is, its balance of payments)? 7. Do data on the U.S. official settlements balance give an accurate picture of the extent to which foreign central banks buy and sell dollars in currency markets? 8. Is it possible for a country to have a current account deficit at the same time it has a surplus in its balance of payments? Explain your answer, using hypothetical figures for the current and nonrescrve financial accounts. Be sure to discuss the possible implications for official international reserve flows. 9. Suppose that the U.S. net foreign debt is 25 percent of U.S. GDP and that foreign as-sets and liabilities alike pay an interest rate of 5 percent per year. What would be the drain on U.S. GDP (as a percentage) from paying interest on the net foreign debt? Do you think this is a large number? What if the net foreign debt were 100 percent of GDP? At what point do you think a country's government should become worried about the size of its foreign debt?• •2. A U.S. dollar costs 7.5 Norwegian kroner, but the same dollar can be purchased for 1.25 Swiss francs. What is the Norwegian krone/Swiss franc exchange rate? 3. Petroleum is sold in a world market and tends to be priced in U.S. dollars. The Nippon Steel Chemical Group of Japan must import petroleum to use in manufactur-ing plastics and other products. How are its profits affected when the yen depreciates against the dollar? 4.. Calculate the dollar rates of return on the following assets: a. A painting whose price rises from $200,000 to $250,000 in a year. b. A bottle of a rare Burgundy, Domaine de la Romande-Conti 1978, whose price rises from $255 to $275 between 2013 and 2014. c. A £10,000 deposit in a London bank in a year when the interest rate on pounds is 10 percent and the $/£ exchange rate moves from $1.50 per pound to $1.38 per pound. 5. What would be the real rates of return on the assets in the preceding question if the price changes described were accompanied by a simultaneous 10 percent increase in all dollar prices? 6. Suppose the dollar interest rate and the pound sterling interest rate are the same, 5 percent per year. What is the relation between the current equilibrium $/£ exchange rate and its expected future level? Suppose the expected future $/£ exchange rate, $1.52 per pound, remains constant as Britain's interest rate rises to 10 percent per year. If the U.S. interest rate also remains constant, what is the new equilibrium $/£ exchange rate? 7. Traders in asset markets suddenly learn that the interest rate on dollars will decline in the near future. Use the diagrammatic analysis of this chapter to determine the effect on the current dollar/euro exchange rate, assuming current interest rates on dollar and euro deposits do not change.
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