CHAPTER 18
INTERNATIONAL FINANCE
SOLUTIONS TO END OF CHAPTER PROBLEMS
1.
a. –$2,075.0 billion
2.
a. Capital inflows
3.
a. The following graph illustrates supply and demand curves for British pounds
Chapter 18 International Finance 2
b. The new supply curve (S’£) has shifted to the right, parallel to the old curve, and
intersects the demand curve at point b.
4. According to the theory of purchasing power parity (PPP), the exchange rate between
two countries will adjust in the long run to equalize the cost of a basket of
5. From 1879 to 1914, the international financial system operated under a gold standard,
whereby the major currencies of the world were convertible into gold at a fixed rate.
6. Flexible exchange rates are determined by demand and supply and are continually
adjusted based on the forces at work in foreign exchange markets. At the same time, so
long as exchange rates remain flexible, federal governments have little direct influence
in foreign exchange markets. Under these circumstances, debits in the financial accounts
7. Under the managed float system, exchange rates generally fluctuate with changes in
supply and demand for foreign exchange. However, sporadic intervention by the central
banks is used to moderate exchange rate fluctuations among major currencies. Critics