Currency issues
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1. Other things equal, what effect will an increase in the current account deficit have on the home currency value?
2. What effect on a country's current account balance is an increase in the use of quotas expected to have? Would your answer change if other governments retaliate? If so, how?
3. Which currency is used the most to denominate Eurobonds?
4. Assume that the U.S. places a strict quota on goods imported from Chile and that Chile does not retaliate. Holding other factors constant, this event will have what effect on U.S. demand for Chilean pesos? What effect on the value of the peso?
5. If a country experiences low inflation relative to the U.S., what is the expected effect on its exports to the U.S? Imports from the U.S.? Impact on its currency's equilibrium value?
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1. Other things equal, what effect will an increase in the current account deficit have on the home currency value?
An increase in the current account deficit will devaluate the home currency. This explanation is given on the basis of balance of payments model. This model considers only the tradable goods and services and ignores other factors that affect the home currency value. For instance, this model ignores the international flow of capital.
www.econlib.org/library/Enc/BalanceofPayments.html
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2. What effect on a country's current account balance is an increase in the use of quotas expected to have? Would your answer change if other governments retaliate? If so, how?
The effect on a country's current account balance will be positive if there is an increase in the use of quotas. The quotas set a physical limit on the quantity of the good that can be imported into a country in a given period of ...
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