Suppose country A’s goods becomes more popular with foreign consumers, and country B’s less so. How would this affect each country, assuming that they (a) have their own independent currency and (b) share a common currency? Use the Aggregate Demand and Aggregate Supply framework to explain your answer, and comment briefly on the desirability of currency union.

An exchange rate is the domestic price to purchase one unit of a foreign currency. For example, how much does it cost in Canadian dollars to buy one US dollar? There are various economic theories to predict exchange rates. The simplest theory is known as the Law of One Price or also known as Absolute Purchasing Power Parity (PPP). Use absolute PPP and the price of a Big Mac in different countries to complete the table below and to predict whether the local currency is over or undervalued compared to the US dollar. Country USA Canada Saudi Arabia Brazil Italy Source: The Economist Big Mac Price in Local Currency $4.62 $5.54 SR 10 R$ 12 €3.75 Current Market Exchange Rate e 1.10 3.75 2.27 0.74 Exchange Rate Predicted by PPP and Big Mac ê According to the table above, an arbitrageur in Brazil could make money by If the Big Mac Index were accurate for other tradeable goods and services, Brazil's AD curve would O Local Currency should... the US. 수 + 8°C. Clou

You have just been hired by the U.S. government to analyze the following scenario. Suppose the U.S. agricultural industry is concerned about the level of fruit and vegetable imports to the United States, a practice that hurts domestic producers. Lobbyists claim that implementing a tariff on imports would shrink the size of the trade deficit. The following exercise will help you to analyze this claim. The following graph shows the demand and supply of U.S. dollars in a model of the foreign-currency exchange market. Shift the demand curve, the supply curve, or both to show what would happen if the government decided to implement the tariff.   Given this change, the dollar_______ (appreciates/depreciates).   Fill in the following table with the effect of a tariff on the following items:

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