15. Explain what is meant by an appreciation and depreciation of the dollar. What does it mean if the dollar
price of a Swiss franc (SF) decreases from $0.80 = 1 SF to $0.70 = 1 SF? What does it mean if the dollar
price of a Swiss franc increased from $0.70 = 1 SF to $0.80 = 1 SF?
16. The table below shows four different currencies and how much of each currency can be purchased with a
U.S. dollar.
Currency per U.S. $
Country
Currency
Year 1
Year 2
Britain
pound
0.50
0.60
Mexico
peso
6.00
6.50
Germany
euro
1.20
1.00
Japan
yen
110.00
125.00
Among which nations has the U.S. dollar appreciated (A) or depreciated (D) from year 1 to year 2?
Explain the appreciation or depreciation using the nations and numbers in the table.
17. What effect might the depreciation of the U.S. dollar relative to the Japanese yen have on imports and
exports to and from each country?
18. How would a substantial appreciation in the European euro in the foreign exchange market affect the
quantity of imports of European products by the U.S.? How would such an appreciation of the European
euro affect travel by Americans to Europe?
19. Explain how an increase or decrease in demand and supply will affect the value of a nation’s currency.
If the demand for a nation’s currency increases, other things equal, the currency of that nation will
appreciate. Conversely, if the demand for a nation’s currency decreases, other things equal, the currency of
that nation will depreciate.
20. How are changes in one currency mirrored in changes in some other foreign currency?
Currencies are linked because an appreciation in the value of one currency means that there has been a
21. Describe how changes in tastes affect the value of a nation’s currency.
22. Explain how changes in relative income affect the value of a nation’s currency.
If a foreign nation’s income rises more rapidly than other nations’ incomes, then its expenditures on
23. Do changes in relative price levels affect the value of a nation’s currency?
24. Do changes in relative inflation rates affect the value of a nation’s currency?
25. Explain how changes in relative real interest rates affect the value of a nation’s currency.
Higher relative real interest rates in one country will cause an increase in demand for the currency of that
country or an appreciation of that country’s currency as foreign investors seek higher rates of return. The
26. Do changes in relative expected returns on stocks, real estate and production facilities affect the value of a
nation’s currency?
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foreign investors will trade their domestic currencies for euros to invest in Spanish real estate. The
increased demand for the euro will appreciate the currency relative to the currencies exchanged.
27. How does speculation in currencies affect the value of a nation’s currency?
28. Determine the effect the following situations will have the exchange rate for the U.S. dollar.
(a) The United States experiences a recession, reducing imports, while their trading partners experience an
increase in output and incomes.
(b) The Federal Reserve lowers interest rates in the United States, while interest rates in other countries
remain constant.
(c) The demand for U.S. goods declines in other countries.
29. Why might a government intervene in the foreign exchange markets to try to increase or decrease the value
of its currency?
The U.S. economy can potentially benefit from a currency depreciation. It can stimulate the U.S. economy
because of an increase in the foreign purchases of U.S. goods and services as the value of foreign currency
30. Suppose that Mexico devalues the peso. What objectives would prompt the devaluation? Be specific.
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31. In the table below are the supply and demand schedules for euros.
Quantity of
euros supplied
Price
800
$1.20
700
1.15
600
1.10
500
1.05
400
0.95
300
0.90
200
0.85
(a) What will be the rate of exchange for the euro and for the U.S. dollar?
(b) What happens if the U.S. and European governments fix or “peg” the price of a euro at $0.95?
32. In the table below are the supply and demand schedules for Malaysian ringgits.
Quantity of
ringgits
supplied
Price
Quantity of
ringgits
demanded
700
$0.55
100
600
0.50
200
500
0.45
300
400
0.40
400
300
0.35
500
200
0.30
600
100
0.25
700
(a) What will be the rate of exchange for the Malaysian ringgit and for the U.S. dollar?
(b) What happens if the U.S. and Malaysian governments fix or “peg” the price of a ringgit at $0.50?
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33. The table below summarizes the exchange market for the dollar and euro. Use this information to answer
the following questions.
Dollar
price of
euro
Demand
for euro
Supply of
euro
0.00
275
25
0.25
250
50
0.50
225
75
0.75
200
100
1.00
175
125
1.25
150
150
1.50
125
175
1.75
100
200
2.00
75
225
(a) What is the equilibrium exchange rate and quantity?
