Economics (7th Edition) (What's New in Economics)
7th Edition
ISBN: 9780134738321
Author: R. Glenn Hubbard, Anthony Patrick O'Brien
Publisher: PEARSON
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Chapter 30, Problem 30.2.17PA
To determine
Explaining the collapse catastrophe due to “Argentina’s peg collapse”.
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The following graph depicts the supply schedule for euros.
Hint: You can drag the black point (cross symbol) to various positions on the graph to see the values of the coordinates on the graph. You will not be
graded for any changes you make to the graph.
VALUE OF EURO (U.S. dollars per euro)
1.9
1.8
1.7
1.6
1.5
1.4
1.3
1.2
1.1
0
50 100 150 200 250 300 350 400 450 500 550 600
QUANTITY OF EUROS (Billions)
At an exchange rate of 1.2 per euro, the quantity of euros supplied is
of euros supplied is
+
?
billion euros, while at an exchange rate of 1.8 per euro, the quantity
billion euros. This confirms that the supply schedule for euros is
sloping.
According to a survey ("Big MacCurrencies," The Economist, April 17th 1993), in 1993, the average price of a Big Mac in the U.S. was $2.28. In Japan, Big Mac fans had to fork out ¥391 for this feast. What was the PPP implied exchange rate between the $ and the ¥?
Suppose that the Japanese yen rises against the U.S. dollar-that is, it will take more dollars to buy a given amount of Japanese yen. Explain why this increase
simultaneously increases the real price of Japanese cars for U.S. consumers and decreases the real price of U.S. automobiles for Japanese consumers.
dollars, and the purchase of a U.S.
As the value of the yen grows relative to the dollar, the purchase of a Japanese automobile priced in yen requires
automobile priced in dollars requires
yen.
more
fewer
Chapter 30 Solutions
Economics (7th Edition) (What's New in Economics)
Ch. 30.A - Prob. 1RQCh. 30.A - Prob. 2RQCh. 30.A - Prob. 3RQCh. 30.A - Prob. 4RQCh. 30.A - Prob. 5RQCh. 30.A - Prob. 6RQCh. 30.A - Prob. 7PACh. 30.A - Prob. 8PACh. 30.A - Prob. 9PACh. 30.A - Prob. 10PA
Ch. 30.A - Prob. 11PACh. 30.A - Prob. 12PACh. 30.A - Prob. 13PACh. 30.A - Prob. 14PACh. 30.A - Prob. 15PACh. 30.A - Prob. 1RDECh. 30 - Prob. 30.1.1RQCh. 30 - Prob. 30.1.2RQCh. 30 - Prob. 30.1.3PACh. 30 - Prob. 30.1.4PACh. 30 - Prob. 30.1.5PACh. 30 - Prob. 30.1.6PACh. 30 - Prob. 30.2.1RQCh. 30 - Prob. 30.2.2RQCh. 30 - Prob. 30.2.3RQCh. 30 - Prob. 30.2.4RQCh. 30 - Prob. 30.2.5PACh. 30 - Prob. 30.2.6PACh. 30 - Prob. 30.2.7PACh. 30 - Prob. 30.2.8PACh. 30 - Prob. 30.2.9PACh. 30 - Prob. 30.2.10PACh. 30 - Prob. 30.2.11PACh. 30 - Prob. 30.2.12PACh. 30 - Prob. 30.2.13PACh. 30 - Prob. 30.2.14PACh. 30 - Prob. 30.2.15PACh. 30 - Prob. 30.2.16PACh. 30 - Prob. 30.2.17PACh. 30 - Prob. 30.2.18PACh. 30 - Prob. 30.2.19PACh. 30 - Prob. 30.2.20PACh. 30 - Prob. 30.3.1RQCh. 30 - Prob. 30.3.2RQCh. 30 - Prob. 30.3.3PACh. 30 - Prob. 30.3.4PACh. 30 - Prob. 30.3.5PACh. 30 - Prob. 30.2RDE
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- The Big Mac index was introduced by The Economist magazine in 1986, as a playful example to introduce the concept of purchase power parity (PPP) and under/overvaluation of currencies. The PPP rates are usually compiled based on consumer baskets of comparable quality. The problem is that goods in different economies are hardly comparable. The customer basket contains only one good which is made everywhere in exactly the same way – McDonald’s Big Mac. You might think that is an oversimplification, but in fact the Big Mac Index has been widely used for comparing currencies ever since it was first published. Explore the concept behind the Big Mac index and critically assess the importance of comparability of goods in various economies.arrow_forwardRUBLES PER KRONE RUBLES PER KRONE 3. Changes in the foreign exchange market The following questions focus on the exchange rate between the Russian ruble and the Danish krone. Assume the exchange rate is flexible. The exchange rate is defined as the number of rubles you must pay for one krone. Suppose a recession in Russia causes Russian incomes to decrease, while incomes in Denmark remain the same. Shift the appropriate curve or curves on the following graph to illustrate how this affects the market for Danish kroner if all other things remain equal. Note: Select and drap 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. Supply of Kraner Demand for Kraner Demand for Kroner QUANTITY OF KRONER Supply of Kroner ? The decrease in Russian Incomes causes the Danish krone to relative to the Danish krone. relative to the Russian ruble and causes the Russian…arrow_forward12.When the Chips Are Down The Economist magazine uses the price of a Big Mac to determine whether a currency is undervalued or overvalue. In July 2010, the price of a Big Mac was $3.73 in New York, 13.2 yuan in Beijing, and 6.50 Swiss francs in Geneva. The exchanges rates were 6.78 yuan per U.S. dollar and 1.05 Swiss francs per U.S. dollar. a. Was the yuan undervalued or overvalued relative to purchasing power parity? b. Was the Swiss franc undervalued or overvalued relative to purchasing power parity c. Do you think the price of a Big Mac in different countries provides a valid test of purchasing power parity? 13.The price level in the Eurozone is 112.4, the prize level in the United States in 109.1 and the nominal exchange rate was 80 euro cents per U.S dollar. what was the real exchange rate expressed as Eurozone real GDP per unit of U.S. read GDP? 14.The Canadian price level is 106.3 the Japanese price level is 95.4 and the real exchange rate is 103.6…arrow_forward
