38.1 Do
all international financial transactions necessarily involve exchanging
one nation's distinct currency for another? Explain. Could a nation
that neither imports goods and services nor exports goods and services
still engage in international financial transactions?
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38.2 Explain:
“U.S. exports earn supplies of foreign currencies that Americans can
use to finance imports.” Indicate whether each of the following creates a
demand for or a supply of European euros in foreign exchange markets;a.A U.S. airline firm purchases several Airbus planes assembled in France.b.A German automobile firm decides to build an assembly plant in South Carolina.c.A U.S. college student decides to spend a year studying at the Sorbonne in Paris.d.An Italian manufacturer ships machinery from one Italian port to another on a Liberian freighter.e.The U.S. economy grows faster than the French economy.f.A U.S. government bond held by a Spanish citizen matures, and the loan amount is paid back to that person.g.It is widely expected that the euro will depreciate in the near future.
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38.3 What
do the plus signs and negative signs signify in the U.S.
balance-of-payments statement? Which of the following items appear in
the current account and which appear in the capital and financial
account? U.S. purchases of assets abroad; U.S. services imports; foreign
purchases of assets in the United States; U.S. good exports, U.S. net
investment income. Why must the current account and the capital and
financial account sum to zero?
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38.4 What
are official reserves? How do net sales of official reserves to
foreigners and net purchases of official reserves from foreigners relate
to U.S. balance-of-payment deficits and surpluses? Explain why these
deficits and surpluses are not actual deficits and surpluses in the overall balance-of-payments statement.
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38.5 Generally
speaking, how is the dollar price of euros determined? Cite a factor
that might increase the dollar price of euros. Cite a different factor
that might decrease the dollar price of euros. Explain: "A rise in the
dollar price of euros necessarily means a fall in the euro price of
dollars." Illustrate and elaborate: "The dollar-euro exchange rate
provides a direct link between the prices of goods and services produced
in the Euro Zone and in the United States." Explain the
purchasing-power-parity theory of exchange rates, using the euro-dollar
exchange rate as an illustration.
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38.6 Suppose
that a Swiss watchmaker imports watch components from Sweden and
exports watches to the United States. Also suppose the dollar
depreciates, and the Swedish krona appreciates, relative to the Swiss
franc. Speculate as to how each would hurt the Swiss watchmaker.
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38.7 Explain
why the U.S. demand for Mexican pesos is downsloping and the supply of
pesos to Americans is upsloping. Assuming a system of flexible exchange
rates between Mexico and the United States, indicate whether each of the
following would cause the Mexican peso to appreciate or depreciate,
other things equal:a. The United States unilaterally reduces tariffs on Mexican products.b. Mexico encounters severe inflation.c. Deteriorating political relations reduce American tourism in Mexico.d. The U.S. economy moves into a severe recession.e. The United States engages in a high-interest-rate monetary policy.f. Mexican products become more fashionable to U.S. consumers.g. The Mexican government encourages U.S. firms to invest in Mexican oil fields.h. The rate of productivity growth in the United States diminishes sharply.
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38.8 Explain why you agree or disagree with the following statements. Assume other things equal.a. A country that grows faster than its major trading partners can expect the international value of its currency to depreciate.b.
A nation whose interest rate is rising more rapidly than interest rates
in other nations can expect the international value of its currency to
appreciate.c. A country’s currency will appreciate if its inflation rate is less than that of the rest of the world.
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38.9 ”Exports
pay for imports. Yet in 2009 the nations of the world exported about
$379 billion more of goods and services to the United States than they
imported from the United States.” Resolve the apparent inconsistency of
these two statements.
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38.10 Diagram
a market in which the equilibrium dollar price of 1 unit of fictitious
currency zee (Z) is $5 (the exchange rate is $5 = Z1). Then show on your
diagram a decline in the demand for zee.a.
Referring to your diagram, discuss the adjustment options the United
States would have in maintaining the exchange rate at $5 = Zl under a
fixed-exchange-rate system.b. How would
the U.S. balance-of-payments surplus that is caused by the decline in
demand be resolved under a system of flexible exchange rates?
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38.11 Suppose
that a country follows a managed-float policy but that its exchange
rate is currently floating freely. In addition, suppose that it has a
massive current account deficit. Does it also necessarily have a
balance-of-payments deficit? If it decides to engage in a currency
intervention to reduce the size of its current account deficit, will it
buy or sell its own currency? As it does so, will its official reserves
of foreign currencies get larger or smaller? Would that outcome indicate
a balance-of- payments deficit or a balance-of-payments surplus?
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38.12 What
have been the major causes of the large U.S. trade deficits in recent
years? What are the major benefits and costs associated with trade
deficits? Explain: "A trade deficit means that a nation is
receiving more goods and services from abroad than it is sending
abroad." How can that be considered to be “unfavorable”?
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38.13 LAST WORD
Suppose Super D’Hiver—a hypothetical French snowboard retailer—wants to
order 5000 snowboards made in the United States. The price per board is
$200, the present exchange rate is 1 euro = $1, and payment is due in
dollars when the boards are delivered in 3 months. Use a numerical
example to explain why exchange-rate risk might make the French retailer
hesitant to place the order. How might speculators absorb some of Super
D’Hiver’s risk?
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