Current Account Balance

Exercises

Questions and Exercises

1. The People's Bank of China, the country's central bank, announced on July 21 2005 that it would de-link the yuan (China's currency) from the US dollar and peg it instead to a basket of currencies. This change would change a fixed exchange rate system that has existed for a decade. Given that the US has a very large trade deficit with China, what impact do you think this change will have on the value of the US dollar in terms of the yuan? Go to http://www.pbs.org/newshour/bb/asia/july-dec05/currency_7-21.html and write a one-page summary of the key points raised in this PBS interview with international trade experts.

2. The current account deficit reached record levels in the U.S. in 2004. What sort of changes in the economies of the U.S. and its major trading partners would cause the U.S. current account deficit to increase to record levels? Make an exhaustive list, then access the Updates page and read the explanation offered by the U.S. Information Agency.

3. How do you think the OPEC oil price shocks of late 1973 and early 1974 as well as the currently high price of oil have affected the U.S. current account balance? Write down your thoughts and then access the Internet site for the U.S. current account balance and plot the "change from last year" for 1973 and 1974. Was your explanation consistent with the actual change in the U.S. current account balance?

4. It is said that a large current account deficit may eventually put pressure on the Fed to raise interest rates in order to prevent the inflationary effect of the dollar losing value. Search the Internet for an explanation and write a one page (double-spaced) summary.

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