QUESTION 23 In the foreign exchange market, if the U.S. interest rate rises relative to interest rates in other nations, then the deman curve for U.S. dollars shifts to the right; shifts to the left and the supply curve of U.S. dollars shifts to the left; shifts to the left shifts to the right; shifts to the right does not shift: does not shifts
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- How would a contractionary monetary policy affect the exchange rate, net exports, aggregate demand, and aggregate supply?Does an expectation of a stronger exchange rate in the future affect the exchange rate in the present? If so, how?What are some of the reasons a central bank is likely to care, at least to some extent, about the exchange rate?
- Assume an economy has a budget surplus of 1,000, private savings of 4,000, and investment of 5,000. Write out a national saving and investment identity for this economy. What will be the balance of trade in this economy? If the budget surplus changes to a budget deficit of 1000k with private saving and investment unchanged, what Is the new balance of trade In this economy?You have been hired as a Marco Economist by the President of the United States to help evaluate the recentannouncement by Federal Reserve chairman Ben Bernanke that the FED will be increasing interest rates again.Ben Bernanke has justified the move on the grounds that the economy continues to be strong. Answer thefollowing questions. Provide a graphical explanation for your answers whenever possible. What is the effect on the foreign exchangemarket (the $ market)? 12. What impact will this have on imports?A. increaseB. decreaseC. remains unchanged 13. What impact does the change in the exchangerate have on aggregate demand?A. increase (shifts to the right)B. decrease (shifts to the left)C. remains unchanged 14. What happens to the aggregate supply curve?A. increase (shifts to the right)B. decrease (shifts to the left)C. remains unchangedYou have been hired as a Marco Economist by the President of the United States to help evaluate the recentannouncement by Federal Reserve chairman Ben Bernanke that the FED will be increasing interest rates again.Ben Bernanke has justified the move on the grounds that the economy continues to be strong. Answer thefollowing questions. Provide a graphical explanation for your answers whenever possible What is the effect on the foreign exchangemarket (the $ market)? 8. The exchange rate (the amount of foreigncurrency that a $ buys)?A. increaseB. decreaseC. remains unchanged 9. The U.S. dollar has?A. depreciatedB. appreciatedC. remained unchanged 10. The currency in the other country has?A. depreciatedB. appreciatedC. remained unchanged
- 6. In the exchange rate model in Example 7.2, supposethe company continues to manufacture its product inthe United States, but now it sells its product in theUnited States, the United Kingdom, and possibly othercountries. The company can independently set its pricein each country where it sells. For example, the pricecould be $150 in the United States and £110 in theUnited Kingdom. You can assume that the demandfunction in each country is of the constant elasticityform, each with its own parameters. The question iswhether the company can use Solver independently ineach country to find the optimal price in this country.(You should be able to answer this question withoutactually running any Solver model(s), but you mightwant to experiment, just to verify your reasoning.)Suppose you obtain the following quotes: Foreign exchange market: Spot rate: SUS$/€ = 1.0623 180-day Forward rate: F180US$/€ = 1.0765 Money market (180-day): RUS$ = 5.75% p.a. R€ = 4.25% p.a. Note: Keep your answers to 4 decimal points if necessary. a) Based on the above information, is there any arbitrage opportunity? If yes, what should the commercial bank do to capture this arbitrage opportunity? If not, why? Explain. b) Suppose the commercial bank has the ability to “move” the market (i.e., affecting the spot exchange rate, the forward exchange rate, and the returns on bonds in both countries), what happens to these variables after the transactions carried in part (a)? Explain. c) Instead of affecting the interest rates and the 180-day forward rate, suppose the spot exchange rate bears all the burden of adjustments, find the US$/€ spot rate that would eliminate interest arbitrageThe following are the items in the UK’s 2014 balance of payments (£ billions) Exports of goods............................................................................ 292.2 Exports of services.......................................................................... 215.0 Direct and portfolio UK net investment abroad ............................ –24.8 Reserves (adding to = –ve)............................................................... –7.1 Other (mainly short-term) financial inflows to UK.......................... 35.0 Other (mainly short-term) financial outflows from UK................. 100.3 Capital transfers to UK from abroad.................................................. 2.4 Capital transfers abroad from the UK................................................ 1.4 Net incomes and current transfers from/to abroad......................... –70.4 Imports of goods............................................................................ 413.4 Imports of…
- The following are the items in the UK’s 2014 balance of payments (£ billions) Exports of goods............................................................................ 292.2 Exports of services.......................................................................... 215.0 Direct and portfolio UK net investment abroad ............................ –24.8 Reserves (adding to = –ve)............................................................... –7.1 Other (mainly short-term) financial inflows to UK.......................... 35.0 Other (mainly short-term) financial outflows from UK................. 100.3 Capital transfers to UK from abroad.................................................. 2.4 Capital transfers abroad from the UK................................................ 1.4 Net incomes and current transfers from/to abroad......................... –70.4 Imports of goods............................................................................ 413.4 Imports of…3. Toyota manufactures most of the vehicles it sells in the United Kingdom in Japan. The baseplatform for the Toyota Tundra truck line is X1,650,000. The spot rate of the Japanese yen againstthe British pound has recently moved from X197/E to X190/E. How does this change the price of theTundra to Toyota's British subsidiary in British pounds?We saw that former Federal Reserve Chairman Ben Bernanke argued thatlow interest rates in the United States during the mid-2000s were due to a globalsavings glut rather than to Federal Reserve policy. In an interview with Albert Huntof Bloomberg Television, Alan Greenspan, who was Federal Reserve Chairman fromAugust 1987 through January 2006, made the following similar argument: Behind the low level of long-term rates: a global savings glut as China,Russia and other emerging market economies earned more money on exportsthan they could easily invest. (a) Use two loanable funds graphs to illustrate Greenspan’s argumentthat a global savings glut caused low interest rates in the United States. Onegraph should illustrate the situation in the United States, and the other graphshould illustrate the situation in the rest of the world.(b) Why should Alan Greenspan care about a debate over the causes oflow interest rates?