Explain: “U.S. exports earn supplies of foreign currencies that Americans can use to finance imports.
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Explain: “U.S. exports earn supplies of foreign currencies that Americans can use to finance imports.” Indicate whether each of the following creates a demand for or a supply of European euros in foreign exchange markets: LO27.1 a. A U.S. airline firm purchases several Airbus planes assembled in France. b. A German automobile firm decides to build an assembly plant in South Carolina. c. A U.S. college student decides to spend a year studying at the Sorbonne in Paris. d. An Italian manufacturer ships machinery from one Italian port to another on a Liberian freighter. e. The U.S. economy grows faster than the French economy. f. A U.S. government bond held by a Spanish citizen matures, and the loan amount is paid back to that person. g. It is widely expected that the euro will depreciate in the near future. |
a
Explanation
When goods are exported to foreign countries by producers in Country U, the holdings of foreign currency bank deposits of people in Country U increases. These foreign currency bank deposits can then be used to make payments for the imports of goods and services from foreign countries by people in Country U. As such, it could be stated that the exports of the country finance the imports made by that country.
As Country U purchases goods in Country F, which is a foreign country, it would be required to make payments in terms of Currency E. As such, there would arise a demand for Currency E by Country U.
Verified Answer
Exports of Country U raise the deposit holdings of people U in foreign currency banks. These deposits are used by people in Country U when they are required to make payments in terms of foreign currency for making imports.
There would be a creation of demand for Currency E.
b
Explanation
As Country G firm would be required to pay in Currency D for building the plant in Country U, it would have to exchange Currency E with Currency D in the foreign exchange market. This, in turn, would increase the supply of Currency E.
Verified Answer
There would be the creation of the supply of Currency E.
c
Explanation
Students residing in Country U need to purchase Currency E in order to study in Country F, because students of Country U would be required to pay their educational expenses in terms of Currency E. Consequently, the demand for Currency E would increase in the foreign exchange market.
Verified Answer
There would be a creation of demand for Currency E.
d
Explanation
In order to pay the freighter who belongs to Country U, the manufacturer of Country I would need Currency D dollars. As such, Country I manufacturer would be required to exchange Currency E with Currency D, which in turn would increase the supply of Currency E in the foreign exchange market.
Verified Answer
There would be the creation of the supply of Currency E.
e
Explanation
Faster growth in Country U relative to growth in Country F implies that the Country U imports of Country F produced goods and services would grow much faster than Country F imports of Country U produced goods and services, Country U would demand Currency E so as to pay for the imports of Country F produced goods and services. Similarly, Country F would exchange Currency E with Currency D so as to make payments for the imports of Country U produced goods and services, This would increase both the demand and supply of Currency E in the foreign exchange market. However, the demand would be greater than supply, since Country U imports of Country F produced goods and services are much higher than Country F imports of Country U produced goods and services.
Verified Answer
There would be a net creation of demand for Currency E.
f
Explanation
The maturity of the government bond would require Country U government to pay the bondholder of Country S in terms of Currency D. Country S person receiving payment in terms of Currency D would exchange it with Currency E so as to have a currency that can be used for buying goods and services in his home country, which is country S.
Verified Answer
There would be a creation of demand for Currency E.
g
Explanation
Depreciation of a currency occurs when its value declines in terms of the other currency. Consequently, if the individuals apprehend that Currency E is likely to lose its value, then they would decrease their holding of Currency E by selling them in the foreign exchange market so as to avoid future losses. This, in turn, would increase the supply of Currency E in the foreign exchange market.
Verified Answer
There would be a creation of the supply of Currency E.
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