Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Chapter 34, Problem 3.8P
To determine
The changes in the interest rate on the basis of
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In the picture below is the table to answer this question. The highlighted one is my guess which is wrong.
Based on the Exchange rates above, How might international travel be affected by the exchange rates above?
A)More Americans can afford to travel to Canada.B)More Canadians will be able to afford travel in the US.
C)More Americans can afford to travel to Great Britain.D)Mexico is an expensive place for Americans to travel.
Suppose that there are only two countries in the world: Localia (which is us), that uses the
"Localios" (LCL) as its currency, and Nearovia (our trading partner), which uses “Nearos" (NER)
as its currency. For questions 1-3, assume that this exchange rate between the NER and the LCL
is flexible.
Now consider the Supply & Demand market for domestic Localios. Suppose also that the Central
Bank cuts interest rates at home in Localia.
1. What would we expect to happen to the exchange rate for LCL as a result of this rate
cut? Explain using the Supply and Demand Figure for LCL and explain why any
movements of any of the curves occur.
2. Would this create a recessionary gap, inflationary gap, or neither in Localia? Explain
using your AD-AS Figure for Localia.
3. Similarly, what is the effect of the interest rate cut in Localia on the exchange rate for
Nearos and on short-term GDP in Nearovia? Explain using both the Supply and Demands
figure for NER and the AD-AS figure for Nearovia.
If the exchange was 100 Japanese Yen = 1 US dollar last month and today it is 90 Japanese = 1 US dollar, then
a) None of the choices is correct
b) US goods just became more expensive for the Japanese
c) All trade between the U.S. and Japan will stop until the exchange rate goes back to what it was last month
d) US goods just became cheaper for the Japanese
e) Japanese goods just became cheaper for the US
Chapter 34 Solutions
Principles of Economics (12th Edition)
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- Country A follows a fixed exchange rate policy that pegs its currency to the currency of country B, which is its main trading partner in a world where international capital is fully mobile. However, due to unresolved structural inefficiencies (for example, excessive bureaucracy), prices in country A tend to increase more than prices in country B. Over time, if nothing else changes, and provided that country A is committed to its current exchange rate policy, which of the following problems is not anticipated for country A? a. Economic recession. O b. Growing deficit in international trade balance. c. Worsening inflation. Od. Decreasing reserve assets. Oe. Growing external indebtedness.arrow_forwardBalance of payments accounting. For the following international transactions, identify the balance of payments accounts and whether the transaction would generate an inflow or an outflow of foreign exchange for the two countries involved. ■ TIAA-CREF—the pension fund of American college professors—purchases 1 million shares of South Africa’s Standard Bank for $16 million. ■ Air France purchases $2.5 million of jet fuel at Boston’s Logan Airport. Payment is made directly from Air France’s bank account with State Street in Boston. ■ Hong Kong–based Cathay Pacific pays a $25 million annual lease on two Boeing 777s to U.S.-based lessor GE Capital.arrow_forwardUsing data from The Economist's Big Mac index for 2011, the following table shows the local currency price of a Big Mac in several countries as well as the actual exchange rate between each country and the United States. At the time of the data collection, a Big Mac would have cost you $4.07 in the United States and GBP 2.39 in the United Kingdom. The actual exchange rate between the British pound and the U.S. dollar was $1.63 per pound. The dollar price of a Big Mac purchased in the United Kingdom was, therefore, computed as follows: NOTE: here are the options for drop down questions for when u get there The exchange rate that would have equalized the dollar price of a Big Mac in the United States and Brazil (that is, the PPP exchange rate for Big Macs) is __________ ($0.43 per real OR $1.96 per deal OR $2.33 per real OR $2.63 per real). This change would mean that the dollar had ________ (appreciated OR depreciated) against the real.arrow_forward
- Using data from The Economist's Big Mac Index for 2011, the following table shows the local currency price of a Big Mac in several countries as well as the actual exchange rate between each country and the United States. At the time of the data collection, a Big Mac would have cost you $4.07 in the United States and GBP 2.39 in the United Kingdom. The actual exchange rate between the British pound and the U.S. dollar was $1.63 per pound. The dollar price of a Big Mac purchased in the United Kingdom was, therefore, computed as follows: S1.63 Dollar price of a Big Mac in the United Kingdom= GBP 2.39 x GBP 1.0 = $3.90 For the price you paid for a Big Mac in the United States, you could have purchased a Big Mac in the United Kingdom and had some change left over for french fries! Complete the final column of the table by computing the dollar price of a Big Mac for the countries where this amount is not given. Note: Round your answers to the nearest cent. Big Mac Index: July 25, 2011 Local…arrow_forwardIn 1961, Charles de Gaulle decided he did not want the French franc to be considered as a second-rate currency, so he chopped two zeros off the value of the franc, which meant the exchange rate was approximately FF5/$ instead of FF500/$ (he also ordered that the $ key on IBM punchcard machines be replaced by the FF symbol). This