A country has a fixed exchange rate and capital is very mobile.  Because it is experiencing high unemployment, the central bank increases the money supply.  Using symbols and words, explain what will happen to (a) internal balance; (b) external balance; (c) the country’s exchange rate.    How must the central bank respond if it wishes to maintain the fixed exchange rate?  Why is monetary policy said to be ineffective with fixed exchange rates and capital mobility?

Answer the followings: 1. A depreciation of the dollar on the foreign exchange market would result in: A) a decrease in the dollar prices paid by U.S. importers. B) foreign holidays for U.S. residents to be less expensive. C) a decrease in the demand for U.S. exports. D) an increase in the foreign currency prices paid for U.S. exports. 2. The exchange rate for one U.S. dollar is 1.2 Euros and 1.5 British pounds. Exactly six months later, the exchange rate for one U.S. dollar is 0.9 Euro and 1.7 British pounds. We can say: A) the dollar has depreciated relative to both British pounds and Euros. B) the dollar has appreciated relative to both British pounds and Euros. C) the dollar has appreciated relative to Euros and depreciated relative to British pounds. D) the dollar has appreciated relative to British pounds and depreciated relative to Euros. 3. The cost of a trip to New York, US, was $5000. Two weeks later, the US dollar appreciated against the British pound. If the price of the…

If the money supply in Mexico is increasing much more rapidly than the money supply in the United States, holding other factors constant, what would you predict will happen to the nominal exchange rate between the Mexican peso and the United States dollar if purchasing-power parity (PPP) holds? Explain.

In the foreign currency market for U.S. dollars: Which of the following would be correct?  U.S. residents are on the supply curve U.S. residents are on the demand curve Foreign residents are on the supply curve Foreign residents are on the demand curve

“If a country wants to keep its exchange rate fromchanging, it must give up some control over its monetary policy.” Is this statement true, false, or uncertain?Explain your answer

Suppose the foreign exchange market is characterized by the following equations: Qd  = 12.5 – 1.25R Qs  = 3.5 + 1.25R where  Qd  is the demand function for foreign exchange,  Qs  is supply function of foreign exchange, and  R  is exchange rate in units of domestic currency per unit of foreign currency (quantity is in million units of foreign currency). ===================== The foreign exchange market described above is Select one: stable unstable unpredictable none of the above

In recent years, China has helped make its currency ____ by ____ U.S. dollars. stronger; buying stronger; selling  weaker; buying weaker; selling

The Policy Trilemma states that a country or a monetary union cannot pursue the following three policies at the same time a) free capital mobility, a flexible exchange rate, and an independent monetary policy. b) capital controls, a flexible exchange rate, and an independent monetary policy. c) capital controls, a fixed exchange rate, and an independent monetary policy. d) free capital mobility, a fixed exchange rate, and an independent monetary policy.

Following on from the analysis in the previous questions, an economist comes to the conclusion that the best option for policymakers in order to influence the economy would be to fix the exchange rate, keep control of money supply and allow free movement of capital. Would you agree with such a statement and why?

There is trade between the U.S. (domestic country) and Great Britain (foreign country) and the quantity of pounds supplied is positively related to the exchange rate. The exchange rate is defined as the domestic currency price of the foreign currency, i.e., dollars per pound. Using clearly labeled graphs of demand for and supply of the foreign currency, show and explain what will happen to: (i) the demand for pounds and/or; (ii) the supply of pounds; and (iii) the value of the dollar against the pound as a result of each one of the following changes. (a) a decrease in tariffs in the Great Britain. (b) a decrease in prices of goods produced in China. Both the U.S. and Great Britain trade with China. (c) a decrease in interest rates in the U.S