Debt-servicing problems of less developed countries that primarily sell raw materials to the United States would be eased by
Answer (B) is correct. An expanding U.S. economy would result in greater demand for raw materials from these countries. Also, since the money supply and interest rates are inversely proportional (when the money supply is rising, interest rates are falling), less developed nations could borrow again at lower rates. Moreover, if the money supply is rising, inflation might increase and U.S. dollars would become cheaper, thereby easing the burden of foreign debtors with obligations payable in dollars.
Of the following transactions, the one that would result in worsening the U.S. balance of payments account is the
Answer (D) is correct. A U.S. resident vacationing abroad transfers money to the foreign country, worsening the U.S. balance of payments and improving that of the other country.
In most recent years, the U.S. balance of payments has registered a deficit. This balance of payments deficit is a measure of the excess of
Answer (C) is correct. The balance of payments is defined as the excess of imports, private capital outflows, grants, and remittances over exports and private capital inflows. When there is a surplus in the balance of payments, more domestic goods may have been sold abroad than were imported, and/or foreigners may have invested more capital in the domestic country than domestic citizens invested abroad. For this reason, a surplus is considered a favorable balance of payments. Just the opposite is true for a deficit in the balance of payments.
The U.S. balance of trade is decreased by
Answer (D) is correct. The balance of trade is the difference between imports and exports of goods alone over a given period (the balance of payments is more comprehensive, embracing all transfers made between two countries, including capital movements). A country’s balance of trade is decreased (worsened) by imports.
An appreciation of the U.S. dollar against the Japanese yen would
Answer (C) is correct. When one currency appreciates, other currencies lose buying power. Thus, if the dollar appreciates against the yen, Japanese customers will find American goods
A U.S. company took out a 12-month, 4% loan of £10,000 when the spot rate was $2 to £1. At the end of the loan term, the spot rate was 2. 0 to £ . What was the company’s effective rate on this loan?
Answer (A) is correct. The effective interest rate on a loan denominated in a foreign currency is affected by changes in the exchange rates during the time the loan is outstanding. First, the amount borrowed is stated in terms of the borrowing party’s domestic currency [£10,000 × ($2.00 per £1) = $20,000]. The maturity amount of the loan in the foreign currency is then calculated (£10,000 × 1.04 = £10,400). This amount is then converted to the domestic currency at the spot rate in effect on the maturity date [£10,400 × ($2.10 per £1) = $21,840]. The difference in the amounts at the two dates is determined ($21,840 – $20,000 = $1,840), and this amount is divided by the face amount of the loan ($1,840 ÷ $20,000 = 9.2%).
On September 22, Year 1, Yumi Corp. purchased merchandise from an unaffiliated foreign company for 0,000 units of the foreign company’s local currency. On that date, the spot rate was $.55. Yumi paid the bill in full on March 20, Year 2, when the spot rate was $.65. The spot rate was $.70 on December 31, Year 1. What amount should Yumi report as a foreign currency transaction loss in its income statement for the year ended December 31, Year 1?
Answer (D) is correct. The FASB requires that a receivable or payable denominated in a foreign currency be adjusted to its current exchange rate at each balance sheet date. The resulting gain or loss should ordinarily be reflected in current income. It is the difference between the spot rate on the date the transaction originates and the spot rate at year-end. Thus, the Year 1 transaction loss for Yumi Corp. is $1,500 [10,000 units ×
($0.55 – 0.70) .
A gold-mining company expects to sell 10,000 ounces of gold 6 months from today. The revenue risk of selling the gold can be hedged by
Answer (C) is correct. Selling a gold futures contract for 10,000 ounces today that expires in 6 months would allow the gold-mining company to lock in a selling price today for the sale of the 10,000 ounces in 6 months when the contract expires. This will hedge the revenue risk as the company pre-determined what it will get for the contract in 6 months.
Suppose that Swiss wrist watches priced in Swiss francs become very popular among U.S. consumers while Britain experiences relatively higher inflation than the United States at the same time. Assuming that all other economic parameters remain constant, which one of the following statements is most accurate?
Answer (D) is correct. The Swiss franc is gaining purchasing power with respect to the U.S dollar. Therefore, the Swiss franc is said to have appreciated against the U.S dollar. By the same token, the U.S. dollar is said to have depreciated (lost purchasing power) against the Swiss franc. Inflation of a currency relative to a second currency causes the first currency to depreciate relative to the second. Because Britain is experiencing higher inflation than the U.S., the British pound depreciates relative to the U.S. dollar. By the same token, the U.S dollar is said to have appreciated against the British pound.
Assuming exchange rates are allowed to fluctuate freely, which one of the following factors would likely cause a nation’s currency to appreciate on the foreign exchange market?
Answer (C) is correct.
Assuming that exchange rates are allowed to fluctuate freely, a nation’s currency will appreciate if the demand for it is constant or increasing while supply is decreasing. For example, if the nation decreases its imports relative to exports, less of its currency will be used to buy foreign currencies for import transactions and more of its currency will be demanded for export transactions. Thus, the supply of the nation’s currency available in foreign currency markets decreases. If the demand for the currency increases or does not change, the result is an increase in (appreciation of) the value of the currency.