- Using the concept of "carry trade," explain how a decrease in U.S. interest rates could affect the EUR/USD exchange rate. Given this change in exchange rate, how would firms and customers be affected? professors note Supply and demand for currencies can be tricky, not least due to the confusing idea that what we are buying or selling is money itself! Once you can wrap your mind around the idea that money is what is being obtained for other money, the next set of questions relates to what would or could make the price of one money change in terms of another. To this effect, I'd recommend a primer from Investopedia: Six Factors That Influence Exchange Rates. For your consideration in responding to this post, I suggest reading on how the Carry Trade has the capacity to magnify systemic risk.arrow_forwardIn the foreign exchange market, the supply curve for the dollar is upward sloping. That is, when the exchange rate (foreign currency per dollar) increases, the quantity of dollars supplied increases. Assuming actors have not yet had time to change their expectations about the future exchange rate, when the exchange rate increases, why is the supply curve of dollars in the foreign exchange market upward sloping? Foreign goods and services are less expensive to import. U.S. firms profit more by selling their goods and services domestically rather than selling to foreigners. The expected profitability of purchasing a dollar today to sell in the future rises. U.S. goods are less expensive for foreigners to purchase.arrow_forward(a) There are two countries in the world, Australia and Japan. Suppose that the central bank of Australia lowers the real interest rate, while the central bank of Japan raises the real interest rate. In this case, the nominal exchange rate (Yen/Dollar) increases. Answer true or false. Please briefly explain your answer. (b) Argentina is an open economy. Suppose that Argentina fixes the value of their currency to US dollars. If Argentina experiences hyperinflation, it can stabilize inflation by using its monetary policy freely. Answer true or false. Please briefly explain your answer.arrow_forward
- The following graph depicts the foreign exchange market for euros. The blue line represents the demand schedule for euros, while the orange line represents the euro supply schedule. Suppose that real interest rates in France suddenly increase, while real interest rates in the United States remain stable. Use the graph to shift either the supply schedule, the demand schedule, or both, to depict the impact on the value of the euro. Then answer the question that follows. D QUANTITY OF EUROS As a result of this, the value of the euro is expected top VALUE OF EURO (U.S. dollars per euro)arrow_forwardThe following question focuses on the exchange rate between Mexican pesos and U.S. dollars, defined as the number of Mexican pesos you must pay for one dollar. Suppose that incomes decrease in Mexico, causing Mexican consumers to purchase fewer U.S.-made goods and services. How does this affect the peso-dollar exchange rate? Drag the appropriate curve(s) on the following graph to illustrate how this change affects the market for dollars. Tool tip: Click and drag one or both of the curves. Curves will snap into position, so if you try to move the curve and it snaps back to its original position, just try again and drag it a little farther. EXCHANGE RATE (Pesos per dollar) Supply Demand FOREIGN EXCHANGE IMIlions of dollars) A decrease in incomes that causes Mexican consumers to buy fewer U.S.-made goods and services will cause the Mexican peso to relative to the dollar, appreciate depreciatearrow_forwardAssume in a given month, Japan's export to the U.S. increased. How such an increase will affect the Japanese Yen? From a U.S. perspective, how this increase will affect the U.S. dollar? Knowing that both currencies can float, verbally explain your answers using the demand/supply model (no need to draw a graph).arrow_forward
- Real Exchange Rate Suppose the Canadians suddenly have a switch in taste from Japanese automobiles to American automobiles. On the following graph, indicate what happens to the demand for U.S. dollars in the market for foreign-currency exchange as a result of this change in tastes. Supply Quantity of Dollars Demand Demand Supply This causes the value of dollars in the market for foreign-currency exchange to exports to , and the equilibrium quantity of netarrow_forwardExplain, with the aid of a graph, what will happen to the exchange rate between the rand and the dollar if more South African residents purchase shares in American companies. Also comment on the impact on the equilibrium quantity of dollars.arrow_forwardSuppose Indonesia drastically decreases the size of their import quota for red onions. Use the interactive graph to illustrate the impact the decreased quota has on the foreign exchange market for rupiahs. The rupiah's real exchange rate remains constant. Considering the previous answer, choose the answer that describes what happens to Indonesia's net exports (NX). O Net exports decrease. Net exports increase. Net exports do not change. Real exchange rate Supply Quantity of rupiahs Demandarrow_forward
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