Question

A German company wants to buy dollars to purchase U.S. bonds. In the open-economy macroeconomic model of the U.S., this transaction would be accounted for in:
a. the demand for currency in the foreign exchange market, and the supply of loanable funds.
b. the demand for currency in the foreign exchange market, and the demand for loanable funds.
c. the supply of currency in the foreign exchange market, and the supply of loanable funds.
d. the supply of currency in the foreign exchange market, and the demand for loanable funds.

Answer 1

Answer:

The correct answer is d. the supply of currency in the foreign exchange market, and the demand for loanable funds.

Explanation:

In an open economy, we must add the external sector, which includes the Trade Balance or net exports and the Capital or Financial Balance.

Net exports, being part of aggregate expenditure, are incorporated into the SI. However, the inflows and outflows of payment commitments or international financial assets are recorded in the capital account, which gives rise to a new curve, the BB.

We know that in an open economy, monetary phenomena depend on the exchange system that the country follows: fixed or flexible exchange rate.

Under a fixed exchange rate, the variable that is permanently and permanently adjusted to an imbalance in the money market is international reserves.

Under the flexible exchange rate, the adjustment variable is the exchange rate.

With a fixed exchange rate, an increase in the money supply pressures upward on the level of domestic prices, which encourages imports and discourages exports, causing us to lose competitiveness against our business partners. This translates into a permanent and definitive loss of international reserves, which thus constitute the adjustment variable, that is, the monetary phenomenon.