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Chapter 21: Q1. (page 451)

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

Short Answer

Expert verified

The correct option is option c: $200.

Step by step solution

01

Exchange-rate system

There are two types of exchange rate systems, fixed exchange rate and floating exchange rate systems.

When demand and supply determine exchange rates without government intervention, it is a floating-exchange-rate system. It is also called a flexible exchange-rate system.

When the government sets the exchange rates for its currency and adjusts the monetary and fiscal policy to maintain this rate, it is called a fixed-exchange-rate system.

02

Computing the cost of TV

The American company will have to convert 1200 yuan into dollars to pay for the television.

The current exchange between the US dollar and the Chinese Yuan is $1=6. The cost of the TV is 1200 Yuan. The American company will have to pay 1200/6 that is $200 for the television.

Hence, the correct option in the question is option “c”.

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Most popular questions from this chapter

If a country such as Greece that has joined the European Monetary Union can no longer use an independent monetary policy to offset a recession, what sorts of fiscal policy initiatives might it undertake? Give at least two examples.

If the economy booms in the United States while going into recession in other countries, the US trade deficit will tend to ________.

a. increase

b. decrease

c. remains the same

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?

Explain why the U.S. demand for Mexican pesos slopes downward and the supply of pesos to Americans slopes upward. Assuming a system of flexible exchange rates between Mexico and the United States, indicate whether each of the following will cause the Mexican peso to appreciate or depreciate, other things equal:

a. The United States unilaterally reduces tariffs on Mexican products.

b. Mexico encounters severe inflation.

c. Deteriorating political relations reduce American tourism in Mexico.

d. The U.S. economy moves into a severe recession.

e. The United States engages in a high-interest-rate monetary policy.

f. Mexican products become more fashionable to U.S. consumers.

g. The Mexican government encourages U.S. firms to invest in Mexican oil fields.

h. The rate of productivity growth in the United States diminishes sharply.

Suppose that the government of China is currently fixing the exchange rate between the US 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 want 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. They will increase.

b. They will decrease.

c. They will stay the same.

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