Economics

1. Suppose that Bill, a resident of the U.S., buys software from a company in Japan. Explain why and in what directions this changes U.S. net exports and U.S. net capital outflow.
2. A U.S. mutual fund uses $1 million to buy yen from a Japanese bank. It then uses these yen to buy stocks in a Japanese electronics firm. The Japanese electronic firm then exchanges the $1 million dollars of yen for dollars from a U.S. bank. It uses these dollars to buy equipment manufactured by a company located in the U.S. As a result of these exchanges, by how much, if at all, and in which direction does:
   a. U.S. net exports change?
   b.U.S. net capital outflow change?
3. A country recently had a GDP of $1000 billion. Its consumption expenditures were $650 billion, its government spent $250 billion, and it had domestic investment of $150 billion. What was the value of this country’s net capital outflow?
   Explain how you found your answer.
4. In the market for foreign-currency exchange, the source of the supply of dollars is
   . The supply curve is because .

Shoe Quota

Concerns raised about the declining U.S. shoe industry and unfair labor practices in foreign shoe factories lead the Congress and President to impose a quota on shoe imports.

1. Refer to Shoe Quota. As a result of the quota, is there initially a surplus or a shortage in the market for foreign- currency exchange? Carefully explain how people’s response to this surplus or shortage and the resulting changes in their behavior leads to a new equilibrium exchange rate.
2. If a country makes political reforms so that people now believe this country’s assets are less risky, what happens to its interest rate, its exchange rate, and its net exports?
3. If a county becomes less likely to default on its bonds, what happens to that country’s interest rate and exchange rate? Explain.
4. Suppose a presidential candidate promises to increase the government budget surplus and claims that doing so will stop U.S. citizens from investing in foreign companies and increase the value of the dollar. Evaluate this candidate’s promise.