Assume that the capital account is equal to zero. Net unilateral transfers 150 Exports of goods and services 7500 Net increase in United States government’s nonreserve foreign assists -130 Net increase in foreign ownership of United States based nonreserve assets 550 Net increase in U.S. private assets abroad 1250 Invest income received in the U.S. 510 Net increase in U.S. ownership of official reserve assets 110 Imports of goods and services 6500 Net increase in foreign ownership of U.S.-based reserve assets 100 Investment income paid abroad by the U.S. 800 (a) What is the current account balance? (b) What is the capital account balance? (c) What is the financial account balance? (b) Does the capital account equal the current account? (c) What is the statistical discrepancy? Please show your work 2)Draw a graph of the supply of and demand for the Canadian dollar by the U.S. market. Diagram the effect of each of the following on exchange rates, state in words whether the effect is long, medium,or short run, and explain your reasoning. (f) Big budget deficits in EU and CAD in US. (a) More rapid growth in EU than in the United States. (b) A rise in U.S. interest rates. (c) Goods are more expensive in EUe than in the United States. (d) A recession in the EU. (e) Expectations of a future depreciation in the euro.
(a) To calculate the current account balance, we need to sum up the following items:
exports of goods and services ($7500) + net unilateral transfers ($150) - imports of goods and services ($6500) + investment income received in the U.S. ($510) - investment income paid abroad by the U.S. ($800).
Current Account Balance = $7500 + $150 - $6500 + $510 - $800
Current Account Balance = $1860
(b) Since the capital account is given as zero, the capital account balance is zero.
(c) The financial account balance can be calculated by summing up the net increase in United States government's nonreserve foreign assets (-$130), the net increase in foreign ownership of United States based nonreserve assets ($550), the net increase in U.S. private assets abroad ($1250), and the net increase in U.S. ownership of official reserve assets ($110).
Financial Account Balance = -$130 + $550 + $1250 + $110
Financial Account Balance = $1780
(d) The capital account does not equal the current account in this case because the capital account balance is zero.
(e) The statistical discrepancy can be calculated as the difference between the current account balance and the financial account balance.
Statistical Discrepancy = Current Account Balance - Financial Account Balance
Statistical Discrepancy = $1860 - $1780
Statistical Discrepancy = $80
2) I apologize, but as an AI text-based model, I am unable to draw graphs. However, I can provide you with an explanation of the effects of each scenario on the exchange rates:
(a) More rapid growth in the EU than in the United States: This would lead to an increase in demand for the EU currency (euro) relative to the U.S. currency (dollar) due to higher economic prospects. Therefore, the value of the euro would appreciate relative to the dollar in the long run.
(b) A rise in U.S. interest rates: Higher interest rates in the United States would increase the demand for the U.S. dollar as foreign investors seek higher returns on their investments. This would cause the value of the dollar to appreciate relative to other currencies, including the Canadian dollar, in the medium term.
(c) Goods are more expensive in the EU than in the United States: If goods are relatively more expensive in the EU, it would lead to a decrease in demand for the euro and an increase in demand for the U.S. dollar. This would cause the euro to depreciate relative to the dollar in the short run.
(d) A recession in the EU: A recession in the EU would lower economic activity and reduce demand for the euro. As a result, the euro would depreciate relative to the U.S. dollar in the medium term.
(e) Expectations of a future depreciation in the euro: If there are expectations of a future depreciation in the euro, it would reduce the demand for the euro and increase demand for the U.S. dollar. This anticipation would cause the euro to depreciate relative to the dollar in the short run.
To answer the questions related to the current account balance, capital account balance, financial account balance, and statistical discrepancy, we need to understand their definitions and calculations:
1. Current Account Balance:
The current account balance measures the net flow of goods, services, income, and unilateral transfers between a country and the rest of the world. It is calculated as follows:
Current Account Balance = (Exports of goods and services + Net unilateral transfers) - (Imports of goods and services + Investment income paid abroad by the US)
In this case, the values given are:
Exports of goods and services = 7,500
Net unilateral transfers = 150
Imports of goods and services = 6,500
Investment income paid abroad by the US = 800
Plugging in those values, we can calculate the current account balance:
Current Account Balance = (7,500 + 150) - (6,500 + 800) = 500
So, the current account balance is $500.
