Macro Ch 15
The equilibrium exchange rate is ___ dong per dollar (based on above numbers)
(The equilibrium exchange rate is found by comparing the current price of a Big Mac in dollars in the United States to the price in dong in Vietnam:) e = units of foreign currency/ units of domestic currency 60,000/4.62 = 12,987.0
Complete the table below by indicating the optimum decision based on the given changes in the peso-per-dollar exchange rate.
(peso-per-dollar real exchange rate) goes up: imports less from US export more to US Export less to Mexico Import more from Mexico Goes down: Import more from US Export less to US Export more to mexico Import less from mexico
Brazil imports aircraft parts from the U.S. Suppose the dollar appreciates. This means there is ____ in the real exchange rate. Fill in the following blanks based on the above info.
-an increase -Brazil's demand for aircraft parts from the US: decreases -US net exports: decrease -Demand for aircraft parts supplied by US producers: decreases -Labor demand curve of aircraft parts producers in the US: shifts left
Using this equation, the dollar cost to Sam of buying a tire from Mexico is $____. (Round your response to two decimal places as needed.)
169.23
How does a fixed exchange rate differ from a managed exchange rate?
A fixed exchange rate is set at a long-run value determined by the government, while a managed exchange rate can vary day to day depending on government actions.
How does a flexible exchange rate differ from a managed exchange rate?
A managed exchange rate involves government intervention, while a flexible exchange rate does not.
Countries peg their exchange rates at a level that overvalues their own currency to _________.
All of the above: make debts to foreign lenders easier to pay off for domestic borrowers. keep inflation in check by making foreign goods more attractive to domestic consumers. keep up the perception of strength, since a drop in the relative value of the currency may be seen as a failure of government policies.
Sam owns a tire shop. He needs to decide whether to stock tires from a firm in Mexico that sells tires at a price of 2,200 pesos per tire or from a U.S. firm that sells tires for $159 per tire. Assume the peso-dollar exchange rate is 13 (this means 13 pesos can be purchased with $1). Which of the following equations should Sam use to convert the peso cost of tires to U.S. dollars?
Dollar cost= Peso cost x (Dollars/Pesos)
The real exchange rate for the United States is calculated as ____________.
Dollar price of basket of goods X Nominal Exchange Rate / Foreign price of same basket of goods
how can an increase in the real interest rate affect a country's net exports?
The country's assets become more appealing, causing an increase in demand for domestic currency. This will cause the nominal and real exchange rates to appreciate, reducing net exports
Which of the following statements correctly describes Black Wednesday?
The depreciation of the pound on Black Wednesday led to a decline in the pound's real exchange rate.
The graph on the right represents the economy of Freedonia, which is currently faced with a decrease in net exports, causing its labor demand curve to shift to the left. The county has downward rigid wages, resulting in a drop in labor demand and unemployment, as labeled on the graph. How can this economy that is currently faced with negative net exports and high unemployment be restored to full employment?
The government could lower interest rates, which would cause a depreciation of the domestic currency and an increase in net exports.
Suppose the peso-dollar exchange rate rises (pesos per dollar) and causes an appreciation of the dollar. What do we know about the peso?
The peso must be depreciating relative to the dollar.
how can a decrease in the real interest rate affect a country's net exports?
The country's assets become less appealing, causing a decrease in demand for domestic currency. This will cause the nominal and real exchange rates to depreciate increasing net exports
Given your answer, Sam should buy tires from
United States
How does a change in a country's real exchange rate affect its net exports?
When a country's real exchange rate depreciates, it imports less and exports more causing its net exports to rise
Under a flexible exchange rate, an increased demand for domestic products by foreign buyers causes ____________.
a rightward shift of the demand curve for dollars and an increase in the equilibrium nominal exchange rate. (Under a flexible exchange rate, an increased demand for domestic products by foreign buyers causes a rightward shift of the demand curve for dollars and an increase in the equilibrium nominal exchange rate.)
Given that the current VND-dollar exchange rate is ____ the equilibrium exchange rate, the dong is ____ compared to the U.S. dollar.
above undervalued
In this way, a change in net exports has led to a larger ______ than the direct effect of the change in net exports.
aggregate economic contraction
What do we know about a country's imports and exports at points E1 and E2, given that at E1 net exports are less than 0 and at Upper E2 net exports are greater than 0?
at E1, imports exceed exports, while at E2 exports exceed imports
To support an undervalued currency, a foreign government would need to ____________.
buy dollars and sell its local currency.(To maintain a peg above the market-clearing exchange rate—in other words, to keep the dollar overvalued-foreign authorities would have to continuously purchase dollars and sell their local currency.)
The demand curve for dollars slopes downward because when the dollar ____________.
depreciates in value, U.S. goods become relatively less expensive abroad, causing more people to buy dollars. or appreciates invalue, U.S. goods become relatively more expensiveabroad, causing fewer people to buy dollars.
The supply curve for dollars slopes upward because when the dollar ___________.
depreciates in value, goods from abroad become relatively more expensive in the United States, causing fewer people to sell (supply) dollars to buy the foreign currency.
A currency is said to depreciate against a foreign currency when the nominal exchange rate goes ____________.
down, meaning the domestic currency now buys less of the foreign currency.
Which of the following equations represents the nominal exchange rate?
e = units of foreign currency --------------------- 1 unit of domestic currency
A Big Mac costs $4.62 in the United States but only 60,000 dong or $2.84 in Vietnam at the current exchange rate. Given this information, the current exchange rate is _____ dong per dollar. (Round your response to one decimal place.)
e = units of foreign currency/ units of domestic currency 60,000/2.84 = 21,126.8
contractionary monetary policy leads to a _____ real interest rate this causes the economy to _____ along the downward-sloping line summarizing the relationship between the real interest rates and net exports (net capital outflows). The change in the real interest rate also brings about ____ in the real exchange rate. In equilibrium, net exports
higher move up an increase decline
how can a decrease in the real interest rate affect a country's current account and financial account?
it causes the current account to strengthen and the financial account to weaken
how can an increase in the real interest rate affect a country's current account and financial account?
it causes the current account to weaken and the financial account to strengthen
With downward rigid wages, a shift in the labor demand curve will translate into ____ in the U.S. that will ultimately ___ consumption
lower employment reduce
Depending on its policy needs, the Fed can increase net exports by ___ domestic interest rates, or it can lower net exports by ___ domestic interest rates.
lowering raising
In order to make the exchange rate stay at 9 zips per dollar, instead of adjusting it to the equilibrium level, the Zeronian government would _____________.
need to buy dollars and sell zips in order to keep the dollar strong and the zip weak.
The nominal exchange rate between two currencies is defined as the ____________.
only A & B: number of units of foreign currency that can be purchased with one unit of domestic currency. price of one country's currency in units of another country's currency.
The demand curve for dollars shows the relationship between ____________.
the quantity of dollars demanded and the exchange rate.
Fixing the zip-dollar exchange rate at 9 would be an example of the Zeronian government causing its currency to be
undervalued
