Finance

1.

Wheat shipment: credit entry, exports of goods (category I), debit entry, unilateral transfers made

Imports of textile machinery: debit entry, imports of goods (category I)

Opening a $500 bank account in Zurich: debit entry, increase short-term assets abroad (category III)

Japanese purchase of U.S. government bonds: credit entry, increase in foreign long-term assets (category II)

Hotel expenses in Geneva: debit entry, imports of services (category I)

The purchase of a BMW automobile: debit entry, imports of goods (category I)

Interest earned in London: credit entry, imports of services (category I)

Carbide purchase of a French chemical plant: debit entry, increase in US long-term assets abroad (category III)

Sales of lumber to Japan: credit entry, exports of goods (category I)

The shipment of Fords to the United States from a Mexican production plant:

Debit entry, imports of goods (category I)

Credit entry, exports of services (category I)

2.

The merchandise trade balance increase 1000, and the current account balance increase 500, official reserve transaction balance decrease 500.

3.

a.

Absolute purchasing power parity is that the exchange rate between two countries will be identical to the ratio of the price levels for those two countries.

Relative purchasing power parity relates the change in two countries’ expected inflation rates to the change in their exchange rates.

b.

iNY – iLondon=2-6=-4

xa-RP=-1-2=-3

Because they are not equals, so this is a disequilibrium situation.

Because the expected return between these two countries is different after accounting for expected change of the foreign currency, we know the expected return rate in the US is 2 percent, and this rate in London is 3 percent, so it has an uncovered interest.

4.

a.

p=(1.0685/1.0670)-1=0.14%, So there is a premium of the Swiss franc.

ius-iSWITZERLAND=3.25%-0.52%=2.73%

Since the premium is 0.14%, so it is not consistent with covered interest parity.

b....