Answer to Question 2:

Which of the following are autonomous transactions and which are induced transactions: a) Uncontrolled (by the government) private purchases of automobiles from Japan; b) Accumulation of official reserves of U.S. dollars by the Japanese government; c) Government purchase of military equipment abroad; d) Exports of beer to Germany by the U.S. government so that armed forces stationed there will not use deutchmarks to purchase German beer.

1. a) and c) are autonomous and b) and d) induced.

2. b) is induced and a), c) and d) autonomous.

3. all are autonomous.

4. all are induced.

Choose the correct option.

The correct option is 1. The purchase of automobiles and military equipment abroad are clearly being undertaken for purposes other than government control of the price of domestic currency in terms of foreign currency on the international market. They are therefore autonomous transactions. The purchase of official reserves of foreign exchange by the Japanese government is clearly an induced transaction---it is designed to influence the price of the yen in terms of the dollar and other currencies on the international market. The export of beer is also an induced transaction because the U.S. government is doing it to reduce the conversion of U.S. dollars into deutchmarks in the foreign exchange market and thereby affect the dollar/mark exchange rate.

Notice that the question carefully stated that the private purchase of automobiles from Japan was uncontrolled by the government. The government could be interfering in the market in a number of ways. It could be preventing the private sector from buying the all yen it would need to purchase the quantity of Japanese automobiles desired. Or it could have levied tariffs or import quotas on Japanese cars to reduce the competition faced by domestic producers. Or it could persuade the Japanese to voluntarily limit exports of automobiles to the United States in return for the elimination of tariffs on imports of Japanese TV sets. Only in the first case, where the government is clearly trying to influence the dollar price of the yen, is there an induced component to the transaction. The other government interferences represent attempts to curry the support of particular special interest groups in the economy.

Tariffs, import quotas, and other such devices do not create induced components in private transactions because they are imposed for reasons other than manipulating the exchange rate. Because what constitutes an induced transaction depends on the motives of the government, differences of interpretation can arise, since governments often cloud their motives in attempts to obtain political support. Import restrictions may be sold to voters as devices to reduce pressure on the international value of domestic currency, for example, when their real purpose is to protect particular domestic manufacturing industries from foreign competition.

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