WEEK 1 - 5 QUIZZES

All three options directly address problem of the current accounts and financial and capital accounts. While deflation and capital control can remedy both current account and financial and capital accounts, devaluation only has immediate impacts on the current account. (Figure 1 bellow illustrates direct impacts of each option to these accounts.) However, as exchange rates, interest rates, economic growth and balance of payments are interacted, when one components of the balance of payment improves, the other accounts will also recover. For example, when import demand increases, demand for the dollar also increases, and therefore can prevent the outflow of gold from official reserve. That being said, all three options can solve U.S balance of payment problem; however, there must be cost incurred that Kennedy government have to consider.

C. the simultaneous purchase of currencies from several countries in hopes of profiting from increasing

15. What is the primary role of the Federal Reserve? What is the significance of this role?

Given its mandate to maximize employment and maintain price stability, the Fed took monetary policy actions in December 2008 to keep long-term interest rates at near zero (between 0.0% and 0.25%) to help stabilize and revive the U.S economy -- leaving no option for further interest rate reduction.

I hope you have enjoyed this simple explanation of international trade and foreign exchange rates as it pertains to the current U.S. macro economy.

One form of direct control can be exercised by adjusting the legal reserve ratio (the proportion of its deposits that a member bank must hold in its reserve account), and as a result, increasing or decreasing the amount of new loans that the commercial banks can make. Because loans give rise to new deposits, the possible money supply is, in this way, expanded or reduced. This policy tool has not been used too much in recent years. The money supply may also be influenced through manipulation of the discount rate, which is the rate if interest charged by the Federal Reserve banks on short-term secured loans to member banks. Since these loans are typically sought to maintain reserves at their required level, an increase in the cost of such loans has an effect similar to that of increasing the reserve requirement. The classic method of indirect control is through open-market operations, first widely used in the 1920s and now used daily to make some adjustment to the market. Federal Reserve bank sales or purchases of securities on the open market tend to reduce or increase the size of commercial bank reserves. When the Federal Reserve sells securities, the purchasers pay for them with checks drawn on their deposits, thereby reducing the reserves of the banks on which the checks are drawn. The three instruments of control explained above have been conceded to be more effective in preventing inflation in times of high economic activity than in bringing about revival from a

lower the value of the dollar because the U.S. will be a less attractive place to invest in

The Fed makes these debt transactions with banks in order to alter total reserves in the banking system. The Fed uses three tools of monetary policy, trying to influence the amount of reserves in private banks. They are Open Market Operations, Discount Rate and Reserve requirements. Open market operations are purchases and sales of U.S. Treasury and federal agency securities. This is the Federal Reserve’s principal tool for implementing monetary policy. The Federal Reserve’s objective for open market operations has varied over the years. In the 1980’s the focus shifted toward attaining a specified level of the federal funds rate. This process was largely complete by the end of the decade. Discount rate is the interest rate charged to commercial banks and other depository institutions or loans they receive from their regional Federal Reserve Bank’s lending facility. Reserve requirements are the amount of funds that a depository institution must hold in reserve against specified deposit liabilities.

Monetary policy is the process of the monetary authorities of a country primarily controlling the supply of money available, often targeting a certain rate of interest for the main purpose of promoting economic growth and stability. The Main Official goals usually include relatively stable prices with low unemployment. Discretionary monetary policy on the other hand, uses the Federal Reserve to increase the money supply; this is made possible by manipulating the four tools we learned about. The Federal Reserve uses open market operations when they have to purchase the

On September 18, 2013 the Federal Reserve reaffirmed its view that a highly accommodative stance of monetary policy will remain appropriate for a considerable time after the asset purchase program ends and the economic recovery strengthens. In addition, the committee agreed to continue its monthly $85 billion purchase of Treasury and mortgage-backed securities as long as the unemployment rate remains above 6.5 percent. Inflation between one and two years ahead is projected to be no more than a half percentage point above the Committee's 2 percent longer-run goal and longer-term inflation expectations continue to be well anchored .

(3) Reducing the value of the dollar against foreign currencies. That mean selling dollar would cause the value of the dollar to fall. When the value of the dollar falls it makes U.S. imports more expensive, therefore the demanded of imports will fall.

a reduction in trade deficits by two hundred to five hundred billion dollars with the help of these three steps. The first step recommends Congress to pass a legislation to define currency manipulation as an illegal contribution and allow the Commerce Department to address it in countervailing duty complaints. This step would send out the message that the U.S. is ready to confront this issue and aid importers that were hurt by any unjust competition from imports. The second step is to address the issue of currency manipulation in future trade agreements, such the Trans-Pacific Partnership. Ideas addressed in these future trade agreements include the agreement of members to not participate in currency manipulation, but if this is violated the members would suffer penalties that would end their benefits. The last step to end this issue is to balance or tax foreign assets by currency manipulators, which will cause currencies too costly to

The U.S should continue trading with China because both countries benefit from it. Although the trade in goods has not been favorable to the U.S due to China comparative advantage in the sector, the U.S will find almost the same outcome trading with other nations. The U.S has lost its comparative advantage in many sectors that required labor intensity. Hence, China should not be seen as the cause of that loss. That is what happens in a free trade based on different factors. China is the third

It is often suggested that the large current account deficit poses a serious financing problem for the United States. Each year, the lament goes, the United States must attract net inflows of capital sufficient to "cover" the huge current shortfall. But this proposition gets the logic backward: the U.S. deficit is "financed" by net capital inflows only in an ex post accounting sense. In economic terms it is more nearly correct to say that net capital inflows cause the current account deficit. (p. 218)

The issue of the trade deficit is not normally a worrying problem, especially since the trade balance tends to gain equilibrium over time. Within the United States however, the deficitary balance of trade has been maintained for decades now, leading to concerns among the economists. Their main concern is linked to the fact that high volumes of imports result in high volumes of dollars exiting the United States. This subsequently translates into a potential weakening of the national currency as a result of its increasing sensitivity to international parties owning and deciding on how to spend US dollars (Investopedia, 2012).