Managerial Economics - Chapter 11 - Foreign Exchange, Trade, and Bubbles

Most of the appliances that Whirlpool sells in the UK are built in the EU. Suppose the pound falls in value relative to the euro. True or False: Whirlpool's profit margin will increase.

FALSE

Suppose market participants expect the krona to depreciate relative to the dollar. In the following graph, shift the supply curve, the demand curve, or both to illustrate the effects of the expectations described. True or False: The expectation that the krona would depreciate actually caused the krona to appreciate.

FALSE Graph: https://prnt.sc/pipmez

Suppose market participants expect the krona to appreciate relative to the dollar. In the following graph, shift the supply curve, the demand curve, or both to illustrate the effects of the expectations described. True or False: The expectation that the krona would appreciate actually caused the krona to depreciate.

False Graph: https://prnt.sc/piplel

Suppose that the euro is trading at $1.15 per euro in the foreign exchange market. Next, suppose that the exchange rate falls to $0.98 per euro, due to falling interest rates in the eurozone. The following graph shows the supply and demand curves for euros in the foreign exchange market. On the following graph, shift either the supply curve for euros or the demand curve for euros to reflect the influence of "carry trade" (in isolation from other factors that may affect the exchange rate) on the exchange rate for euros. (Hint: Carefully consider which price is measured on the vertical axis and which currency is being measured on the horizontal axis.)

Graph: https://prnt.sc/pipfe5 A carry trade is a strategy in which an investor borrows money at a low interest rate to invest in an asset that yields a higher return. In this case, an investor would borrow more euros in response to the lower European interest rate, then sell the euros for dollars to invest in the United States. The carry trade would be reflected in an increase in the supply of euros ("selling" euros), represented graphically by a rightward shift of the supply curve for euros. As a result of the carry trade, the euro depreciates against foreign currencies, including the dollar.

Suppose that the euro is trading at $1.90 per euro in the foreign exchange market. Next, suppose that the exchange rate falls to $1.54 per euro, due to falling interest rates in the eurozone. The following graph shows the supply and demand curves for dollars in the foreign exchange market. On the following graph, shift either the supply curve for dollars or the demand curve for dollars to reflect the influence of "carry trade" (in isolation from other factors that may affect the exchange rate) on the exchange rate for dollars. (Hint: Carefully consider which price is measured on the vertical axis and which currency is being measured on the horizontal axis.)

Graph: https://prnt.sc/pipfvs

Suppose that the euro is trading at $1.50 per euro in the foreign exchange market. Next, suppose that the exchange rate falls to $1.19 per euro, due to falling interest rates in the eurozone. The following graph shows the supply and demand curves for euros in the foreign exchange market. On the following graph, shift either the supply curve for euros or the demand curve for euros to reflect the influence of "carry trade" (in isolation from other factors that may affect the exchange rate) on the exchange rate for euros. (Hint: Carefully consider which price is measured on the vertical axis and which currency is being measured on the horizontal axis.)

Graph: https://prnt.sc/pipg9n

Suppose the dollar appreciates relative to foreign currencies. If U.S. firms have domestic content below 100%, the harm to domestic firms is *less/greater* than the harm if U.S. producers had domestic content of 100%.

If U.S. firms have domestic content below 100%, the harm to domestic firms is *less* than the harm if U.S. producers had domestic content of 100%.

Most of the appliances that Whirlpool sells in the UK are built in the EU. Suppose the pound falls in value relative to the euro. True or False: Whirlpool's profit margin will decrease.

TRUE

Most of the appliances that Whirlpool sells in the UK are built in the EU. Suppose the pound rises in value relative to the euro. True or False: Whirlpool's profit margin will increase.

TRUE

Suppose market participants expect the krona to depreciate relative to the dollar. In the following graph, shift the supply curve, the demand curve, or both to illustrate the effects of the expectations described. True or False: The expectation that the krona would depreciate helped the krona to depreciate.

