Consider two economies, Canada and the U.S. Canada is a small open economy and exchange rate is quoted as the number of U.S. $ per C$, i.e., EUS$/C$. a) Suppose at the current exchange rate, Canada has a balance of payments deficit. If Canada adopts a flexible exchange rate, what happens to the US$/C$ exchange rate? Explain in words with the aid of a supply-demand diagram for C$ (Be sure to identity what happens before and after the adjustment on your diagram) b) After the adjustment mentioned in part (a), the foreign exchange market is in equilibrium. Suppose there is a change in the consumption preference such that households in both Canada and the U.S. want to consume more American goods. What happens to the US$/C$ exchange rate? What happens to Canada's BOP? Explain with the aid of another supplydemand diagram for C$, and be sure to discuss the adjustment in the BOP (i.e., what happens to different components of the BOP) 2:16 pm

Consider two economies, Canada and the U.S. Canada is a small open economy and exchange rate is quoted as the number of U.S. $ per C$, i.e., EUS$/C$. a) Suppose at the current exchange rate, Canada has a balance of payments deficit. If Canada adopts a flexible exchange rate, what happens to the US$/C$ exchange rate? Explain in words with the aid of a supply-demand diagram for C$ (Be sure to identity what happens before and after the adjustment on your diagram) b) After the adjustment mentioned in part (a), the foreign exchange market is in equilibrium. Suppose there is a change in the consumption preference such that households in both Canada and the U.S. want to consume more American goods. What happens to the US$/C$ exchange rate? What happens to Canada's BOP? Explain with the aid of another supplydemand diagram for C$, and be sure to discuss the adjustment in the BOP (i.e., what happens to different components of the BOP) 2:16 pm

Exploring Economics

8th Edition

ISBN:9781544336329

Author:Robert L. Sexton

Publisher:Robert L. Sexton

Chapter29: International Finance

Section: Chapter Questions

Problem 8P

See similar textbooks

Question

help please answer in text form with proper workings and explanation for each and every part and steps with concept and introduction no AI no copy paste remember answer must be in proper format with all working

Consider two economies, Canada and the
U.S. Canada is a small open economy and
exchange rate is quoted as the number of U.S.
$ per C$, i.e., EUS$/C$.
a) Suppose at the current exchange rate,
Canada has a balance of payments deficit.
If Canada adopts a flexible exchange rate,
what happens to the US$/C$ exchange
rate? Explain in words with the aid of a
supply-demand diagram for C$ (Be sure to
identity what happens before and after the
adjustment on your diagram)
b) After the adjustment mentioned in
part (a), the foreign exchange market is in
equilibrium. Suppose there is a change in the
consumption preference such that households
in both Canada and the U.S. want to consume
more American goods. What happens to
the US$/C$ exchange rate? What happens
to Canada's BOP? Explain with the aid of
another supplydemand diagram for C$, and be
sure to discuss the adjustment in the BOP
(i.e., what happens to different components of
the BOP)
2:16 pm

Definition Definition Structural system an enterprise uses to collect, store, report, retrieve, and process financial data. Accounting information systems are used by business analysts, auditors, accountants, and consultants for accurate and efficient access to financial data.

Expert Solution

This question has been solved!

Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.

