1. Suppose that a country's international assets, denoted A, consist of 50 shares in the Italian company Fiat, and that the price of each Fiat share is 2 euros. Suppose that this country's international liabilities, denoted L, consist of 80 units of bonds issued by the local government and held by foreigners, and that the price of local bonds is 1 dollar per unit. The local currency of this country is the dollar. Suppose that the dollar depreciates from 2 dollars per euro to 3 dollars per euro. The quantity of each asset and liability remain unchanged, as well as the Euro price of Fiat shares and the local price of bonds. Calculate the change in the external wealth (which equals A-L). Is this change in wealth reflected in the financial account or valuation effects?
2. Indicate whether the following statement is true, false, or uncertain and explain why. An economy that starts with a negative external wealth must run a trade balancesurplusevery period in the present and future.
3. Indicate whether the following statement is true, false, or uncertain and explain why. A country can have positive net investment income in the current account if its external wealth is negative.