Economics: Principles & Policy
14th Edition
ISBN: 9781337696326
Author: William J. Baumol; Alan S. Blinder; John L. Solow
Publisher: Cengage Learning
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Question
Chapter 35, Problem 4TY
To determine
The effects of the act of arbitrage on price fluctuations.
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In Belarus, the government doesn’t allow trading of its ruble outside a narrow price range, which greatly overvalues the ruble – there is a price floor on the ruble compared to euros or dollars. Because of the floor, currency trading has dried up – who would want to sell foreign currencies for grossly overpriced Belarusian rubles? A friend of one of my students has a web site designed to overcome rigidities in this market, a sort of Craigslist for currency. People specify amounts they are willing to buy or sell, agree to trade at some price and arrange a meeting place. When they meet, the trade nominally occurs at the official price floor, making the transaction nominally legal; but the person selling rubles makes extra payments to the buyer to lower the price sufficiently so that the trade actually takes place at the equilibrium price. This is one more way in which technology helps markets circumvent imperfections and rigidities.
Q: If the Belarusian government increases…
Which of the following surprises would most likely
decrease the valuation of a currency?
Surprise increase in PPI
Surprise increase in central bank rates
Surprise decrease in CPI
One reason that the quantity of money
demanded will increase as the value of a
currency decreases is called:
a) Import effect
b) export effect
c) Trade effect
d) None of the above
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