978-1259291814 Chapter 22 Solution Manual

Chapter 22: International Finance

Solutions Manual

Questions for Discussion

1. Why would a decline in the value of the dollar prompt foreign manufacturers such as BMW to

build production plants in the United States? (LO 22-03)

Answer: BMW can produce cars at a lower cost in the United States when the dollar falls in

2. How do changes in the value of the U.S. dollar affect foreign enrollments at U.S. colleges?

3. How would rapid inflation in Canada affect U.S. tourism travel to Canada? Does it make any

difference whether the exchange rate between Canadian and U.S. dollars is fixed or flexible?

4. Under what conditions would a country welcome a balance-of-payments deficit? When would

it not want a deficit? (LO 22-03)

Answer: A balance-of-payments deficit or surplus occurs with fixed exchange rates. A floating

exchange rate system would change the exchange rate to eliminate any imbalance. In a fixed

5. In what sense do fixed exchange rates permit a country to “export its inflation”? (LO 22-01)

6. Why did the value of the Ukrainian hryvnia depreciate so much when Russia invaded (p.476)?

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7. If a nation’s currency depreciates, are the reduced export prices that result “unfair”? (LO

22-03)

8. How would each of these events affect the supply or demand for Japanese yen? (LO 22-01)

(a) Stronger U.S. economic growth.

(b) A decline in Japanese interest rates.

(c) Higher inflation in the United States.

(d) A Japanese tsunami.

Answers:

(a) U.S. imports of Japanese goods would increase, causing greater demand for Japanese yen.

(c) U.S. imports of Japanese goods (with relatively lower prices) would increase, causing more

(d) The tsunami restricted Japanese output, increased unemployment, and reduced incomes.

9. Who in Mexico is helped or hurt by a strong U.S. dollar? Redo the World View on p. 475 for

Mexicans. (LO 22-03)

Answer:

Who Gains, Who Loses from Strong Dollar

The value of the U.S. dollar has been rising since 2010. In the past 4 years, the dollar has risen

The winners:

Mexican exporters to sell their product in the U.S.

The losers:

Consumers that purchase goods made in the U.S.

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10. Why does the World View on page 481 say the undervalued yuan is “more bane than boom”?

Problems

1. According to the World View on page 472, which nation had

(a) The cheapest currency?

(b) The most expensive currency?

(LO 22-02)

Answers:

Feedback:

(a) According to the World View, the dollar price of the Indonesian rupiah was 0.001, making it

(b) According to the World View, the dollar price of the British pound was 1.668, making it the

2. If a euro is worth $1.20, what is the euro price of a dollar? (LO 22-02)

Feedback: If one euro is worth $1.20, then one dollar is worth 0.83 euros (= €1/ 1.20).

3. How many Ukrainian hryvnia (see p. 476) could you buy with one U.S. dollar

(a) Before the Russian invasion?

(b) After the Russian invasion?

(LO 22-03)

Answer:

Feedback:

(a) If one hryvnia was worth $0.123, then one dollar was worth 8.13 hryvnia (= 1 / $0.123).

(b) After the Russian invasion, one hryvnia is worth $0.076, so then one dollar is worth 13.16

4. If a McDonald’s Big Mac sells for $4.00, how much will it cost in the currencies of

(a) Brazil?

(b) Japan?

(c) Indonesia?

(See World View, p. 472) (LO 22-02)

Answer:

Feedback:

(a) $4.00 × 2.2627 = 9.0508 real

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(b) $4.00 × 102.3284 = 409.3136 yen

(c) $4.00 × 11,699.5000 = 46,798 rupiah

5. If a pound of U.S. pork cost 40 baht in Thailand before the Asian crisis (p. 476), how much did

it cost after the devaluation? (LO 22-03)

6. If a PlayStation 3 costs 20,000 yen in Japan, how much will it cost in U.S. dollars if the

exchange rate is

(a) 110 yen = $1?

(b) 1 yen = $0.009?

(c) 100 yen = $1?

