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Problem Set 3

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FNCE 101 Problem Set #3 Due: 11-5-12 1. A) The private savings would not change, in the long-run, because since consumers tend to be consumption-smoothers, there would be a natural switch from the consumption of foreign goods to the consumption of domestic goods. However, in the short-run, there would be a decrease in savings because the demand for domestic goods would increase thus increasing domestic prices and since consumers are consumption-smoothers, they would dip into private savings, decreasing national private savings. The Domestic Investment would increase because there’s an incentive to invest in domestic assets because of the inevitable increase in production of domestic goods (increase in exports). The gov’t budget …show more content…

D) Debit- Decreases in $ holdings by foreigners (in this case the Korean gov’t) counts as a debit. The Korean gov’t is taking the American dollar holdings it has in American banks and reinvesting them in its own foreign currency. Credit- Foreign currency, Korean dollars, is purchased with American dollars that are being used by the Korean gov’t. Holdings of foreign currency by U.S. residents is decreasing, which counts as a credit. E) Debit-- The tourist from Detroit converts his American currency into a traveler’s check, transferring his American currency to foreign currency. Credit- The purchase of the meal counts as a credit because it is a decrease in the holding of foreign currency by a U.S. resident. F) Debit-- The conversion of the pound into American dollars because the English demanded the American currency, increasing our CA. This transaction was necessary for the purchase of the wine/ Credit- The purchase of the wine because the debt incurred by the English was credited to the U.S. once the purchase of the wine was made. G) Debit-- The purchases of the Mexican machinery are counted as a debit, because purchases of foreign capital assets by U.S. residents are counted as debits. Credit-- The decreases in holdings of foreign currency by U.S. residents counts as a credit, as in when the foreign currency is used to purchase the Mexican machinery. 3. If the interest rate is 3% and the foreign debt is 30% of the

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