1.U.S. international transactions are recorded in the balance of payments. a.Ide
ID: 2440809 • Letter: 1
Question
1.U.S. international transactions are recorded in the balance of payments.
a.Identify if each of the following transactions would be recorded as an increase or decrease in the balance of payments current or financial account for the United States.
-A wealthy entrepreneur purchases a new car directly from British Motor Works.
-A U.S. manufacturer purchases recording equipment from Germany.
b.How would an increase in U.S. price level impact the current account? Explain.
c.How would the change in the current account identified in part (b) impact the international value of the dollar? Explain.
Explanation / Answer
A)
I) Purchase of new car forms import of good from other country. Hence, money flows outside. It decreases current account.
II) Likewise, buying of equipment will again decrease current account of country.
C)
Increase in price level renders export less competitive. Fall in export will make current account unfavorable for any country.
D)
Since there is outflow of foreign exchange and inflow is curtailed. Value of dollar is determined based on demand and supply of foreign exchange. here, demand for foreign exchange increases for paying off import bills.Hence, it will lead to depreciation of dollar value.
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