Question

Suppose the U.S. foreign assets are 67 percent of the U.S.​ GDP, and the U.S. foreign liabilities are 95 percent of the U.S. GDP. ​ Moreover, suppose that 66 percent of U.S. foreign assets are denominated in foreign​ currencies, while all liabilities to foreigners are denominated in U.S. dollars. How will a 13 percent depreciation of the dollar affect ​foreigners' net foreign claims on the U.S. measured in U.S. dollars​ (as a percent of U.S.​ GDP)

Answer 1

Answer:

8.58% of US GDP is the answer for the required question.

Explanation:

US Foreign Assets = 67% of US GDP

US Liabilities = 95% of US GDP

66% of US Foreign Assets = Foreign Currencies

All Liabilities to Foreigners = US Dollars.

Depreciation rate = 13%

Solution:

Consider the following formula for this problem:

Change in external wealth in US dollar = (Change in foreign assets in dollars) - (Change in foreign liabilities in US dollars)

Liabilities are already denominated in dollars in our instance, but assets are not. As a result, we'll use the formula above to calculate the dollar value of the foreign assets. However, because the dollar value of net external assets fluctuates, we must also consider the rate of depreciation.

Change in dollar value of foreign currency denominated asset = rate of depreciation x Share of the foreign currency

Share of the foreign Currency = 66%

Rate of Depreciation = 13%

= 0.13 x 0.66 = 0.0858 = 8.58%

Hence,

8.58% of US GDP is the answer for the required question.