FNCE 101 Problem Set #3
Due: 11-5-12

1.
A) The private savings would not change, in the long-run, because since consumers tend to be consumption-smoothers, there would be a natural switch from the consumption of foreign goods to the consumption of domestic goods. However, in the short-run, there would be a decrease in savings because the demand for domestic goods would increase thus increasing domestic prices and since consumers are consumption-smoothers, they would dip into private savings, decreasing national private savings. The Domestic Investment would increase because there’s an incentive to invest in domestic assets because of the inevitable increase in production of domestic goods (increase in exports). The gov’t budget deficit would decrease because more domestic production would require less government spending to stimulate the U.S. economy.

B) It will not necessarily decrease the current account deficit because other factors, such as net exports, net factor payments and net unilateral payments can outweigh the decrease in imports. Also, if the foreigner who was previously importing the good has a perfectly inelastic demand for American goods, this will not change their demand for American exports and therefore not change the current account deficit of the United States.

2.
A) Debit- When the dollars were converted to euros because there is an increased demand for the foreign currency/ Credit- exchanged at a German bank because now the foreign bank is holding american dollars and therefore is in debt to the Unites States.

B) Debit- Purchase of the German stock because the purchase of a foreign security is a liability to the U.S./ Credit- paying the check on an American bank because now the foreigner is using our bank as a foreign service, thus, a credit to the U.S.

C) Debit- Purchase of the Japanese stock because the purchase of a