International Econ Chapter 12 E 333

"A nation that experiences higher growth rates in productivity than its trading partners can expect the exchange value of its currency to appreciate." Agree or Disagree

I agree with this statement because the nation's interest rate fall more rapidly than that of other nations. People would prefer to move their fund overseas to generate greater returns since the interest rates are higher in foreign nations.

A nation that experiences higher growth rates in productivity than its trading partners can expect the exchange value of its currency to appreciate." Agree or Disagree

I agree with this statement because when a domestic nation experiences higher growth rates in productivity than it is able to produce goods more efficiently and at lower costs.

"A nation whose interest rate falls more rapidly than that of other nations can expect the exchange value of its currency to depreciates currency will depreciate if its inflation rate is less than that of its trading agree or disagree

I disagree with this statement because the inflation rate in a domestic nation is lower than the inflation rates of other countries, that nation's currency would appreciate against currencies of those other countries.

(c) increased demand for U.S. exports and decreased U.S. demand for imports;

Increased demand for U.S exports and decreased U.S demand for imports: increased demand for domestic exports increases the demand for dollars because foreigners are making their purchases in U.S currency. Moreover, it has decreased in the U.S demand for imports decreases the demand for foreign currencies because domestic consumers are not purchasing much foreign good. These factors increase the value of the dollar relative to the values of their currencies thereby increasing the dollar's exchange rate.

an increase in U.S. money demand

It would make the dollar increase in values in the exchange rate for other currencies increases

What is meant by exchange rate overshooting? Why does it occur?

Overshooting is when the appreciation depreciation of a currency in the short-run is greater than its long-run change, overshooting occurs because of the tendency of elasticities to be smaller in the short term than in the long term. The long-term supply schedule of a currency tends to be more elastic than the short-term supply schedule so when the demand schedule shifts, the equilibrium exchange rates in both periods differ greatly.

(d) rising productivity in the United States relative to other countries;

Rising productivity in the United States relative to other countries when productivity rises, domestic suppliers are able to produce goods in a more efficient manner and lower the cost of production. This causes the price of U.S goods to decrease, which increases demand for them because producers only accept payment for their goods in U.S goods to decrease., which increases demand for them by both domestic consumers and foreigners. In turn the demand for dollars would increase because producers only accept payment for their goods in U.S currency. This leads to an increase in the value of the dollar, causing the dollar's exchange rate to increase relative to foreign currencies.

1.) In a free market, what factors underlie currency exchange values? Which factors best apply to long and short run exchange rates?

Some factors that that underlie currency exchange values is real interest rates, productivity, investment profitability and monetary and fiscal policy. For the short-term exchange rates are affected by the transfer of assets and currencies and it goes to the differences in real interest rates. Furthermore, the long-term currency exchange rates are determined by relative productivity levels and consumer preferences for domestic and foreign goods.

What factors underlie changes in a currency's value in the short run?

Some of the factors that underlie the changes in a currency's value for the short term is the future expectations of domestic economic growth, changes in domestic interest rates, and changes in the domestic inflation rate.

rising real interest rates overseas, relative to U.S. rates;

Suppose that real interest rates overseas rise. This would attract U.S investors to move their funds overseas in order to receive higher returns. People must exchange their domestic currencies for respective foreign currencies in order to invest in foreign markets. This causes the demand for foreign currencies in order to increase and increases their values relative to the value of the dollar. When foreign currencies appreciate against the dollar, the exchange rate of the dollar decreases.

an increase in U.S. money growth; and

This causes the value of the dollar to decrease because the supply of money has increased. Hence, the dollar's exchange rate decreases because it is worth less compared to other currencies.

(b) tariffs and quotas placed on U.S. imports;

This makes foreign goods relatively more expensive for domestic consumers causing the demand for foreign goods relatively more expensive for domestic consumers. Therefore the demand for foreign currencies to decrease when the demand for foreign currencies decrease the value of those currencies also decrease.

3.) What predictions does the purchasing-power-parity theory make concerning the impact of domestic inflation on the home country's exchange rate? What are some limitations of the purchasing- power-parity theory?

What the purchasing power-parity theory suggest that the changes that in general the predictions tend to be correct and have the appreciating currencies. It is because countries with a relatively low inflation rate tend to have the appreciating currencies whereas countries with high inflation rates tend to have depreciating currencies. However, some of the limitations is that it overlooks the fact that exchange-rate movements may be influenced by investment flow and the inability in choosing the appropriate price index in price calculations

Explain how the following factors affect the dollar's exchange rate under a system of market-determined exchange rates: (a) a rise in the U.S. price level, with the foreign price level held constant;

What this causes is the domestic consumers and foreigners to demand fewer U.S goods because they are relatively more expensive than goods more the rest of the world. A reduction in demand for American goods means that demand for the dollar will decrease causing the dollar to depreciate.