had no immediate impact on any domestic or international transactions, but was supposed to convince the French people to put inflation behind them and keep their currency in line with the Dmark and the British pound. Whether or not this change in currency values made any difference, the relative inflation rate did slow down and the value of the FF did rise relative to the dollar over the next two decades. At the same time, the current account balance improved slightly. Based on these factors, explain what happened to the growth rate, show how the NX and NFI curves must have shifted, and describe the underlying economic developments.arrow_forwarda) If the interest rate in the United Kingdom is 8%, the interest rate in the U.S. is 10%, and the spot exchange rate is 1.35 dollar per pound. If interest rate parity holds, what is the expected future exchange rate? b) Alternatively, using the same interest rates as above, suppose the expected future exchange rate is 1.35 dollar per pound. What is the spot exchange ratearrow_forward
- We look at the trade of gas between Russia and the EU and assumes that both areas' supply curves slope upwards and their demand curves slope downwards in the diagram with quantity on the horizontal axis and price on the vertical axis. To make the situation simple, we also initially assume that the exchange rate is constant, and it is 1 (so that we do not need to differentiate between the prices i Russia and the EU). In the autarky equilibria, prices are higher in the EU than in Russia. Unless otherwise specified, there are no trading costs, and the capacity of the pipelines is not binding (ie with free trade the prices are basically the same in the EU and Russia). (a) Draw and show the supply of export goods and the demand for import goods in relation to the two areas' supply and demand curves (three islands next to each other). (b) What happens (to welfare in the two countries and consumer surplus/producer surplus) if the EU stops importing Russian gas? (c) Without Nord Stream 1/2 in…arrow_forwardA carry trade is a trading strategy that involves borrowing low-interest currencies and buying high-interest currencies, with results that can be profitable. During much of the 2000s, Japanese yen interest rates were close to zero while Australia’s interest rates were positive. Investors pursued a carry trade strategy, investing billions in Australian dollars and driving that currency’s value up against the yen. According to the interest parity condition, such a strategy should not be systematically profitable: On average, shouldn’t the interest advantage of Australian dollars be wiped out by relative appreciation of the yen? Is the prevalence of the carry trade evidence that interest parity is wrong? What is the risk of investing in such a strategy? Incorporate the Japanese Yen/Australian Dollar exchange rate history in your discussion.arrow_forwardBalance of payments accounting. For the following international transactions, identify the balance of payments accounts and whether the transaction would generate an inflow or an outflow of foreign exchange for the two countries involved. ■ U.S.-based General Electric (GE) sells 25 air turbines to Airbus-France for the total sum of $500 million. ■ U.S.-based Goldman Sachs advises the French government for the partial privatization of state-owned utility Gaz de France for a lump sum of $10 million. ■ American Airlines purchases five propeller aircrafts from Canada-based Bombardier for the total amount of $75 million. ■ TIAA-CREF—the pension fund of American college professors—purchases 1 million shares of South Africa’s Standard Bank for $16 million. ■ Air France purchases $2.5 million of jet fuel at Boston’s Logan Airport. Payment is made directly from Air France’s bank account with State Street in Boston. ■ Hong Kong–based Cathay Pacific pays a $25 million annual lease on two Boeing…arrow_forward
- The following graph depicts the supply and demand curves for U.S. dollars in the foreign exchange market. Suppose that Japan puts quotas on all U.S. imports. On the graph, shift either the supply of dollars curve, the demand for dollars curve, or both curves to best reflect the given scenario. PRICE (Yen per dollar) S D QUANTITY OF DOLLARS (Millions per day) If Japan puts quotas on all U.S. Imports, the U.S. dollar 6.4.arrow_forwardSuppose a currency is temporarily undervalued by a fixed exchange rate system, such as the international gold standard. Let that currency be the US dollar, and expressed in terms of British pounds. First show this disequilibrium using a supply and demand graph and then Clearly explain how one could profit by arbitraging in dollars using a bill of exchange.arrow_forwardBalance of payments accounting. For the following international transactions, identify the balance of payments accounts and whether the transaction would generate an inflow or an outflow of foreign exchange for the two countries involved. ■ U.S.-based General Electric (GE) sells 25 air turbines to Airbus-France for the total sum of $500 million. ■ U.S.-based Goldman Sachs advises the French government for the partial privatization of state-owned utility Gaz de France for a lump sum of $10 million. ■ American Airlines purchases five propeller aircrafts from Canada-based Bombardier for the total amount of $75 million. ■ TIAA-CREF—the pension fund of American college professors—purchases 1 million shares of South Africa’s Standard Bank for $16 million. ■ Air France purchases $2.5 million of jet fuel at Boston’s Logan Airport. Payment is made directly from Air France’s bank account with State Street in Boston. ■ Hong Kong–based Cathay Pacific pays a $25 million annual lease on two Boeing…arrow_forward
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