Principles of Economics 2e
2nd Edition
ISBN: 9781947172364
Author: Steven A. Greenlaw; David Shapiro
Publisher: OpenStax
expand_more
expand_more
format_list_bulleted
Textbook Question
Chapter 29, Problem 25CTQ
If a country’s currency is expected to appreciate in value, what would you think will be the impact of expected exchange rates on yields (e.g., the Interest rate paid on government bonds) in that country? Hint: Think about how expected exchange rate changes and interest rates affect a currency’s demand and supply.
Expert Solution & Answer
Trending nowThis is a popular solution!
Students have asked these similar questions
Explain how an increase in price level in a country can affect the exchange rate of the country and explain the effects of this change on the country’s economy
Using the concept of "carry trade," explain how a decrease in U.S. interest rates could affect the EUR/USD exchange rate. Given this change in exchange rate, how would firms and customers be affected?
professors note
Supply and demand for currencies can be tricky, not least due to the confusing idea that what we are buying or selling is money itself!
Once you can wrap your mind around the idea that money is what is being obtained for other money, the next set of questions relates to what would or could make the price of one money change in terms of another.
To this effect, I'd recommend a primer from Investopedia: Six Factors That Influence Exchange Rates.
For your consideration in responding to this post, I suggest reading on how the Carry Trade has the capacity to magnify systemic risk.
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.
Chapter 29 Solutions
Principles of Economics 2e
Ch. 29 - How will a stronger euro affect the following...Ch. 29 - Suppose that political unrest in Egypt leads...Ch. 29 - Suppose U.S. interest rates decline compared to...Ch. 29 - Suppose Argentina gets inflation under control and...Ch. 29 - This chapter has explained that one of the most...Ch. 29 - A booming economy can attract financial capital...Ch. 29 - How would a contractionary monetary policy affect...Ch. 29 - A central bank can allow its currency to fall...Ch. 29 - Is a country for which imports and exports...Ch. 29 - What is the foreign exchange market?
Ch. 29 - Describe some buyers and some sellers in the...Ch. 29 - What is the difference between foreign direct...Ch. 29 - What does it mean to hedge a financial...Ch. 29 - What does it mean to say that a currency...Ch. 29 - Does an expectation of a stronger exchange rate in...Ch. 29 - Does a higher rate of return in a nations economy,...Ch. 29 - Does a higher inflation rate in an economy, other...Ch. 29 - What is the purchasing power parity exchange rate?Ch. 29 - What are some of the reasons a central bank is...Ch. 29 - How can an unexpected fall in exchange rates...Ch. 29 - What is the difference between a floating exchange...Ch. 29 - List some advantages and disadvantages of the...Ch. 29 - Why would a nation dollarize—that is, adopt...Ch. 29 - Can you think of any major disadvantages to...Ch. 29 - If a countrys currency is expected to appreciate...Ch. 29 - Do you think that a country experiencing...Ch. 29 - Suppose a country has an overall balance of trade...Ch. 29 - We learned that changes in exchange rates and the...Ch. 29 - If a developing country needs foreign capital...Ch. 29 - Many developing countries, like Mexico, have...Ch. 29 - What would make a country decide to change from a...Ch. 29 - A British pound cost 2.00 in U.S. dollars in 2008,...
Additional Business Textbook Solutions
Find more solutions based on key concepts
Define cost pool, cost tracing, cost allocation, and cost-allocation base.
Horngren's Cost Accounting: A Managerial Emphasis (16th Edition)
Describe the three levels of strategy and what a manager developing strategy at each level is concerned with.
Principles of Management
A process that is often linked to Six Sigma and is designed toward continuous improvement by eliminating waste ...
Principles of Accounting Volume 2
Discussion Questions 1. What characteristics of the product or manufacturing process would lead a company to us...
Managerial Accounting (4th Edition)
E2-13 Identifying increases and decreases in accounts and normal balances
Learning Objective 2
Insert the mis...
Horngren's Accounting (11th Edition)
Ravenna Candles recently purchased candleholders for resale in its shops. Which of the following costs would be...
