Question No-2 5+5

a) U.S.-based MNCs commonly invest in foreign securities.

i) 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?

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

iii) In general terms, what is the attraction of foreign investments to U.S. investors?

b) Explain why a stronger dollar could enlarge the U.S. balance-of-trade deficit. Explain why a weaker dollar could affect the U.S. balance of- trade deficit.

i) It is sometimes suggested that a floating exchange rate will adjust to reduce or eliminate any current account deficit. Explain why this adjustment would occur.

ii) Why does the exchange rate not always adjust to a current account deficit?