Question 1

Assuming the theory of purchasing power parity holds,what is the exchange rate between the United States and Mexico if the price of an avocado is $1.50 in the United States and 15.5 pesos in Mexico?

Accepted Answer

Purchasing power parity implies that the exchange rate should equal the ratio of the price levels. Therefore, 15.5 pesos / $1.50 = 10.33 pesos per dollar.

Question 2

The following figure depicts the demand for Japanese yen in the foreign currency exchange market. Use this figure to answer the following questions. 
-If interest rates in the United States fall,then we can expect that the demand curve

Accepted Answer

If interest rates in the United States fall, then the demand curve for the US dollar will increase from D1 to D2. This is because a lower interest rate makes it more attractive for foreigners to hold US dollars, which increases the demand for the US dollar.

Question 3

What is a pegged exchange rate? Give an example of a country that has a pegged exchange rate,explain how it is able to maintain a pegged exchange rate,and explain the economic advantage this country hopes to gain by pegging its exchange rate.

Accepted Answer

The answer of What is a pegged exchange rate? Give...

Question 4

Explain what is meant by derived demand,and discuss the importance of this concept to international trade.Describe another market with derived demand.

Accepted Answer

The answer of Explain what is meant by derived demand,and...

Question 5

Suppose the European Central Bank decides to issue more euros.Illustrate and explain the impact of this policy on the European economies using a model of exchange rates for the euro and an aggregate demand-aggregate supply model.

Accepted Answer

The answer of Suppose the European Central Bank decides to...

Question 6

Suppose the price of oil in Texas is initially $30 per barrel.New Mexico builds several large oil-burning power plants.This causes the price of oil in New Mexico initially to rise to $35 per barrel.According to the law of one price,what can we expect to happen to the price of oil in Texas and New Mexico,respectively,over the long run? Assume that it is difficult to transport oil from Texas to New Mexico.

Accepted Answer

The law of one price states that in the long run, the price of a homogeneous good will be the same in all locations, taking into account transportation costs. However, in this scenario, it is difficult to transport oil from Texas to New Mexico, so the prices are likely to remain different. The initial increase in price in New Mexico may cause some companies in Texas to increase their prices, but in the long run, competition should keep the prices settling between $30 and $35 per barrel in both regions.

Question 7

Based on marketing data,a large building materials retailer decides to sell lumber at a discounted rate in Louisiana.The campaign is successful,and the company decides to extend the discount over the long run.According to the law of one price,we can expect

Accepted Answer

The answer of Based on marketing data,a large building materials...

Question 8

If the price for oil in Texas is $30 per barrel,what is the price for oil in Oklahoma,according to the law of one price?

Accepted Answer

The answer of If the price for oil in Texas...

Question 9

The following figure depicts the supply for Japanese yen in the foreign currency exchange market. Use this figure to answer the following questions. 
-If the United States central bank decreases the supply of U.S.dollars,the supply curve for yen will ________.If the exchange rate for yen falls,then the supply curve will ________.

Accepted Answer

The answer of The following figure depicts the supply for...

Question 10

The following figure depicts the demand for Japanese yen in the foreign currency exchange market. Use this figure to answer the following questions. 
-If Japanese anime videos become incredibly popular in the United States,then we can expect that the demand for yen

Accepted Answer

As the popularity of Japanese anime videos increases in the United States, the demand for Japanese yen will increase, leading to a rightward shift of the demand curve from D₁ to D₂. This is because more U.S. dollars will be exchanged for yen to purchase Japanese anime videos, increasing the demand for yen. Therefore, the answer is D – the demand for yen will increase from D₁ to D₂.

Question 11

The following figure depicts the supply for Japanese yen in the foreign currency exchange market. Use this figure to answer the following questions. 
-If the Japanese central bank fixes its currency to the U.S.dollar and the demand for yen decreases,then the supply curve for yen will ________.If the Japanese central bank abandons its exchange rate manipulation policy,then the supply curve will ________.

Accepted Answer

The answer of The following figure depicts the supply for...

Question 12

Assuming a country is satisfied with its level of exports,why would a country still decide to peg its exchange rate to another currency,such as the U.S.dollar?

Accepted Answer

The answer of Assuming a country is satisfied with its...

Question 13

Complete the equation: current account balance =

Accepted Answer

The current account balance is equal to the balance of payments minus the capital account balance.

Question 14

Marco wants to buy a BMW while on a trip to Germany.The model that sells for $40,000 in the United States sells for 47,000 euros in Germany.Assuming that purchasing power parity holds,what is the exchange rate?

Accepted Answer

The answer of Marco wants to buy a BMW while...

Question 15

For which of the following goods and services is purchasing power parity LEAST likely to hold?

Accepted Answer

The answer of For which of the following goods and...

Question 16

Suppose a new study reveals major health benefits from the consumption of avocados,of which Mexico is the world's largest producer.As a result of the study,U.S.citizens start eating more avocados.Using a model of exchange rates,explain and illustrate the effect of this change in consumer preferences on both Mexican pesos and U.S.dollar markets.

Accepted Answer

The answer of Suppose a new study reveals major health...

Question 17

The following figure depicts the demand for Japanese yen in the foreign currency exchange market. Use this figure to answer the following questions. 
-If Japanese cars become much more popular in the United States while simultaneously Japanese interest rates fall,we can expect that the demand for yen will

Accepted Answer

The answer of The following figure depicts the demand for...

Question 18

The following figure depicts the supply for Japanese yen in the foreign currency exchange market. Use this figure to answer the following questions. 
-If the Japanese central bank increases the supply of yen,the supply curve for yen will ________.If the Japanese central bank fixes its currency to the U.S.dollar and demand for yen is high,then the supply curve will ________.

Accepted Answer

When the Japanese central bank increases the supply of yen, the supply curve for yen shifts rightward. If the currency is fixed to the U.S. dollar and demand is high, the central bank will also increase supply to maintain the fixed rate, causing another rightward shift.

Question 19

Many countries deliberately intervene in the foreign currency markets in an attempt to manipulate the value of their own currencies.How is a country able to devalue its currency? What is one advantage and one disadvantage of this type of intervention?

Accepted Answer

The answer of Many countries deliberately intervene in the foreign...

Question 20

The following figure depicts the demand for Japanese yen in the foreign currency exchange market. Use this figure to answer the following questions. 
-If American cars enjoy new,fad-based popularity in Japan,then we can expect that the demand for yen

Accepted Answer