Financial Accounting (12th Edition) (What's New in Accounting)
Knowledge Booster
Similar questions
- If a French car costs 10,000 euros, a similar American car costs 15000 dollars, and a euro can buy 1.2 dollars. what is real exchange rates ( you may assume any currency as the “domestic currency”) If a French car costs 10,000 euros, a similar American car costs 15000 dollars, and a euro can buy 1.2 dollars. what is real exchange rates ( you may assume any currency as the “domestic currency”) ???arrow_forwardIn 1992, 18.6 million Canadians visited the United States, but only 11.8 million U.S. residents visited Canada. By 2002, roles had been reversed: more U.S. residents visited Canada than vice versa. Why did the tourism reverse direction? Canada didn’t get any warmer from 1992 to 2002 – but it did get cheaper. The reason is a large change in the exchange rate: in 1992 Canadian dollar was worth $0.80, but by 2002 it had fallen in the value by 20% to about $0.65. This means that Canadian goods and services, particularly hotel rooms and meals, were about 20% cheaper for Americans in 2002 compared to 1992. American vacations had become 20% more expensive for Canadians. Canadians responded by vacationing in their own country or in other parts of the world. Foreign travel is an example of a good that has a high price elasticity of demand: elasticity=4.1. One reason is that foreign travel is a luxury good for most people – you may regret not going to Paris this year, but you can live…arrow_forwardAssume that there are substantial capital flows among Country A, Country B and Country C. How will a decrease in interest rates in one country (Say A) exchange rate between country A and country B currencies ( if inflationary expectations remain unchanged). Can this affect the exchange rate between Country A and C too? How?arrow_forward
- How would I find the actual exchange rate to answer the bottom part of the data shown.arrow_forwardAssume that you are studying exchange rates between India and the US. Assume that the equilibrium exchange rate in India is 76 Indian rupees per US dollar. Now suppose that the inflation rate falls in India. Which of the following choices shows a change we would expect to see in the Indian forex market? The demand for the US dollar would rise, leading to a depreciation of the Indian rupee. The demand for the Indian rupee would increase leading to an appreciation of the US dollar. The supply of the Indian rupee would rise leading to an appreciation of the Indian rupee. The supply of the US dollar would rise leading to an appreciation of the Indian rupeearrow_forwardThe following paragraphs discuss the impact of various economic events on the exchange rate. Complete the paragraphs by filling in the blanks. Use any of the words from the following list (you can use each of these words as many times as you wish but choose carefully - your sentence must make grammatical sense):demand supply left right buy sell imports exports rise fall increases decreases What happens to the current account balance and the exchange rate when the following happens? Suppose that New Zealand firms become more profitable relative to foreign firms and so increase their payment of dividends (everything else held constant). The value for net foreign income therefore ________ and the value of the current account balance will _______. Payment of NZ dividends to foreign owners affects the _______ or/of $NZ while payments of foreign dividends to NZ owners of foreign companies affects the _______ for/of $NZ. Therefore the impact of the change in profit of NZ firms is…arrow_forward
- You are going to Japan on an exchange trip in a few months and need to turn your dollars into the Japanese currency, the yen. Right now the exchange rate is $1 = 105 yen, but you expect the dollar to appreciate next month and it should be valued at $1= 107 yen. If you exchange $200 for yen today, how many yen will you receive? Explain. If you decide to wait and exchange your dollars when they are worth $1= 107 yen, how many yen will you receive? Explain. Based on this information, should you exchange your money now or wait a few months? Explain.arrow_forwardWhen you write an exchange rate in terms of how many units of a foreign currency it takes to buy one US dollar, we call that: a)a direct quote b) the real price c) an indirect quote d) a depreciationarrow_forwardSuppose that a country follows a managed float policy but that its exchange rate is currently floating freely. In addition, suppose that it currently has a massive current account deficit. Does it also have a balance of payments deficit? If it decides to engage in a currency manipulation in order to reduce the size of its current account deficit, will it buy or sell its own currency? As it does so, what will happen to its official reserves of foreign currencies? Will they get larger or smaller? And, finally, will the country have a balance of payments deficit while it is manipulating the exchange rate?arrow_forward
- What is the foreign exchange market? Give examples of those who would be demanders or suppliers of the US dollars in the foreign exchange market. Discuss what is meant when a currency appreciates (strengthens) or depreciates (weakens), and examples of who would benefit from each situation.arrow_forwardView the data below for the exchange rate between the US dollar and the Japanese yen. How many yen could you get per dollar at the earliest date shown on the chart? Explain. How many yen could you get per dollar at the most recent date shown on the chart? Explain. Has the dollar appreciated or depreciated in value over time? Explain.arrow_forwardSuppose that yesterday, the U.S. dollar-Japanese yen exchange rate was $1=¥0.553546. The price of one Japanese yen in terms of a U.S. dollar was ___ . Suppose that today the U.S. dollar-Japanese yen exchange rate falls to $1=¥0.533585 for one dollar. This means that between yesterday and today, the U.S. dollar has ___ against the Japanese yen. The price of a Mexican peso in terms of the U.S. dollar is now ___ .arrow_forward
arrow_back_ios
SEE MORE QUESTIONS
arrow_forward_ios
Recommended textbooks for you
Economics (MindTap Course List)EconomicsISBN:9781337617383Author:Roger A. ArnoldPublisher:Cengage Learning
Brief Principles of Macroeconomics (MindTap Cours...EconomicsISBN:9781337091985Author:N. Gregory MankiwPublisher:Cengage Learning
Macroeconomics: Private and Public Choice (MindTa...EconomicsISBN:9781305506756Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. MacphersonPublisher:Cengage Learning
Economics (MindTap Course List)
Economics
ISBN:9781337617383
Author:Roger A. Arnold
Publisher:Cengage Learning
Brief Principles of Macroeconomics (MindTap Cours...
Economics
ISBN:9781337091985
Author:N. Gregory Mankiw
Publisher:Cengage Learning
Macroeconomics: Private and Public Choice (MindTa...
Economics
ISBN:9781305506756
Author:James D. Gwartney, Richard L. Stroup, Russell S. Sobel, David A. Macpherson
Publisher:Cengage Learning