Ch. 10: The Exchange Rate and the Balance of Payments. Exchange rates Definition Determinants Short run Long run Purchasing power parity Interest rate parity Balance of payments accounts Causes of an international deficit Alternative exchange rate policies and their long-run effects.
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Suppose that the exchange rate is 7 pesos per dollar. If you are in Mexico and must pay 120 pesos for a round of golf, it will cost you $_____ (give your answer to nearest dollar, no dollar sign – e.g. 37)
If the exchange changes from 8 yuan per dollar to 10 yuan per dollar, relative to the yuan, the dollar has _____ and the cost of U.S. imports from China _____.
Current exchange rates: per dollar, relative to the yuan, the dollar has _____ and the cost of U.S. imports from China _____.http://finance.yahoo.com/currency-investing
The the Mexican peso.trade-weighted index is the average exchange rate of the U.S. dollar against other currencies, with individual currencies weighted by their importance in U.S. international trade.
If $ is “too strong”, surplus of $
If $ is “too weak”, shortage of $
If U.S. demand for Chinese imports falls as a result of our recession, we should expect the dollar to _____ relative to the yuan because the ____ dollars will fall.
If the Chinese become less willing to buy U.S. bonds because of concerns about default, the dollar will ______ because the _______ dollars will decrease.
interest rate on foreign currency +
expected change in value of foreign currency
U.S. pays 5% interest; Japan pays 8% interest; Value of $ expected to depreciate by 5% over next year. People should buy their bonds from:
U.S. pays 5% interest; Japan pays 8% interest; Value of $ expected to depreciate by 5% over next year. Given the observed buying pattern in prior problem, we should expect interest rates to ___ in U.S. and ___ in Japan.
Suppose exchange rate is .75 Euros per dollar. The price of gold is $600 per ounce in U.S.; 500 euros per ounce in Euro-zone. Arbitrage would cause gold prices to ____ in U.S. and ___ in Euro-zone:
Three balance of payments accounts
The current accounts balance equals the sum of exports minus imports, net interest income, and net transfers.
Foreign investment in the United States minus U.S. investment abroad.
CAB = NX + Net interest income + Net transfers
If there is a fixed exchange rate system and the dollar is “undervalued”, the U.S. central bank will be forced to ___ dollars which will ___ the U.S. money supply