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Describe the easing
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Explanation of Solution
When the government takes a contractionary monetary policy under flexible exchange rate, the policy will reduce the domestic real interest rate. Due to this reduction in interest rate, the foreigners become less attractive to invest in domestic market. Then the inflow of foreign currency to the domestic market becomes less. Also, this will reduce the demand for domestic currency in foreign market. The less demand toward the domestic currency will force the foreigners to hold less domestic assets. These will lead the domestic currency to depreciate. The
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Chapter 15 Solutions
EBK PRINCIPLES OF MACROECONOMICS
- As the price level decreases, the cost of borrowing money will (remain the same/increase/decrease) , causing the quantity of output demanded to (rise/increase/fall/remain the same) . This phenomenon is known as the (exchange rate/interest rate/wealth) effect. Additionally, as the price level decreases, the impact on the domestic interest rate will cause the real value of the dollar to (rise/decrease/falll) in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will therefore (rise/increase/fall/remain the same) , and the number of foreign products purchased by domestic consumers and firms (imports) will (rise/decrease/fall/remain the same) . Net exports will therefore (rise/increase/fall/remain the same) , causing the quantity of domestic output demanded to (fall/increase/remain the same/rise) . This phenomenon is known as the (exchange rate/interest rate/wealth) effect.arrow_forward• Consider two open economies, the Philippines (Domestic Country) and Singapore (Foreign Country) • The price of foreign exchange is given by the amount of Philippine Peso (PHP) required to purchase a unit of Singapore Dollar (SGD). Hence: E = PHP SGD • At the initial equilibrium exchange rate, the prevailing interest rate for Philippine and Singaporean securities were both 3% • Given the recent series of rate hikes by the Bangko Sentral ng Pilipinas, the prevailing interest rates for Philippine securities increased to 5%, while that of Singaporean securities stayed the same Given this information, illustrate and explain the effects of the Philippine interest rate decrease on the equilibrium price of foreign exchange, and the equilibrium quantity of foreign exchange (SGD) in the market. Make sure to include the following: shifts (if any) in the supply and/or demand for foreign exchange (SGD), the change (if any) in equilibrium price and/or quantity of foreign exchange (SGD), and…arrow_forwardThe nominal exchange rate is the price of one currency in terms of another currency. A nominal exchange rate specifies how many units of one country's currency are needed to buy one unit of another country's currency. Suppose the following table presents nominal exchange rate data for May 21, 2019, in terms of U.S. dollars per unit of foreign currency. Use the information in the table to answer the questions that follow. Foreign Currency Cost of One Unit of Foreign Currency (Dollars) Brazilian real (BRL) 0.3666 Canadian dollar (CAD) 0.8493 Euro (EUR) 1.3288 Japanese yen (JPY) 0.009748 Mexican peso (MXN) 0.0889 United Kingdom pound (GBP) 1.8965 Suppose that on May 21, 2019, a marble statue handmade in Brazil is priced at BRL 2,750. The approximate U.S. dollar price of the statue would be . If the nominal exchange rate for the U.S. dollar–euro rises from $1.3288 to $1.52812 per euro, the euro in value, or , relative to the U.S. dollar.arrow_forward
- Assume that in the United States $1,000 wíll buy the same basket of goods that 20,000 pesos will buy in Mexico. The U.S. dollar/Mexican Peso exchange rate is $0.04 per peso. (a) Is the U.S. dollar overvalued or undervalued? Please explain. (b) Is the Mexican Peso overvalued or undervalued? Please explain. Consider the Purchasing Power Parity theory in your answer. (Only accept typing answers) (Only accept typing answers) (Only accept typing answers)arrow_forwardSuppose that the US interest rate is 5.4% per annum and the interest rate in Japan is 2.8% per annum. The value of the US dollar in the spot market is ¥74 what must the forward exchange rate be (yen per US dollar) for There to be no risk less profit? (Enter the numerical value only rounding to one decimal place) The forward rate you calculate above will be different and different from the spot rate explain why it cannot be the samearrow_forwardWhich of the following is true if Purchasing Power Parity holds between the Australian (AUD) and the New Zealand Dollar (NZD)? One AUD can be traded for one NZD in the FX market. New Zealand has the same level of money supply for the the NZD as Australia does for the the AUD. The long-run equilibrium real exchange rate between the AUD and NZD is equal to one. GDP per capita (PPP) is the same between the two countries. The long-run equilibrium nominal exchange rate between the AUD and the NZD is equal to zero. Note:- Do not provide handwritten solution. Maintain accuracy and quality in your answer. Take care of plagiarism. Answer completely. You will get up vote for sure.arrow_forward
