Comments on: NEW! Exam Questions of the Week http://welkerswikinomics.com/blog/2009/11/12/new-exam-questions-of-the-week/ for students and teachers of Economics Wed, 23 May 2012 04:39:58 +0000 hourly 1 http://wordpress.org/?v=3.3.2 By: Mike Fladlien http://welkerswikinomics.com/blog/2009/11/12/new-exam-questions-of-the-week/comment-page-1/#comment-9004 Mike Fladlien Mon, 16 Nov 2009 18:58:52 +0000 http://welkerswikinomics.com/blog/?p=1291#comment-9004 I posted this excellent question on the CEE site, Teaching AP Economics. I look forward to more questions and answers. I posted this excellent question on the CEE site, Teaching AP Economics. I look forward to more questions and answers.

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]]> By: Jason Welker http://welkerswikinomics.com/blog/2009/11/12/new-exam-questions-of-the-week/comment-page-1/#comment-8999 Jason Welker Sun, 15 Nov 2009 17:16:27 +0000 http://welkerswikinomics.com/blog/?p=1291#comment-8999 Andy, I see what you're saying. The question, however, asks specifically about the current account deficit. I agree that a financial account surplus would put upward pressure on a country's exchange rate, and a current account deficit is by definition countered by a financial account surplus. But this question asks about the deficit in the current account. In my classes, we teach that a country's demand for imports requires the conversion of its currency on foreign exchange markets for other countries' currencies. In the forex market, supply of the importing nation's currency increases while demand for exporting nations' currencies increases. Thus the downward pressure on the importing nation's currency. If the question were asking about the effect of a movement towards surplus in the financial account, then the explanation would involve increasing demand for the nation's currency, thus an appreciation. It's the other side of the BoP however, in the case of the above question. Thanks again! Andy, I see what you're saying. The question, however, asks specifically about the current account deficit. I agree that a financial account surplus would put upward pressure on a country's exchange rate, and a current account deficit is by definition countered by a financial account surplus. But this question asks about the deficit in the current account.

In my classes, we teach that a country's demand for imports requires the conversion of its currency on foreign exchange markets for other countries' currencies. In the forex market, supply of the importing nation's currency increases while demand for exporting nations' currencies increases. Thus the downward pressure on the importing nation's currency.

If the question were asking about the effect of a movement towards surplus in the financial account, then the explanation would involve increasing demand for the nation's currency, thus an appreciation. It's the other side of the BoP however, in the case of the above question.

Thanks again!

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]]> By: Andy http://welkerswikinomics.com/blog/2009/11/12/new-exam-questions-of-the-week/comment-page-1/#comment-8996 Andy Sun, 15 Nov 2009 07:13:12 +0000 http://welkerswikinomics.com/blog/?p=1291#comment-8996 What I meant is that suppose a country's current account deficit is (mainly) driven by financial asset purchases (a financial account surplus) rather than the causation being from imports which then results in the financial account surplus. In the latter case (which is usually empirically relevant), we might expect the exchange rate to depreciate so that foreigners will hold domestic assets, but particularly in the former case it is not a logical necessity, is it? Hopefully that makes sense. I think it's clear what the question is going for, I may just be nitpicking to try to make sure of my own understanding. Thanks... What I meant is that suppose a country's current account deficit is (mainly) driven by financial asset purchases (a financial account surplus) rather than the causation being from imports which then results in the financial account surplus.

In the latter case (which is usually empirically relevant), we might expect the exchange rate to depreciate so that foreigners will hold domestic assets, but particularly in the former case it is not a logical necessity, is it?

Hopefully that makes sense. I think it's clear what the question is going for, I may just be nitpicking to try to make sure of my own understanding.

Thanks…

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]]> By: Jason Welker http://welkerswikinomics.com/blog/2009/11/12/new-exam-questions-of-the-week/comment-page-1/#comment-8995 Jason Welker Sun, 15 Nov 2009 02:24:37 +0000 http://welkerswikinomics.com/blog/?p=1291#comment-8995 Andy, I think you're confusing the financial account of the balance of payments (sometimes referred to as the capital account) with the current account. Current account refers to the balance of trade in goods and services. Financial flows are measured in the financial (capital) account. Jason Andy,

I think you're confusing the financial account of the balance of payments (sometimes referred to as the capital account) with the current account. Current account refers to the balance of trade in goods and services. Financial flows are measured in the financial (capital) account.

Jason

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]]> By: Andy http://welkerswikinomics.com/blog/2009/11/12/new-exam-questions-of-the-week/comment-page-1/#comment-8986 Andy Sat, 14 Nov 2009 12:46:37 +0000 http://welkerswikinomics.com/blog/?p=1291#comment-8986 Is it necessarily true that a current account deficit puts downward pressure on the exchange rate? What if financial flows are driving the deficit? Is it necessarily true that a current account deficit puts downward pressure on the exchange rate? What if financial flows are driving the deficit?

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