Chapter 19 Macroeconomics - Exchange Rates

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When countries agree to keep the value of their currencies​ constant, there is

a fixed exchange rate system.

If the United Kingdom enters into an agreement with other countries to keep the exchange rate among their currencies fixed it is taking part​ in:

a fixed​ exchange-rate system

The exchange rates between currencies were determined by the amount of gold in each currency under the gold standard. The gold standard collapsed because

under a gold​ standard, countries could not control their money supplies.

All of the following ARE expected benefits of the creation of the​ Euro

The creation of the Euro should reduce costsreduce costs. The creation of the Euro would allow Western European countries to more closely integrate their economies. Having a common currency allow firms to sell across bordersallow firms to sell across borders.

Under the gold​ standard, if 1 U.S. dollar contained 0.5 ounces of gold and 1 British pound contained 0.8 ounces of​ gold, the exchange rate between the pound and dollar would have been 1 British pound=​

$1.60 .8 / .5 = 1.60

​"The company says the weaker yen accounts for​ 84% of a​ ¥310.2 billion​ ($3.1 billion) increase in operating​ profit." The article reference to a​ "weaker yen" means that A weaker yen would lead to higher profits for Toyota because proportionately

According to the information in the​ article, the exchange rate between the yen and the dollar in August 2013 was yen¥99.06 ​/$ 310.2-3.1 / 3.1 = 99.06 it takes fewer U.S. dollars to buy a yen. less of its production costs are in foreign currencies that have strengthened against the yen.

Suppose that under the gold standard ​, there was​ one-fifth of an ounce of gold in a U.S. dollar and one ounce of gold in a British pound and that there is no cost of shipping gold from one country to the other.

If the exchange rate between the dollar and the pound was​ $4 = pound£1 ​(one British​ pound), you could make unlimited profits by buying gold in the United Kingdom and selling it in the United States . If the exchange rate between the dollar and the pound was​ $6 = pound£1 ​(one British​ pound), you could make unlimited profits by buying gold in the United States and selling it in the United Kingdom . The equilibrium exchange rate is ​$5 ​= pound£1 ​(one British​ pound).

Assume that the Big Mac is selling for​ $4.56 in the United States. In the table​ below, fill in the implied exchange rate and then state whether the currency is overvalued or undervalued versus the U.S. dollar. Country Big Mac Price Implied Exchange Rate Chile ​2,000 pesos 438.60 ​pesos/$ Israel 17.5 shekels 3.84 ​shekels/$ Russia 87 rubles 19.09 ​rubles/$ New Zealand 5.5 New Zealand​ $ 1.21 ​NZ$/$

Implied-Actual/Actual = -undervalued or +overvalued Actual Exchange Rate Overvalued or Undervalued 508.16​ pesos/$ undervalued 3.65​ shekels/$ overvalued 32.94​ rubles/$ undervalued 1.28​ NZ$/$ undervalued

Consider this​ statement: ​"It usually takes more than 95 yen to buy 1 U.S. dollar and more than 1.5 dollars to buy 1 British pound. These values show that the United States must be a much wealthier country than Japan and that the United Kingdom must be wealthier than the United​ States." Is this reasoning​ correct?

The statement is incorrect because wealth is measured by productive capacity and purchasing​ power, not by the exchange rate

Which of the following describes a managed float exchange rate​ system?

The value of the currency is determined by supply and​ demand, with occasional government intervention.

According to the purchasing power parity​ theory, relative price levels play an important role in determining exchange rates in the​ long-run. Suppose prices have been rising faster in Japan than in the United​ States, we then predict​ that:

The value of the yen must decline.

If the United Kingdom allows​ it's currency's exchange rate to be determined by supply and​ demand, with occasional government intervention it is​ using:

a managed float excahnge system

Under the Bretton Woods​ system, all of the following were true EXCEPT that

all member countries pledged to buy and sell gold at a fixed price that each country set independently

Under the Bretton Woods​ system, exchange rates were determined by

an international agreement to fix the value of the dollar in terms of gold and the value of all other currencies in terms of the dollar.

The change in the​ yen-dollar exchange rate described in the article was __________ for U.S. consumers because they paid____________ for the goods imported from Japan

good news, less

The currency is overvalued The currency is undervalued

if the actual exchange rate is less than the implied exchange rate. if the actual exchange rate is greater than the implied exchange rate. Implied-Actual/Actual = -undervalued or +overvalued

Under the Bretton Woods​ system, all of the following were true

it was a fixed exchange rate system. all member countries pledged to buy and sell their currencies at a fixed rate against the dollar. no country was willing to redeem its paper currency for gold domestically.

Capital controls are

limitations on the flow of foreign exchange and financial investment between countries.

One advantage of a fixed exchange rate system is that it

reduces uncertainty for businesses about the value of a currency

The implied exchange rate shows

what the exchange rate would be if purchasing power parity held for that particular good or service.

