Principles of Economics 2e
2nd Edition
ISBN: 9781947172364
Author: Steven A. Greenlaw; David Shapiro
Publisher: OpenStax
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Textbook Question
Chapter 29, Problem 4SCQ
Suppose Argentina gets inflation under control and the Argentine inflation rate decreases substantially. What would likely happen to the
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Suppose Argentina gets inflation under control and the Argentine inflation rate decreases substantially. What would likely happen to the demand for Argentine pesos, the supply of Argentine pesos, and the peso/U.S. dollar exchange rate?
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We noted that in 1900, the fixed exchange rate between the British pound and the U.S. dollar was 1 pound equals $5. What is the exchange rate today? Whose currency has gained the most in purchasing power? What caused this dramatic change in the exchange rate?
Chapter 29 Solutions
Principles of Economics 2e
Ch. 29 - How will a stronger euro affect the following...Ch. 29 - Suppose that political unrest in Egypt leads...Ch. 29 - Suppose U.S. interest rates decline compared to...Ch. 29 - Suppose Argentina gets inflation under control and...Ch. 29 - This chapter has explained that one of the most...Ch. 29 - A booming economy can attract financial capital...Ch. 29 - How would a contractionary monetary policy affect...Ch. 29 - A central bank can allow its currency to fall...Ch. 29 - Is a country for which imports and exports...Ch. 29 - What is the foreign exchange market?
Ch. 29 - Describe some buyers and some sellers in the...Ch. 29 - What is the difference between foreign direct...Ch. 29 - What does it mean to hedge a financial...Ch. 29 - What does it mean to say that a currency...Ch. 29 - Does an expectation of a stronger exchange rate in...Ch. 29 - Does a higher rate of return in a nations economy,...Ch. 29 - Does a higher inflation rate in an economy, other...Ch. 29 - What is the purchasing power parity exchange rate?Ch. 29 - What are some of the reasons a central bank is...Ch. 29 - How can an unexpected fall in exchange rates...Ch. 29 - What is the difference between a floating exchange...Ch. 29 - List some advantages and disadvantages of the...Ch. 29 - Why would a nation dollarize—that is, adopt...Ch. 29 - Can you think of any major disadvantages to...Ch. 29 - If a countrys currency is expected to appreciate...Ch. 29 - Do you think that a country experiencing...Ch. 29 - Suppose a country has an overall balance of trade...Ch. 29 - We learned that changes in exchange rates and the...Ch. 29 - If a developing country needs foreign capital...Ch. 29 - Many developing countries, like Mexico, have...Ch. 29 - What would make a country decide to change from a...Ch. 29 - A British pound cost 2.00 in U.S. dollars in 2008,...
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- To keep the U.S. dollar from depreciating against the Japanese yen, the U.S. Federal Reserve must Buy Yen and sell U.S. dollars. Buy both Yen and U.S. dollars. Sell Yen and buy U.S. dollars. Sell both Yen and U.S. dollars.arrow_forwardIn 1992, 18.6 million Canadians visited the United States, but only 11.8 million U.S. residents visited Canada. By 2002, roles had been reversed: more U.S. residents visited Canada than vice versa. Why did the tourism reverse direction? Canada didn’t get any warmer from 1992 to 2002 – but it did get cheaper. The reason is a large change in the exchange rate: in 1992 Canadian dollar was worth $0.80, but by 2002 it had fallen in the value by 20% to about $0.65. This means that Canadian goods and services, particularly hotel rooms and meals, were about 20% cheaper for Americans in 2002 compared to 1992. American vacations had become 20% more expensive for Canadians. Canadians responded by vacationing in their own country or in other parts of the world. Foreign travel is an example of a good that has a high price elasticity of demand: elasticity=4.1. One reason is that foreign travel is a luxury good for most people – you may regret not going to Paris this year, but you can live…arrow_forwardIn 1961, Charles de Gaulle decided he did not want the French franc to be considered as a second-rate currency, so he chopped two zeros off the value of the franc, which meant the exchange rate was approximately FF5/$ 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_forward
- Who would demand U.S. dollars in the foreign exchange market? U.S. firms and households wishing to purchase foreign goods and services Foreigners wishing to purchase U.S goods and services U.S. households wishing to purchase U.S. goods and servicesarrow_forwardSuppose that yesterday, the U.S. dollar-Japanese yen exchange rate was $1=¥0.553546. The price of one Japanese yen in terms of a U.S. dollar was ___ . Suppose that today the U.S. dollar-Japanese yen exchange rate falls to $1=¥0.533585 for one dollar. This means that between yesterday and today, the U.S. dollar has ___ against the Japanese yen. The price of a Mexican peso in terms of the U.S. dollar is now ___ .arrow_forwardThe figure below illustrates the market for Bahamian dollars, where the price of the Bahamian dollar is valued in U.S. dollars. Assume that the Bahamian government wants to peg its currency to the U.S. dollar at a 1:1 ratio (one U.S. dollar = one Bahamian dollar). But the current exchange rate is at 90 cents (10 cents below the official peg). What must the Bahamian central bank do to return to the $1 exchange rate A. It would need to reduce the demand for the Bahamlan dollar. B. It would need to reduce the supply of the Bahamian dollar. C. It would need to Increase the supply of the Bahamian dollar. D. It would need to Increase the demand for the Bahamlan dollar. Part 2 Suppose you are a U.S. student and are thinking about visiting the Bahamas for spring break. You would rather the central bank intervened ___ (before or after) spring break. Part 3 Suppose that currently, the exchange rate is 1 Bahamian dollar for 1 U.S. dollar. The price of a Big Mac is $5 in the United States and 3.00…arrow_forward
- Suppose that one year ago the Government in Mexico has announced to keep the par value of the Peso against the US Dollar at 5, with the commitment to maintain the value of the Peso against the US dollar within a band of 3% of its par value. In the last two months, demand for US dollars in Mexico has been very strong, and the market value of the US Dollar has been exceeding the +3% upper band. The press reports that the Government and the Central Bank of Mexico are having a series of meetings to decide on a change on the par value of the Peso against the US Dollar. As a rational investor.... you should buy US Dollars today (for a maximum of Pesos 5.15), and sell them back for Pesos at the expected higher par value in the future you should sell US Dollars today (for a maximum of Pesos 5.15) and buy Dollars back at the expected higher par value in the future CH you should sell US Dollars today (for a maximum of Pesos 4.85), and buy Dollars back at the expected higher future par value you…arrow_forwardWhen you write an exchange rate in terms of how many units of a foreign currency it takes to buy one US dollar, we call that: a)a direct quote b) the real price c) an indirect quote d) a depreciationarrow_forwardSuppose U.S. interest rates decline compared to the rest of the world. What would be the likely impact on the demand for dollars, supply of dollars, and exchange rate for dollars compared to, say, euros?arrow_forward
- 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_forwardIf 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.arrow_forwardWhich of the following will lead to an appreciation of the U.S. dollar against the British pound? 1) an increase in U.S. demand for British imports 2) an increase in British demand for U.S. imports 3) a decrease in British demand for U.S. assets 4) an increase in British interest ratesarrow_forward
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