Question

1) Consider the following statement: “Exports pay for imports. Yet in 2012 the nations of the world exported about $540 billion more of goods and services to the United States than they imported from the United States.” The apparent inconsistency of these two statements can be resolved by recognizing that

a) these comparisons use different measures of exports and imports.

b) in the short run, exports pay for imports, but in the long run a country can import more goods and services than it exports.

c) in the short run, a country can import more goods and services than it exports, but in the long run exports pay for imports.

d) each measuring agency uses a slightly different accounting system.

2) Suppose that a country follows a managed-float policy but that its exchange rate is currently floating freely. In addition, suppose that it has a massive current account deficit.

a. Other things equal, are its official reserves increasing, decreasing, or staying the same?

b. If it decides to engage in a currency intervention to reduce the size of its current account deficit, will it buy or sell its own currency?

c. As it does so, will its official reserves of foreign currencies get larger or smaller?

Answer 1

1) Solution: in the short run, a country can import more goods and services than it exports, but in the long run exports pay for imports.

Explanation: In short duration, a nation can import more products and services than it exports through the sale of domestic assets to foreigners or external borrowing. Both activities raises the capital account balance of the country and leads to an inflow of foreign currency that can be utilized to finance import purchases