TRUE Graph: https://prnt.sc/piplxc

Consider two similar restaurants in close proximity to each other on either side of the U.S.-Mexico border. Suppose the dollar appreciates against the peso. The following graph shows the supply and demand curves for meals at the restaurant on the U.S. side of the border. On the following graph, shift either the supply curve or the demand curve to represent the effect of the appreciation of the dollar against the peso on the market for meals at the restaurant on the U.S. side of the border. The dollar appreciation harms *The U.S. restaurant owner/The U.S. restaurant customers*

The dollar appreciation harms *The U.S. restaurant owner* Graph: https://prnt.sc/pipkec

Consider two similar restaurants in close proximity to each other on either side of the U.S.-Mexico border. Suppose the dollar depreciates against the peso. The following graph shows the supply and demand curves for meals at the restaurant on the U.S. side of the border. On the following graph, shift either the supply curve or the demand curve to represent the effect of the devaluation of the dollar against the peso on the market for meals at the restaurant on the U.S. side of the border. The dollar devaluation harms *U.S. restaurant customers/the U.S. restaurant owners*.

The dollar devaluation harms *U.S. restaurant customers*. Graph: https://prnt.sc/pipky3

Consider two similar restaurants in close proximity to each other on either side of the U.S.-Mexico border. Suppose the dollar depreciates against the peso. The following graph shows the supply and demand curves for meals at the restaurant on the Mexican side of the border. On the following graph, shift either the supply curve or the demand curve to represent the effect of the devaluation of the dollar against the peso on the market for meals at the restaurant on the Mexican side of the border. The dollar devaluation helps *the Mexican restaurant owner/Mexican restaurant customers*

The dollar devaluation helps *Mexican restaurant customers* Graph: https://prnt.sc/pipjxz

When Great Britain voted to leave the eurozone, the pound depreciated 17% against the dollar. It also raised fears that the eurozone, which uses the euro as a common currency, would fall apart. Suppose that the dollar is considered safer than the euro, given these conditions. The following graph shows the market for dollars, with the quantity of dollars measured along the horizontal axis and the price of dollars in terms of euros measured along the vertical axis (in other words, the euro/dollar exchange rate). Use the graph to help you answer the questions that follow. You can shift either the supply curve for dollars or the demand curve for dollars, or both, to observe the effects. You will not be graded by any changes you make to the graph. These fears would cause the demand for dollars to *increase/decrease*, and the supply of dollars to *increase/decrease*, leading to *an increase/a decrease* in the euro/dollar exchange rate.

These fears would cause the demand for dollars to *increase*, and the supply of dollars to *decrease*, leading to *an increase* in the euro/dollar exchange rate.

When Great Britain voted to leave the eurozone, the pound depreciated 17% against the dollar. It also raised fears that the eurozone, which uses the euro as a common currency, would fall apart. Suppose that the dollar is considered safer than the euro, given these conditions. The following graph shows the market for euros, with the quantity of euros measured along the horizontal axis and the price of euros in terms of dollars measured along the vertical axis (in other words, the dollar/euro exchange rate). Use the graph to help you answer the questions that follow. You can shift either the supply curve for euros or the demand curve for euros, or both, to observe the effects. You will not be graded by any changes you make to the graph. These fears would cause the supply of euros to *decrease/increase*, and the demand for euros to *decrease/increase*, leading to *a decrease/an increase* in the dollar/euro exchange rate.

These fears would cause the supply of euros to *increase*, and the demand for euros to *decrease*, leading to *a decrease* in the dollar/euro exchange rate.

When Great Britain voted to leave the eurozone, the pound depreciated 17% against the dollar. It also raised fears that the eurozone, which uses the euro as a common currency, would fall apart. Suppose that the dollar is considered safer than the euro, given these conditions. The following graph shows the market for euros, with the quantity of euros measured along the horizontal axis and the price of euros in terms of dollars measured along the vertical axis (in other words, the dollar/euro exchange rate). Use the graph to help you answer the questions that follow. You can shift either the supply curve for euros or the demand curve for euros, or both, to observe the effects. You will not be graded by any changes you make to the graph. These fears would cause the supply of euros to *decrease/increase*, and the supply of the dollars to *increase/decrease*, leading to an *increase/decrease* in the euro/dollar exchange rate.

These fears would cause the supply of euros to *increase*, and the supply of the dollars to *decrease*, leading to an *increase* in the euro/dollar exchange rate.

The British pound (GBP) falls in value relative to the dollar. This devaluation would harm British *consumers/producers* but benefit British *consumers/producers* .

This devaluation would harm British *consumers* but benefit British *producers* .