International Financial ~ Assignment 3

Dan Nguyen

FIN 410

Assignment 3

Q1. “The current account deficit of the U.S. is explained by the strength of the dollar with respect to major currencies.”

Agree.

- The strengthening of the dollar since the mid-1990s led U.S. imports to be cheaper measured in dollars and U.S. exports to be more expensive in foreign currency, thereby weakening export and strengthening imports.

- The strengthening of the dollar led U.S. interest rates to be higher => more attractive on savings and less on investing.

Q2. a) Do you think the European Central Banks and the Federal Reserve have similar objectives? Why? Why not?

NO.

- Both ECB and FED has a similar objective, which is to maintain price stability

- However:

+ ECB: This is its only one objective, so ECB can make a clear mission is "[to] aim at inflation of rates of below, but closed to, 2% over the medium term."

+ FED: In contrast, besides maintaining price stability, FED also has objectives in other areas including maximum employment rate, moderate long-term interest rates, "supervising and regulating banking institutions," "providing financial services," and so on. Indeed, "over the years, its role in banking and economy has expanded." Therefore, FED doesn't have any clear mission to achieve its goals.

b) Are the objectives of the Federal Reserve conflicting?

YES. Since FED has more-than-one objectives to accomplish its expanded role in banking and economy, FED doesn't have any clear mission to follow. Consequently, FED faces the conflicts to fulfill its different objectives.

Q3.

a) The growth rate of national income is higher in the U.S than in Japan:

Appreciate. Rising GNP in the United States leads to a relative increase in demand for dollars.

b) Inflation is higher in the U.S than in Japan.

Depreciate. The value of the dollar should fall in line with purchasing power parity.

c) Prices in Japan and in the U.S are rising at the same rate.

Stay the same. Based on purchasing power...