SEE SOLUTION Check out a sample Q&A here

Step by step

Solved in 2 steps with 2 images

SEE SOLUTION Check out a sample Q&A here

Similar questions

State whether each of the following events Involves a financial flow to the Mexican economy or a financial flow out of the Mexican economy: Mexico Imports sen4ces from Japan Mexico exports goods to Canada U.S. investors receive a return from past financial investments in Mexico
Imagine that the economy of Germany finds itself in the following situation: the government budget has a surplus of 1 of Germanys GDP; private savings is 20 of GDP; and physical investment is 18 of GDP. Based on the national saving and investment identity, what is the current account balance? If the government budget surplus falls to zero, how will this affect the current account balance?
If foreign investors buy more U.S. stocks and bonds, how would that show up in the current account balance?
a. If the exchange rate changes from $1.70 per British pound (₤1) to $1.68 per ₤1, has the pound (₤) appreciated or depreciated? Has the dollar appreciated or depreciated? b. What happens to the ₤-price that British residents pay for a $500 U.S. export good due to the exchange rate change above? c. What happens to the $-price that U.S. residents pay for a ₤1200 import good from Britain? d. How do these changes affect the economic welfare of U.S. exporters and U.S. importers? 2. a. If the exchange rate changes from $1.70 per British pound (₤1) to $1.72 per ₤1, has the pound (₤) appreciated or depreciated? Has the dollar appreciated or depreciated? b. What happens to the ₤-price that British residents pay for a $500 U.S. export good due to the exchange rate change above? c. What happens to the $-price that U.S. residents pay for a ₤1200…
(1) a. If the exchange rate changes from $1.70 per British pound (₤1) to $1.72 per ₤1, has the pound (₤) appreciated or depreciated? Has the dollar appreciated or depreciated? b. What happens to the ₤-price that British residents pay for a $500 U.S. export good due to the exchange rate change above? c. What happens to the $-price that U.S. residents pay for a ₤1200 import good from Britain? d. How do these changes affect the economic welfare of U.S. exporters and U.S. importers? (2) Suppose that the euro (€) appreciates from $1.00 per €1 to $1.20 per €1. Determine whether the underlined individuals listed below would see that appreciation as a good or a bad thing. a. A U.S. business buys €10,000 of chemicals from a German company. b. An Italian clothing company buys $100,000 of leather from a U.S. leather maker. c. A U.S. resident has a retirement account totaling €500,000 in a German bank. d. A U.S. company must make an interest payment of €25,000 to the French bank from which it…
Draw and carefully label the Euro-U.S. dollar foreign exchange graph as discussed in the textbook.You must use the Euro/US $ exchange rate as your price variable. Assume we are currently in marketequilibrium. Illustrate using the graph how the equilibrium euro/dollar foreign exchange rate wouldbe affected by the following events, holding all else constant. Use a different graph for each part.Explain in words why the equilibrium exchange rate changed. Show an increase in US productivity relative to the Euro Area
The following Figure 1 is an edited version of an image discussed during the course. Use it to briefly explain how the balance of payments works. Give examples (they do not need to be only about this specific figure). Figure 1 - Current Account TRADE IN GOODS -$887 BILLION +260 TRADE IN SERVICES Income on investments abroad is a positive. +137 .. but overall, these add up to a substantial “current account" deficit, -491 CAPITAL FLOWS IN Financial Account OUT: U.S.-PURCHASED | IN: FOREIGN-PURCHASED FOREIGN ASSETS U.S. ASSETS +66 -311 +736 OTHER +491 By The New York Times | Source: Bureau of Economic Analysis
The graph shows the supply curve of Canadian dollars. Draw a new supply curve that shows the effect of a rise in the expected future exchange rate. Label it. A change in the expected future exchange rate changes the supply of Canadian dollars________, and a change in Canadian demand for imports changes the supply of Canadian dollars O A. today; today B. in the future; today C. today; in the future D. in the future; in the future 120 MacBook Pro 110 100- 90- 80- 70- Exchange rate (Canadian cents per Canadian dollar) Click the graph, choose a tool in the palette and follow the instructions to create your graph. So 70 80 90 100 10 20 30 40 50 60 Quantity (billions of Canadian dollars per day) >>> Draw only the objects specified in the question.
a. Describe what is happening to the country’s capital account of the balance of payments prior to government changing its tack on supporting the value of the currency? Which items in the capital account are likely to change and how will they change? b. What is likely to happen to the country’s real exchange rate initially and after the government changes its policy stance with respect to supporting the currency? Please justify your answer. c. What happens to the current account balance right after the oil price shock and after the government stops supporting the currency? What items of the current account are likely to change and why? d. How is the market for non-tradables in the domestic economy affected in these two stages?
Suppose a country imposes a tariff on imports from abroad. a. How does this action affect the country’s imports of foreign goods? b. How does this action affect the world relative demand for foreign goods and the relative demand for home goods? c. How does this action change the long-run real exchange rate between the home and foreign currencies? d. How is the long-run nominal exchange rate affected?
A case study in the chapter analyzed purchasingpower parity for several countries using the pricc ofBig Macs. Here arc data for a few more countries: a. For each country, compute the predicted exchangerate of the local currency per U.S. dollar. (Recallthat the U.S. price o( a Big Mac was $4.93.)b. According to purchasing-power parity, what is thepredicted exchange rate between the Hungarianforint and the Canadian dollar? What is the actualexchange rate?c. How well docs the theory of purchasing-powerparity explain exchange rates?
Would each of the following transactions be includedin U.S. net exports or in U.S. net capital outflow?Indicate whether it would represent an increase or adecrease in that variable.a. An American buys a Sony TV.b. An American buys a share of Sony stock.c. The Sony pension fund buys a bond from theU.S. Treasury.d. A worker at a Sony plant in Japan buys someGeorgia peaches from an American farmer.