- The nominal exchange rate is the price of one currency in terms of another currency. A nominal exchange rate specifies how many units of one country's currency are needed to buy one unit of another country's currency. Suppose the following table presents nominal exchange rate data for November 26, 2019, in terms of U.S. dollars per unit of foreign currency. Use the information in the table to answer the questions that follow. Cost of One Unit of Foreign Currency Foreign Currency (Dollars) Brazilian real (BRL) 0.4755 Canadian dollar (CAD) 0.8666 Euro (EUR) 1.2151 Japanese yen (JPY) 0.008538 Mexican peso (MXN) 0.0942 United Kingdom pound (GBP) 1.7552 Suppose that on November 26, 2019, an ornamental bookcase handmade in Germany is priced at EUR 830. The approximate U.S. dollar price of the bookcase would be If the nominal exchange rate for the U.S. dollar-Japanese yen rises from $0.008538 to $0.0093918 per Japanese yen, the Japanese yen v in value. or , relative to the U.S. dollar.arrow_forwardAs the price level rises, the cost of borrowing money will (remain the same, fall, rise), causing the quantity of output demanded to (remain the same, fall, rise). This phenomenon is known as the (exchange rate, interest rate, wealth) effect. When an economy’s price level rises, ceteris paribus, the domestic price level relative to the price level in other countries will (rise, fall). This means that domestic exports will be relatively (less, more) expensive than before, while foreign imports will be relatively (less, more) expensive than they were previously. The number of domestic products purchased by foreigners (exports) will therefore (remain the same, fall, rise), and the number of foreign products purchased by domestic consumers and firms (imports) will (remain the same, fall, rise). Net exports will therefore(remain the same, fall, rise), causing the quantity of domestic output demanded to(remain the same, fall, rise). This phenomenon is known as the (interest rate, open…arrow_forwardOn the following graph, use the grey point (star symbol) to show the new exchange rate resulting from an increase in the world demand for coffee. EXCHANGE RATE 10 8 2 0 0 The market for foreign exchange 20 S₁ D 1 40 60 QUANTITY (Millions of reais) 80 Ceiling Floor D2 100 New Exchange Rate Action (?)arrow_forward
- In the foreign exchange market, the supply curve for the dollar is upward sloping. That is, when the exchange rate (foreign currency per dollar) increases, the quantity of dollars supplied increases. Assuming actors have not yet had time to change their expectations about the future exchange rate, when the exchange rate increases, why is the supply curve of dollars in the foreign exchange market upward sloping? Foreign goods and services are less expensive to import. U.S. firms profit more by selling their goods and services domestically rather than selling to foreigners. The expected profitability of purchasing a dollar today to sell in the future rises. U.S. goods are less expensive for foreigners to purchase.arrow_forwardSuppose that one year ago the spot rate for the British pound was $1.17 per pound, while the spot rate for the peso was $0.65 per peso. The cross rate of the British pound one year ago was £1 = pesos. Suppose that now the spot rate for the British pound is $2.00 per pound, while the spot rate for the peso was $1 per peso. Now, the cross rate of the British pound is £1 = pesos. This represents a percent change in the cross rate of the British pound.arrow_forwardThe Big Mac index was introduced by The Economist magazine in 1986, as a playful example to introduce the concept of purchase power parity (PPP) and under/overvaluation of currencies. The PPP rates are usually compiled based on consumer baskets of comparable quality. The problem is that goods in different economies are hardly comparable. The customer basket contains only one good which is made everywhere in exactly the same way – McDonald’s Big Mac. You might think that is an oversimplification, but in fact the Big Mac Index has been widely used for comparing currencies ever since it was first published. Explore the concept behind the Big Mac index and critically assess the importance of comparability of goods in various economies.arrow_forward
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