2. Capital Account Balance:
The capital account records the net flow of financial transactions, including capital transfers and non-produced, non-financial assets. If the capital account is equal to zero, it means that there were no net capital transfers during the given period.
In this case, the capital account is assumed to be zero.
3. Financial Account Balance:
The financial account measures net changes in ownership of financial assets between a country and the rest of the world. It includes both official reserve assets and non-reserve assets. The financial account balance is calculated as follows:
Financial Account Balance = (Net increase in foreign ownership of US-based non-reserve assets + Net increase in US private assets abroad + Net increase in US ownership of official reserve assets) - (Net increase in United States government's non-reserve foreign assets + Net increase in foreign ownership of US-based reserve assets + Investment income received in the US)
In this case, the values given are:
Net increase in foreign ownership of US-based non-reserve assets = 550
Net increase in US private assets abroad = 1,250
Net increase in US ownership of official reserve assets = 110
Net increase in United States government's non-reserve foreign assets = -130
Net increase in foreign ownership of US-based reserve assets = 100
Investment income received in the US = 510
Plugging in those values, we can calculate the financial account balance:
Financial Account Balance = (550 + 1250 + 110) - (-130 + 100 + 510) = 1,390
So, the financial account balance is $1,390.
4. Statistical Discrepancy:
The statistical discrepancy measures any unexplained difference between the sum of the current account balance, capital account balance, and financial account balance. It represents errors, omissions, and discrepancies in the recorded data. The statistical discrepancy is calculated as follows:
Statistical Discrepancy = Current Account Balance + Capital Account Balance + Financial Account Balance
In this case, the statistical discrepancy is not given, so we cannot calculate it.
5. Does the capital account equal the current account?
Since the capital account is assumed to be zero and the current account balance is $500, the capital account does not equal the current account.
Now let's move on to the second part of your question.
2) Draw a graph of the supply of and demand for the Canadian dollar by the U.S. market and explain the effects of the following factors on exchange rates:
a) More rapid growth in EU than in the United States: A higher rate of economic growth in the EU relative to the United States would increase the demand for the Canadian dollar (as it is a substitute for the Euro) in the long run. This increased demand would cause an appreciation of the Canadian dollar, meaning that more U.S. dollars would be needed to purchase the same amount of Canadian dollars.
b) A rise in U.S. interest rates: An increase in U.S. interest rates would lead to a higher return on U.S. investments, attracting more capital flows to the United States. This increased demand for the U.S. dollar would cause an appreciation of the U.S. dollar relative to the Canadian dollar in the short to medium run.
c) Goods are more expensive in the EU than in the United States: If goods are more expensive in the EU relative to the United States, it implies a relatively lower purchasing power parity for the Euro compared to the U.S. dollar. This would decrease the demand for the Euro and increase the demand for the Canadian dollar, causing an appreciation of the Canadian dollar in the long run.
d) A recession in the EU: A recession in the EU would lead to lower economic activity and weaker demand for imports. This decrease in demand for goods would lower the demand for the Canadian dollar, causing a depreciation of the Canadian dollar in the short to medium run.
e) Expectations of a future depreciation in the euro: If there are expectations that the Euro will depreciate in the future, investors would prefer to hold currencies that are expected to appreciate, such as the Canadian dollar. This increased demand for the Canadian dollar would cause an appreciation of the Canadian dollar in the short run.
f) Big budget deficits in the EU and CAD in the US: Big budget deficits in the EU and CAD in the US would increase the supply of their respective currencies (Euro and Canadian dollar). An increase in the supply of a currency would cause a depreciation of that currency in the short run. So, the Euro and Canadian dollar would depreciate relative to the U.S. dollar.
Please note that the effects mentioned above are general tendencies and the actual exchange rate dynamics can be influenced by various other factors and market forces.