Book Title
International Economics: Theory and Policy 9th Edition

978-0132146654 Chapter 20 Solution Manual

December 18, 2019
nAnswers to Textbook Problems
1. The better diversified portfolio is the one that contains stock in the dental company and the dairy
2. Our two-country model (Chapter 19) showed that under a floating exchange rate, monetary expansion
at home causes home output to rise but foreign output to fall. Thus, national outputs
3. The main reason is political risk—as discussed in the Appendix to Chapter 14.
4. Reserve requirements are important for bank solvency. Maintaining adequate reserves enables a bank
to remain solvent, even in periods in which it faces a relatively high amount of withdrawals relative
5. This is again an open-ended question. The main criticism of Swoboda’s thesis is that foreign central
banks held dollars in interest-bearing form, so the United States extracted seigniorage from issuing
© 2012 Pearson Education, Inc. Publishing as Addison-Wesley
Chapter 21 Financial Globalization: Opportunity and Crisis     122
6. Tighter regulation of U.S. banks increased their costs of operation and made them less competitive
7. Banks are more highly regulated and have more stringent reporting requirements than other financial
institutions. Securitization increases the role played by nonbank financial institutions over which
8. The extent of international diversification should go down because some consumption now depends
exclusively on local conditions. In that case, agents want assets correlated with the price of that
9. No, real interest rate equality is not an accurate barometer of international financial integration.
As we saw in Chapter 16, there is a real interest parity condition, which is that r r* %eq.
10. Canada’s current account to GDP ratio ranged from 4 percent to 3 percent over the period, and
on net was marginally positive, but close to zero. The moderate CA surplus in the last few years
11. U.S. gross foreign liabilities rise as the Brazilian has a claim on the fund, and U.S. assets rise as the
fund buys more Brazilian equity. Likewise, Brazil’s foreign assets and liabilities rise. But no U.S.
© 2012 Pearson Education, Inc. Publishing as Addison-Wesley