The Bretton Woods system operated by

fixing the value of the dollar in terms of gold and fixing all other currencies in terms of the dollar.

Under the gold​ standard, exchange rates were determined by

the relative amounts of gold in each​ country's currency

If a country pegs its exchange rate with the dollar below the equilibrium​ value,

there will be an excess demand for that​ country's currency.

What is an exchange rate​ system? Under a fixed exchange rate​ system, exchange rates are determined by Under a managed float​ system, exchange rates are determined by .

An agreement between countries on how exchange rates should be determined. an agreement between countries supply and demand plus government intervention

Which of the following best explains why higher inflation will cause the Australian dollar to depreciate relative to the New Zealand​ dollar?

If prices of goods and services rise faster in Australia than in New​ Zealand, the value of the Australian dollar has to decline to maintain the demand for Australian products

When the Thai government pegged the baht against the​ dollar, a surplus of baht flooded the foreign exchange markets. This occurred because the baht was pegged too high in value against the dollar. As a​ result, the Thai central bank did​ what?

Increased interest rates. Borrowed dollars from the International Monetary Fund. Bought the surplus with dollar reserves.

According to the theory of purchasing power parity ​, if the inflation rate in Australia is higher than the inflation rate in New​ Zealand, what should happen to the exchange rate between the Australian dollar and the New Zealand​ dollar?

The Australian dollar will depreciate relative to the New Zealand dollar.

Purchasing power parity

The theory that in the long​ run, exchange rates move to equalize the purchasing powers of different currencies.

Destabilizing speculation is Destabilizing speculation played a role in the demise of the Bretton Woods system because investors sold currencies they believed to be overvalued and purchased currencies that they believed to be undervalued ​, making it difficult to maintain fixed rates.

actions by investors that make it more difficult to maintain a fixed exchange rate

If a Big Mac is selling in the United States for ​$3.45​, what is the implied exchange rate between each of the currencies in the​ table? Country Big Mac Price Implied Actual Exchange Rate Exchange Rate Brazil 7.40 reais 2.14 reais/ dollar 1.58 reais/ dollar Poland 7.10 zlotys 2.06 zlotys/dollar 2.03 zlotys/dollar S Korea 3,150 won 913.04 won/dollar ​1,018won/dollar C Republic 65.10 korunas 18.87 korunas/dollar 14.5korunas/dollar

According to your​ results, the U.S. dollar is overvalued against the South Korean won and undervalued againt the Brazilian reais

Implied Ex Rate =

Price in other country / Price in US To calculate the implied exchange​ rate, divide the foreign currency price of the good by the U.S. price of the good.

In​ 1997, the pegged​ $/baht rate was 0.04​ $/baht, but the equilibrium exchange rate was estimated to be 0.03​ $/baht. An investor could have made a profit by doing which of the​ following?

Selling baht at the official​ rate, expecting to buy them back in the future when the baht was allowed to depreciate

All of the following are expected benefits of the creation of the​ Euro, EXCEPT​ which?

The participating countries are no longer able to conduct independent monetary policies.

The theory of purchasing power parity states that the​ long-run level of the exchange rate must

make it possible to buy equivalent bundles of goods in either country. The theory of purchasing power parity does NOT explain exchange rates well in the long run.

The following table shows prices of Big​ Macs, implied exchange​ rates, and actual exchange rates. Indicate which countries listed in the table have undervalued currencies versus the U.S. dollar and which have overvalued currencies. Country Big Mac Price Implied Exchange Rate Mexico 37 pesos 8.11​ pesos/$ Japan 320 yen 70.18​ yen/$ United Kingdom 2.69 pounds 0.59​ pound/$ Switzerland 6.5 Swiss francs 1.43 Swiss​ francs/$ Indonesia ​27,939 rupiahs 6,127 rupiahs/$ Canada 5.53 Canadian dollars 1.21 Canadian​ dollars/$ China 16 yuan 3.51​ yuan/$

Implied-Actual/Actual = -undervalued or +overvalued Actual Exchange Rate + Overvalued or -Undervalued 12.94​ pesos/$ undervalued 100.11​ yen/$ undervalued 0.67​ pound/$ undervalued 0.97 Swiss​ francs/$ overvalued ​9,965 rupiahs/$ undervalued 1.05 Canadian​ dollars/$ overvalued 6.13​ yuan/$ undervalued

A car costs ​$25,000 in the United States and 3,000,000 yen in Japan. The exchange rate is​ $1 = 104 yen.

The purchasing power parity of the dollar is 119 yen 3,000,000 - 25,000 / 25,000 = 119

A country that allows demand and supply to determine the value of its currency has

a floating currency.

The change in the​ yen-dollar exchange rate described in the article was __________ for Japanese consumers who buy goods imported from the United States because they paid ___________ for U.S. goods.

bad news, more

The four determinants of exchange rates in the long run are

relative price​ levels, relative productivity​ growth, tastes, and trade barriers.


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