The need for the transaction of international currency.
Explanation of Solution
International transactions take place mainly when there are exchanges of goods and services between the nations. The nation which exports receives currency and the nation which imports pays the currency of others or internationally-accepted currency. This is how the normal exchange of currency takes place. The barter system was present before the introduction of money as the medium of exchange. It was the system in which commodities were traded for other commodities. Now, the barter system cannot be found anywhere between the countries. Even if found, it will be a very rare case.
Even though there are no imports or exports of goods and services in the country, the financial market may be linked to other countries. The asset market as well as the share markets is interlinked and any country can make investments in the asset and share market of the country. Thus, as a result, even though there are no imports or exports, the nation can still engage in international financial transactions.
Concept introduction:
Currency: It is the form of money used in society as a medium of exchange.
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Chapter 27 Solutions
MICROECONOMICS--LOOSELEAF
- 2. Suppose a currency is temporarily undervalued by a fixed exchange rate system, such as the international gold standard. Let that currency be the US dollar, and expressed in terms of British pounds. a. Show this disequilibrium using a supply and demand graph. Be sure to carefully label your axes. b. Clearly explain how one could profit by arbitraging in dollars using a bill of exchange. If it helps, you can use a numerical example.arrow_forwardAssume that the U.S. interest rate is 12 percent, while the British interest rate is 15 percent. If interest rate parity exists, then: O a.U.S. investors will earn 12 percent whether they use covered interest arbitrage or invest in the United States. O b. U.S. investors will earn a higher rate of return when using covered interest arbitrage than what they would earn in the United States. O c. British investors who invest in the United Kingdom will achieve the same return as U.S. investors who invest in the United States. O d. U.S. investors will earn 15 percent whether they use covered interest arbitrage or invest in the United States.arrow_forwardTable 18-3 Country Units of Foreign Currency per U.S. Dollar U.S. Dollars per Unit of Foreign Currency Danish krone 5.00 EU euro 0.70 Refer to Table 18-3. Given the following exchange rates in the above table, what are the exchange rates stated as U.S. dollars per Danish krone and U.S. dollars per EU euro respectively? Group of answer choices 0.02 dollars per krone and 0.70 dollars per euro 2.00 dollars per krone and 7.14 dollars per euro 0.05 dollars per krone and 1.30 dollars per euro 0.20 dollars per krone and 1.43 dollars per euroarrow_forward
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