(b) Suppose the European Central Bank decides to counter rampant growth by reducing the money supply
to moderate the European economy. How will the supply and demand situation for the euro change?
What likely effect will this have on the equilibrium exchange rate and quantity?
(c) Suppose that inflation increases in Europe. How will the supply and demand situation for the euro
change? What likely effect will this have on the equilibrium exchange rate and quantity?
(d) Suppose Europeans decide to take more vacations in the United States. Using the data in the table
above, calculate the new equilibrium. Assume the subsequent shift(s) (if one or more occur), causes
the affected curve(s) to shift by 50 in the appropriate direction.
(e) Suppose that to pull the U.S. economy out of a recession, the Federal Reserve decides to reduce
interest rates. Facing the same economic conditions, the European Central Bank decides to increase
the money supply. Using the data in the table above, calculate the new equilibrium. Assume the
subsequent shift(s) (if one or more occur), causes the affected curve(s) to shift by 50 in the appropriate
direction.
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34. Describe the three major disadvantages of flexible exchange rates.
First, flexible exchange rates are subject to great volatility, and thus create uncertainty in exchange rate
markets. This uncertainty can adversely affect trade because it creates more risks for those businesses that
35. The graph below shows a change in the demand for Swiss francs from D1 to D2. What would happen when
D1 shifted to D2 under a flexible exchange rate system compared to a fixed exchange rate system?
36. Determine whether each of the following characteristics is most likely an attribute of a flexible, fixed, or
managed exchange rate system.
(a) Consumer choice of imported goods may be restricted.
(b) Instability of the economy due to wide fluctuations.
(c) This system is considered a non-system.
(d) Occasional interventions are used to stabilize the economy.
(e) The purchasing power parity moves the system to equilibrium.
(f) Payment deficits tend to persist.
37. How does a fixed exchange rate system work? How can a nation maintain its fixed exchange rate?
In the fixed exchange rate system a nation might fix (or “peg”) its exchange rate with another nation. In
38. Discuss the difference in the foreign exchange market when a fixed exchange rate policy is used, as
opposed to a floating exchange rate.
39. Explain what foreign exchange reserves are and how they are used when a country implements a fixed
exchange rate policy.
40. Suppose the U.S. Dollar were fixed to the Mexican Peso and the demand for the peso decreased. Examine,
graphically and in discussion, the actions that would be required by the government.
41. Discuss the relationship between the foreign exchange reserves and the domestic money supply.
42. Describe the problem that will arise if there is a sustained difference between the fixed and equilibrium
exchange rates.
43. Explain how a fixed exchange rate policy may result in undesired inflation and how a government may go
about correcting it.
44. (Consider This) Discuss the effect of China’s fixed exchange rate policy.
45. Provide methods a country can use they experience a continual decrease in their foreign exchange reserves.
46. Explain the problems with exchange rate controls.
Exchange rate controls or capital controls would require foreign currency obtained in a trade transaction to
be sold to the government. Foreign currency needed for an import transaction would be bought from the
government. The government would ration foreign currency to meet currency exchange needs.
47. What domestic macroeconomic adjustments would be necessary to maintain fixed exchange rates when
there are persistent balance-of-payments deficits? What are the problems with these adjustments?
48. What is a balance-of-payments surplus?
49. What is the “managed float”?
50. What are the advantages and disadvantages of the managed float system of exchange rates?
51. What effects do U.S. trade deficits have on the U.S. economy?
52. Explain the major causes of the persistent trade deficits in the United States in the past decade.
The persistent trade deficits in the United States in recent years were the result of several factors. First,
there was more rapid growth in the domestic economy than in the economies of several major trading
partners. This factor caused U.S. imports to rise more than U.S. exports. Second, the United States
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53. What have been the principal effects of the persistent trade deficits?
54. “Trade deficits are a mixed blessing.” Interpret and elaborate.
55. (Last Word) Examine the decision to develop a shared currency across economies.
The primary benefit of developing a shared currency across economies is the ease of trade. When countries
share a currency the transaction costs associated with trade are greatly reduced. There is no need to
determine the conversion rate and prices are no longer given in multiple currencies. The exchange rate risk
associated international business and trade is also eliminated.
There are also costs of a shared currency. First, the loss of monetary policy independence. When economies
decide to share a currency they must also share monetary policy. If one country under the currency is