1. What is net foreign wealth and what is its relationship to the current account? Suppose that a country starts with $10B in net foreign wealth and its exports and imports in the following three years are $2B and $4B, $1B and $5B, and $2B and $6B, respectively. What is the country's net foreign wealth after three years? Should the country's government worry about this trend? What could it do about it? Does your answer depend on the exchange rate regime? Explain.

- Net foreign wealth is defined as the difference between the foreign assets owned by home country (ex. U.S.) and home country assets (U.S. assets) owned by foreigners. The relationship of net foreign wealth and current account is that the current account balance measures the flow of new net claims on foreign wealth that a country acquires by exporting more goods and services than it imports.
- When a country has an initial $10B in net foreign wealth and its total exports and imports in the following three years are $5B and $15B respectively, the country’s net foreign wealth after three years would be $0B.
- For a country that has bigger imports than exports, thus net foreign wealth of the economy with a deficit; the government should not interfere by implementing policies such as tariffs. True that policy such as tariffs and quotas could reduce imports, which would technically fix current account deficit. However, reducing imports would also cause an increase in the value of the domestic currency relative to other currencies and make it more expensive for domestic exporters to export local products. Bigger imports than exports means that foreigners prefer to consume goods that they produce, which means demand for domestic goods will fall. What needs to be done is to implement macroeconomic policy such as increasing the Money supply, that would shift the economy, expanding its output and depreciating