Problem 1
An American company wants to buy a television from a Chinese company. The Chinese company sells its TVs for 1,200 yuan each. The current exchange rate between the U.S. dollar and the Chinese yuan is \(\$ 1=6\) yuan. How many dollars will the American company have to convert into yuan to pay for the television? a. \(\$ 7,200\) b. \(\$ 1,200\) c. \(\$ 200\) d. \(\$ 100\)
Problem 3
The exchange rate between the U.S. dollar and the British pound starts at \(\$ 1=£ 0.5 .\) It then changes to \(\$ 1=£ 0.75 .\) Given this change, we would say that the U.S. dollar has _______ while the British pound has _______. a. Depreciated; appreciated. b. Depreciated; depreciated. c. Appreciated; depreciated. d. Appreciated; appreciated.
Problem 4
A meal at a McDonald's restaurant in New York costs \(\$ 8 .\) The identical meal at a McDonald's restaurant in London costs £4. According to the purchasing-power-parity theory of exchange rates, the exchange rate between U.S. dollars and British pounds should tend to move toward: a. \(\$ 2=£ 1\) b. \(\$ 1=£ 2\) c. \(\$ 4=£ 1\) d. \(\$ 1=£ 4\)
Problem 5
Suppose that the Fed is fixing the dollar-pound exchange rate at \(\$ 2.50= £ 1\). If the Fed's reserve of pounds falls by \(£ 500\) million, by how much would the supply of dollars increase, all other things equal?
Problem 7
Suppose that the government of China is currently fixing the exchange rate between the U.S. dollar and the Chinese yuan at a rate of \(\$ 1=6\) yuan. Also suppose that at this exchange rate, the people who want to convert dollars to yuan are asking to convert \(\$ 10\) billion per day of dollars into yuan, while the people who are wanting to convert yuan into dollars are asking to convert 36 billion yuan into dollars. What will happen to the size of China's official reserves of dollars? a. Increase. b. Decrease. c. Stay the same.
Problem 8
Suppose that a country follows a managed-float policy but that its exchange rate is currently floating freely. In addition, suppose that it has a massive current account deficit. Other things equal, are its official reserves increasing, decreasing, or staying the same? If it decides to engage in a currency intervention to reduce the size of its current account deficit, will it buy or sell its own currency? As it does so, will its official reserves of foreign currencies get larger or smaller?
Problem 9
If the economy booms in the United States while going into recession in other countries, the U.S. trade deficit will tend to _______. a. Increase. b. Decrease. c. Remain the same.
Problem 10
Other things equal, if the United States continually runs trade deficits, foreigners will own _______ U.S. assets. a. More and more. b. Less and less. c. The same amount of.
