On the graph, show the effect of an expansion in the United States that leads to an increase in American incomes.

A. Canada produces natural resources (coal, natural gas, and others), the demand for which has increased rapidly as China and other emerging economies expand. i. Explain how growth in the demand for Canada's natural resources would affect the demand for Canadian dollars in the foreign exchange market. Explain how the supply of Canadian dollars would change. ii. iii. Explain how the value of the Canadian dollar would change. iv. Illustrate your answer with a graphical analysis. 1

Suppose the exchange rate is such that 1 U.S. dollar equals 1 curo in New York and 0.9 euros in Paris. An arbitrageur would sell euros in New York and buy U.S. dollars in Paris in Paris and buy U.S. dollars in New York in New York while buying them in Paris in Paris while buying them in New York at the same price in both cities

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The following graph shows the market for euros in terms of dollars. The market is initially in equilibrium at $2.00 per euro and 8 billion euros. Suppose an economic downturn in the United States leads to a drop in American incomes, causing imports from Europe to decline. On the following graph, show the effect in the market for euros of an economic downturn in the United States that leads to a drop in European incomes. DOLLAR PRICE OF EUROS 4.0 3.5 3.0 2.5 2.0 1.5 1.0 0.5 0 0 2 Supply of Euros Demand for Euros 4 6 8 10 12 QUANTITY OF EUROS (Billions of euros) 14 Under a system of flexible exchange rates, the dollar will per euro. 16 Increase income taxes in the United States. Lower interest rates by way of monetary policy. Demand for Euros Subsidize the production of certain U.S. exports to Europe. Supply of Euros ? Now suppose that the United States maintains a fixed exchange rate of $2.00 per euro. Which of the following U.S. government policies would keep the balance-of-payments…

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5)  Indicate whether each of the following creates a demand for or a supply of European euros in foreign exchange markets: a.  Liberty purchases an Airbus plane assembled in France b.  Mercedes-Benz decides to build an assembly plant in Knoxville c.  A Liberty student decides to spend a year studying at the Sorbonne in Paris d.  An Italian manufacturer ships machinery from Rome to Venice on an Egyptian freighter e.  It is widely expected that the euro will depreciate in the near future

5. Balance of payments and the foreign exchange market The following graph shows the market for euros, which is initially in equilibrium. Suppose an economic expansion in Canada leads to an increase in the incomes of Canadian households, causing imports from Europe to rise. On the graph, illustrate the effect of an economic expansion on the market for euros by shifting the appropriate curve or curves. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. EXCHANGE RATE (Dollars per euro) Supply 1.25 XXX 1.00 0.75 2.00 1.75 1.50 0.50 0.25 0 Demand Supply Flexible exchange rates Fixed exchange rates (?)

EXCHANGE RATE (Dollars per euro) The following graph shows the short-run supply schedule (S,) and demand schedule (D) for the euro. S, denotes the long-run supply schedule of euros. The initial equilibrium exchange rate is $1.20 per euro. Suppose that the demand for euros increases to D,. On the graph, use the tan point (dash symbol) to indicate the short-run equilibrium exchange rate. Then use the grey point (star symbol) to indicate the long-run equilibrium exchange rate. Note: Dashed drop lines will automatically extend to both axes. The following graph shows the short-run supply schedule (So) and demand schedule (Do) for the euro. Si denotes the long-run supply schedule of euros. The initial equilibrium exchange rate is $1.20 per euro. Suppose that the demand for euros increases to D1. On the graph, use the tan point (dash symbol) to indicate the short-run equilibrium exchange rate. Then use the grey point (star symbol) to indicate the long-run equilibrium exchange rate. Note:…

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