International Finance Theory and Policy
by Steven M. Suranovic

Finance 20

Finance 20

Finance Questions 20 3-1


1. On February 5, 2004 the Wall Street Journal reported that Asian central banks were considering selling a significant share of their US government bond holdings. It is estimated that foreign central banks own over $800 billion in US treasury bonds, or 1/5th of all US federal government debt. Taiwan is considering using some of their foreign reserves to help its businesses purchase US machinery.

A) What is the likely effect on the US dollar value if Taiwan implemented its plan? Briefly explain.

B) What effect would this transaction have on the US trade deficit? Explain.

C) How would the answer to part A change if the Taiwanese government uses sales of their foreign reserves to help its businesses purchase Taiwanese produced machinery? Explain.

International Finance Theory and Policy - Chapter 20: Last Updated on 1/6/08