Problem
1. Suppose you were instructed to construct a BP curve of one state in the United States with another, such as New York's BP curve with Illinois. What general slope would you expect for this curve and why?
2. Why must countries, especially those prone to official reserve transactions deficits, maintain relatively large holdings of foreign exchange reserves in a fixed exchange rate system?
3. Japan has been running huge current account surpluses in the last decade. Because of concern over this surplus (and over the associated U.S. current account deficit with Japan), U.S. government officials for several years urged the Japanese government to adopt a more expansionary fiscal policy stance. Using an IS/LM/BP diagram (assuming that the BP curve is flatter than the LM curve) and starting from a position of equilibrium, explain how the adoption of such a policy stance would affect Japan's national income, current account, capital account, and money supply. Would your conclusions be different if the BP curve were steeper than the LM curve? Why or why not?
The response should include a reference list. Double-space, using Times New Roman 12 pnt font, one-inch margins, and APA style of writing and citations.