Answers:

7. Between 1997 and 2000, by how much did the dollar appreciate (Figure 22.3)? (LO 22-02

8. If inflation raises U.S. prices by 2 percent and the U.S. dollar appreciates by 5 percent, by how

much does the foreign price of U.S. exports change? (LO 22-01

9. According to the World View on page 472, what was the peso price of a euro in August 20

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10. For each of the following possible events, indicate whether the global value of the U.S. dollar

will A: rise or B: fall.

(a) American cars become suddenly more popular abroad.

(b) Inflation in the United States accelerates.

(c) The United States falls into a recession.

(d) Interest rates in the United States drop.

(e) The United States experiences rapid increases in productivity.

(f) Anticipating a return to the gold standard, Americans suddenly rush to buy gold from the

two big producers, South Africa and the Soviet Union.

(g) War is declared in the Middle East.

(h) The stock markets in the United States collapse.

(LO 22-03)

Answers:

(a) (A) Rise.

Feedback:

(a) If American cars suddenly become more popular abroad, demand for the dollar will increase

(foreigners must purchase American cars with dollars), causing a rise in the value of the U.S.

dollar.

(b) If inflation in the United States accelerates, U.S. products become more expensive abroad

and fewer U.S. exports are purchased. This leads to a decrease in the demand for dollars and a

fall in the value of the U.S. dollar.

(c) In a recession, U.S. incomes are depressed and Americans spend less, including less on

imports. So the supply of dollars diminishes and the dollar rises in value.

(d) If interest rates in the U.S. drop, investors will want to move their deposits from the U.S. to

countries where a greater return can be earned. Demand for the U.S. dollar will fall, and it will

depreciate.

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(e) If the U.S. experiences rapid increases in productivity, American goods would therefore

become more competitive. This would increase demand for American exports thereby

increasing demand and the value of the dollar.

11. The following schedules summarize the supply and demand for trifflings, the national currency

of Tricoli:

Use these schedules for the following:

(a) Graph the supply and demand curves on the next page.

(b) Determine the equilibrium exchange rate.

(c) Determine the size of the excess supply or excess demand that would exist if the Tricolian

government fixed the exchange rate at $22 = 1 triffling.

(d) Which of the following events would help reduce the payments imbalance? Which would

not? (A = helps; B = doesn’t help)

(i) Domestic inflation.

(ii) Foreign inflation.

(iii) Slower domestic growth.

(iv) Faster domestic growth.

Answers:

(a)

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Feedback:

(a) The demand curve has a negative relationship between price and quantity demanded. The

(b) The equilibrium exchange rate occurs at the point where quantity demanded is equal to

(c) If the Tricolian government fixed the exchange rate at $22 = 1 triffling, an excess supply

(d) In order to bring about an equilibrium exchange rate at $22, an increase in demand or a

(i) Domestic inflation increases the price of domestic goods relative to imports. The supply of

(ii) Foreign inflation makes imports more expensive and Tricolian exports relatively cheaper.

(iii) Slow domestic growth limits income growth and demand for imports. This reduces the

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(iv) Fast domestic growth expands income growth and demand for imports. This increases the

12. As shown in Table 22.1, in 2013 the United States was running a current account deficit. Would

each of the following events increase (I) or decrease (D) the current account deficit?

(a) U.S. companies, the largest investors in Switzerland, see even more promising investment

opportunities there.

(b) The Netherlands, one of the largest foreign investors in the U.S. finds investment

opportunities less attractive.

(c) Unemployment rises and recession deepens in the United States

Answers:

Feedback:

(a) If U.S. companies invest in Switzerland to an even greater extent, then item #9 (U.S. capital

(b) If the Netherlands finds investment opportunities in the United States less attractive, then

(c) If high unemployment and recession continue in the United States, then item #2

13. The following exchange rates were taken from ExchangeRate.com. On August 1, 2014, by how

much did the dollar appreciate or depreciate against the

(a) Argentine peso?

(b) European euro?

(LO 22-02)

Answers:

Feedback:

(a) According to the table, the exchange rate value of the Argentine peso increased from

(b) According to the table, the exchange rate value of the European euro decreased from

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