1.(5 pts) Other things equal, what is the likely impact of a U.S. trade deficit on

1)the current account?

2)foreign savings if domestic investment is greater than domestic saving?

3)foreign savings if domestic investment is less than domestic saving?

2.(5 pts) Official reserve transactions are necessary to "balance" the Balance of Payments accounts. What should the U.S. central bank do (i.e. buy or sell U.S. dollars on the foreign exchange market):

a.if the current account + capital account is greater than zero?

b.if the current account + capital account is less than zero?

3.(5 pts) You are an arbitrager who starts with $1000 U.S. and wants to end up with U.S. dollars. Following are three spot exchange rates:

$0.01/yen$0.20/krone25 yen/krone

a.How would you engage in arbitrage to profit from these three rates?

b.What profit would you make from the arbitrage in part a?

c.As a result of this arbitrage, will the krone appreciate or depreciate relative to the yen? Explain.

d.What value of the yen-krone exchange rate would eliminate the opportunity for triangular arbitrage?

4.(5 pts) The following is historical data on the U.S. dollar - Japanese yen exchange rate:

date Japanese yen/ U.S. dollar

5/29/2018 108.6

10/3/2019 114.5

a.Which currency has appreciated over this period?

b.How will this change in the exchange rate alter:

1)U.S. exports to Japan

2)Japanese exports to the U.S.

3)The U.S. trade balance

4)The Japanese trade balance.