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 in​value, U.S. goods become relatively more expensive​abroad, 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