Chapter 21: Q5. (page 451)
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?
The supply of dollars will increase by $1250 million if all things are equal.
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Suppose that a Swiss watchmaker imports watch components from Sweden and exports watches to the United States. Also, suppose the dollar depreciates, and the Swedish krona appreciates, relative to the Swiss franc. Speculate as to how each would hurt the Swiss watchmaker.
Generally speaking, how is the dollar price of euros determined? Cite a factor that might increase the dollar price of euros. Cite a different factor that might decrease the dollar price of euros. Explain: "A rise in the dollar price of euros necessarily means a fall in the euro price of dollars." Illustrate and elaborate: "The dollar-euro exchange rate provides a direct link between the prices of goods and services produced in the eurozone and in the United States."Explain the purchasing-power-parity theory of exchange rates, using the euro-dollar exchange rate as an illustration.
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.
Alpha’s balance-of-payments data for 2020 are shown below. All figures are in billions of dollars. What are the (a) balance on goods, (b) balance on goods and services, (c) balance on the current account, and (d) balance on capital and financial account?
What do the plus signs and negative signs signify in the U.S. balance-of-payments statement? Which of the following items appear in the current account and which appear in the capital and financial account: U.S. purchases of assets abroad, U.S. services imports, foreign purchases of assets in the United States, U.S. goods exports, U.S. net investment income? Why must the current account and the capital and financial account sum to zero?
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