Complete the following questions and submit your answers to the Dropbox by midnight Sunday:
- Chapter 1, Pg 23 Questions 7-10
- Chapter 2, Pg 59 & 60 Questions 1-13
- Chapter 3, Pg 78 & 79 Questions 3-8 & 11-12
- Chapter 3, Pg 79 Problem 1
Chapter 1
7. Ross Perot, a former Presidential candidate of the Reform Party, which was a third political party in the United States, had strongly objected to the creation of the North American Trade Agreement (NAFTA), which nonetheless was inaugurated in 1994. Perot feared the loss of American jobs to Mexico where it is much cheaper to hire workers. What are the merits and demerits of Perot's position on NAFTA? Considering the recent economic developments in North America, how would you assess Perot's position on NAFTA?
8. In 1995, a working group of French chief executive officers was set up by the Confederation of French Industry (CNPF) and the French Association of Private Companies (AFEP) to study the French corporate governance structure. The group reported the following, among other things: "The board of directors should not simply aim at maximizing share values as in the U.K. and the U.S. Rather, its goal should be to serve the company, whose interests should be clearly distinguished from those of its shareholders, employees, creditors, suppliers and clients but still equated with their general common interest, which is to safeguard the prosperity and continuity of the company". Evaluate the above recommendation of the working group.
9. Emphasizing the importance of voluntary compliance, as opposed to enforcement, in the aftermath of such corporate scandals as those involving Enron and WorldCom, U.S. President George W. Bush stated that while tougher laws might help, "ultimately, the ethics of American business depends on the conscience of America's business leaders." Describe your view on this statement.
10. Suppose you are interested in investing in shares of Samsung Electronics of Korea, which is a world leader in mobile phones, TVs, and home appliances. But before you make investment decision, you would like to learn about the company. Visit the website of Yahoo (http://finance.yahoo.com) and collect information about Samsung Electronics, including the recent stock price history and analysts' views of the company. Discuss what you learn about the company. Also discuss how the instantaneous access to information via internet would affect the nature and workings of financial markets.
Chapter 2
1. Explain Gresham's Law.
2. Explain the mechanism which restores the balance of payments equilibrium when it is disturbed under the gold standard.
3. Suppose that the pound is pegged to gold at 6 pounds per ounce, whereas the franc is pegged to gold at 12 francs per ounce. This, of course, implies that the equilibrium exchange rate should be two francs per pound. If the current market exchange rate is 2.2 francs per pound, how would you take advantage of this situation? What would be the effect of shipping costs?
4. Discuss the advantages and disadvantages of the gold standard.
5. What were the main objectives of the Bretton Woods system?
6. Comment on the proposition that the Bretton Woods system was programmed to an eventual demise.
7. Explain how special drawing rights (SDR) are constructed. Also, discuss the circumstances under which the SDR was created.
8. Explain the arrangements and workings of the European Monetary System (EMS).
9. There are arguments for and against the alternative exchange rate regimes.
a. List the advantages of the flexible exchange rate regime.
b. Criticize the flexible exchange rate regime from the viewpoint of the proponents of the fixed exchange rate regime.
c. Rebut the above criticism from the viewpoint of the proponents of the flexible exchange rate regime.
10. In an integrated world financial market, a financial crisis in a country can be quickly transmitted to other countries, causing a global crisis. What kind of measures would you propose to prevent the recurrence of an Asia-type crisis.
11. Discuss the criteria for a 'good' international monetary system.
12. Once capital markets are integrated, it is difficult for a country to maintain a fixed exchange rate. Explain why this may be so.
13. Assess the possibility for the euro to become another global currency rivaling the U.S. dollar. If the euro really becomes a global currency, what impact will it have on the U.S. dollar and the world economy?
Chapter 3
3. The United States has experienced continuous current account deficits since the early 1980s. What do you think are the main causes for the deficits? What would be the consequences of continuous U.S. current account deficits?
4. In contrast to the United States, Japan has realized continuous current account surpluses. What could be the main causes for these surpluses? Is it desirable to have continuous current account surpluses?
5. Comment on the following statement: "Since the United States imports more than it exports, it is necessary for the United States to import capital from foreign countries to finance its current account deficits."
6. Explain how a country can run an overall balance-of-payments deficit or surplus.
7. Explain official reserve assets and its major components.
8. Explain how to compute the overall balance and discuss its significance.
11. Exhibit 3.5 indicates that in 1999, Germany had a current account deficit and at the same time a capital account deficit. Explain how this can happen?
12. Explain how each of the following transactions will be classified and recorded in the debit and credit of the U.S. balance of payments:
(1) A Japanese insurance company purchases U.S. Treasury bonds and pays out of its bank account kept in New York City.
(2) A U.S. citizen consumes a meal at a restaurant in Paris and pays with her American Express card.
(3) A Indian immigrant living in Los Angeles sends a check drawn on his L.A. bank account as a gift to his parents living in Mumbai.
(4) A U.S. computer programmer is hired by a British company for consulting and gets paid from the U.S. bank account maintained by the British company.
PROBLEM 1
1. The U.S. Balance of Payments for year 2000.
