a)
To change: Whether the statement “the interest rate parity condition shows that across the country interest rate is the same” is true or false
a)
Explanation of Solution
False, the given statement is false because the interest rate parity refers to keep the difference in the interest rate between the nations that change this into the forward exchange rate.
b)
To change: Whether the statement is true or false
b)
Explanation of Solution
True, the given statement is true because the condition of interest rate parity shows that as there is an increase in expected exchange rate then there will be an appreciation of the domestic currency, keeping the other things constant.
c)
To change: Whether the statement is true or false
c)
Explanation of Solution
It is true because if there is an expectation that the dollar will depreciate as compared to the yen over the next year then the interest rates will be greater in the U.S than Japan.
d)
To change: Whether the statement is true or false
d)
Explanation of Solution
It is true, if there is appreciation in the expected exchange rate than the current exchange rate will immediately appreciate.
e)
To change: Whether the statement is true or false
e)
Explanation of Solution
The statement is true because the central bank changes the magnitude of the exchange rate by varying their domestic rate of interest in relation to the foreign interest rate.
f)
To change: Whether the statement is true or false
f)
Explanation of Solution
The given statement is false, that an increase in domestic interest rates, all other factors equal, does not increase exports.
g)
To change: Whether the statement is true or false
g)
Explanation of Solution
It is false to state that a fiscal expansion tends to increase net export keeping all other factors equal.
h)
To change: Whether the statement is true or false
h)
Explanation of Solution
The given statement is uncertain because the effect on output by the fiscal policy under fixed exchange rate and the flexible exchange rate is directly related to the economic situations. If the economic situations are in the favor of a fixed exchange rate then the output effect will be greater than the effect of flexible exchange rates or vice versa.
i)
To change: Whether the statement is true or false
i)
Explanation of Solution
It is false, United States central bank − the Federal Reserve (the Fed) − is charged with ensuring a certain degree of stability within the financial system of the country. The Fed has unique resources to allow adjustments to broad
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Chapter 19 Solutions
Macroeconomics, Student Value Edition Plus MyLab Economics with Pearson eText -- Access Card Package (7th Edition)
- Under a fixed exchange rate regime, the value of the currency is pegged to a specific currency. This provides stability and predictability for international businesses when engaging in cross-border transactions and making long-term investment decisions. Companies can better plan and forecast their international operations without worrying about sudden exchange rate fluctuations. Businesses with significant cross-border trade and investment activities can benefit from reduced currency risk as their transactions are shielded from short-term volatility in exchange rates. This can be particularly advantageous when dealing with countries with historically unstable currencies. Fixed exchange rates can act as a constraint on monetary policies, preventing excessive money supply growth that may lead to inflation. This can create a more stable economic environment for businesses to operate in. In a floating exchange rate system, currency values are determined by market forces, primarily supply…arrow_forwardSuppose that yesterday, the U.S. dollar-Japanese yen exchange rate was $1=¥0.553546. The price of one Japanese yen in terms of a U.S. dollar was ___ . Suppose that today the U.S. dollar-Japanese yen exchange rate falls to $1=¥0.533585 for one dollar. This means that between yesterday and today, the U.S. dollar has ___ against the Japanese yen. The price of a Mexican peso in terms of the U.S. dollar is now ___ .arrow_forwardWith an exchange rate of 0.73 euros for 1 dollar, a US company is able to purchase 100 trucks from Germany. If the exchange rate shifted to 1 euro for 1 dollar, what would happen to the price the US company would pay for trucks? A)The price would go down, because the US dollar has appreciated. B)The price would go up, because the US dollar has depreciated. C)The price would go up, because the US dollar has appreciated. D)The price would go down, because the US dollar has depreciated.arrow_forward
- In 1992, 18.6 million Canadians visited the United States, but only 11.8 million U.S. residents visited Canada. By 2002, roles had been reversed: more U.S. residents visited Canada than vice versa. Why did the tourism reverse direction? Canada didn’t get any warmer from 1992 to 2002 – but it did get cheaper. The reason is a large change in the exchange rate: in 1992 Canadian dollar was worth $0.80, but by 2002 it had fallen in the value by 20% to about $0.65. This means that Canadian goods and services, particularly hotel rooms and meals, were about 20% cheaper for Americans in 2002 compared to 1992. American vacations had become 20% more expensive for Canadians. Canadians responded by vacationing in their own country or in other parts of the world. Foreign travel is an example of a good that has a high price elasticity of demand: elasticity=4.1. One reason is that foreign travel is a luxury good for most people – you may regret not going to Paris this year, but you can live…arrow_forwardIf a "Big Mac costs $4.00 in the United States and 200 yen in Japan, then the implied "purchasing-power-parity" exchange rate using the "Big Mac" is __________. If the actual exchange rate in the market is 120 yen = $1, then an economist would say that the actual Japanese yen is __________ in comparison with its "purchasing-power-parity" rate.arrow_forwardAn appreciation of the dollar against all currencies in the foreign exchange market would result in all of the following, except: a) a decrease in the dollar prices paid by U.S. importers. b) an increase in the cost of vacations in Florida for Japanese tourists. c) foreign holidays for U.S. residents to be less expensive. d) an increase in the foreign currency prices paid for U.S. exports. e) an increase in the demand for U.S. exports.arrow_forward
- Q3-1 In a situation of flexible exchange rates, other things equal, a shift of the IS curve to the left will lead to ______ of the country's currency if the BP curve is steeper than the LM curve and will ______ of the country's currency if the LM curve is steeper than the BP curve. Select one: a. an appreciation / also lead to an appreciation b. an appreciation / lead to a depreciation c. a depreciation / lead to an appreciation d. a depreciation / also lead to a depreciationarrow_forwardConsider that Britain is trying to maintain a fixed exchange rate with respect to the U.S. dollar. However, the present situation in the foreign exchange market is conducive for the British pound to appreciate with respect to the U.S. dollar. Which of the following interventions is most likely in this situation? The government of Britain should sell pounds and buy dollars. The government of Britain should do nothing, as a fixed rate cannot change. The government of Britain should buy pounds and sell dollars. The government of Britain should decrease the country's money supply.arrow_forwardSuppose that the rate of returns on U.S dollar is 2% and the rate of return on Japanese yen (¥) is 2.5%. Under interest parity, find the ratio of the current to the expected exchange rate (ℇe/ℇ)?arrow_forward
- a) If the interest rate in the United Kingdom is 8%, the interest rate in the U.S. is 10%, and the spot exchange rate is 1.35 dollar per pound. If interest rate parity holds, what is the expected future exchange rate? b) Alternatively, using the same interest rates as above, suppose the expected future exchange rate is 1.35 dollar per pound. What is the spot exchange ratearrow_forwardWho would demand U.S. dollars in the foreign exchange market? U.S. firms and households wishing to purchase foreign goods and services Foreigners wishing to purchase U.S goods and services U.S. households wishing to purchase U.S. goods and servicesarrow_forwardSuppose the nominal exchange rate (given as foreign currency per unit of U.S. currency as in class) rises. If purchasing power parity holds, this could mean that domestic prices __________________ or foreign prices ________________ with all else unchanged. Group of answer choices A) increased, decreased B) decreased, decreased C) increased, increased D) decreased, increasedarrow_forward
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