FM 6 Assignment 2

1. How would a relatively high-income inflation rate affect the home country's current account, and
other things?

Inflation is the rising of prices of the product. It can affect the home country’s accounts because if a
country wants to buy products from the home country and it has high inflation, the buyer has to spend
more than the usual. In the end, the buyer tends to look for another supplier and this has the probability
to cause deficits in the accounts of the home country because there are decrease of inflows.

2. Is a negative current account harmful to a country? Discuss.

Negative current accounts may lead to consequences that gives the country a hard time to cope up. It
can also affect the reputation of the country as well in terms of financial aspects. It gives an impression
to that country that it is uncompetitive enough to control their accounts.

3. How can government restrictions affect international payments among countries?

Restrictions can affect international payments because it controls the systems of the inflows and
outflows of the country. The government can place taxes and tariffs to the importing of products which
may cause to discourage investors from purchasing securities from foreign countries.

4. Assume that the dollar is presently weak and is expected to strengthen over time. How will these
expectations affect the tendency of U.S. investors to invest in foreign securities?

Investors from USA need more dollars to invest in foreign countries to reach the amount they need to
invest. Once it strengthens over time and their investments are already liquidated, they will be able to
exchange the foreign currency into dollars in a less favorable exchange rate than the usual. That all
depends on the values systemized in the exchange rate policies.

5. Explain how low U.S. interest rates can affect the tendency of U.S.-based MNCs to invest abroad.

Having low interests in US can engage US-based MNCs to invest abroad. As investors, we seek to have
higher returns if we wish to invest. In this case that US has low interest rates, the investors seek higher
returns than of that they can earn in US.

Source: https://facultyfp.salisbury.edu/kxkhazeh/447/FINASolutions10Edition/
Madura_IFM10e_IM_Ch02.docx