Country A follows a fixed exchange rate policy that pegs its currency to the currency of country B, which is its main trading partner in a world where international capital is fully mobile. However, due to unresolved structural inefficiencies (for example, excessive bureaucracy), prices in country A tend to increase more than prices in country B. Over time, if nothing else changes, and provided that country A is committed to its current exchange rate policy, which of the following problems is not anticipated for country A? a. Economic recession. O b. Growing deficit in international trade balance. c. Worsening inflation. Od. Decreasing reserve assets. e. Growing external indebtedness.

Country A follows a fixed exchange rate policy that pegs its currency to the currency of country B, which is its main trading partner in a world where international capital is fully mobile. However, due to unresolved structural inefficiencies (for example, excessive bureaucracy), prices in country A tend to increase more than prices in country B. Over time, if nothing else changes, and provided that country A is committed to its current exchange rate policy, which of the following problems is not anticipated for country A? a. Economic recession. O b. Growing deficit in international trade balance. c. Worsening inflation. Od. Decreasing reserve assets. e. Growing external indebtedness.

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

See similar textbooks

Similar questions

The Big Mac index is used as a rough measure of purchasing power parity across countries. The Economist magazine recently included the Vietnamese dong in its calculation of the Big Mac index. A Big Mac costs $5.06 in the United States but only 60,368 dong or $2.66 in Vietnam (at the current exchange rate). What does this information suggest about the value of the real exchange rate of the U.S. dollar relative to the Vietnamese dong (treating the United States as the domestic economy, so the nominal exchange rate is expressed as dong per dollar)? Is the real exchange rate likely to be greater than or less than 1?
Assume the following to be a portion of the simplified balance of payments statement for a hypothetical country. The values are given in billions of dollars. $400 $300 -$100 $60 Exports Imports Capital Outflows Capital Inflows If the central bank has not changed its holding of foreign-currency reserves during this period, then the capital-service account for this country should be equal to S billion
Suppose you are a British venture capitalist holding a major stake in an e-commerce start-up in Silicon Valley. As a British resident, you are concerned with the pound value of your U.S. equity position. Assume that if the American economy booms in the future, your equity stake will be worth $901, and the exchange rate will be $1.28/£. If the American economy experiences a recession, on the other hand, your American equity stake will be worth $817, and the exchange rate will be $1.43/£. You assess that the American economy will experience a boom with a 50 percent probability and a recession with the remaining probability.Estimate the expected value of the property in GBP (as XXX.XXX)
A small, open economy with a fixed exchange rate system faces a balance of payments deficit due to a combination of high import levels and capital outflows. The central bank is using its foreign exchange reserves to support the fixed exchange rate, but these reserves are rapidly depleting. The government is considering policy options such as moving to a flexible exchange rate system, implementing capital controls, or seeking external financial assistance. In this case, the policy choices are primarily aimed at: A) Maintaining the fixed exchange rate at all costs B) Addressing the balance of payments deficit and stabilizing the exchange rate C) Completely closing off the economy from international trade D) Ignoring the balance of payments deficit
an increase of the international value of the US dollar will most likely benefit a) domestic producers of premium wines sold to people in other countries b) currency traders holding large quantities of yen c) German citizens vacationing in the US d) Canadian citizens expecting to purchase real estate in the US e) retired US citizens living overseas on their Social Security checks
A carry trade is a trading strategy that involves borrowing low-interest currencies and buying high-interest currencies, with results that can be profitable. During much of the 2000s, Japanese yen interest rates were close to zero while Australia’s interest rates were positive. Investors pursued a carry trade strategy, investing billions in Australian dollars and driving that currency’s value up against the yen. According to the interest parity condition, such a strategy should not be systematically profitable: On average, shouldn’t the interest advantage of Australian dollars be wiped out by relative appreciation of the yen? Is the prevalence of the carry trade evidence that interest parity is wrong? What is the risk of investing in such a strategy? Incorporate the Japanese Yen/Australian Dollar exchange rate history in your discussion.
The following paragraphs discuss the impact of various economic events on the exchange rate. Complete the paragraphs by filling in the blanks. Use any of the words from the following list (you can use each of these words as many times as you wish but choose carefully - your sentence must make grammatical sense):demand supply left right buy sell imports exports rise fall increases decreases What happens to the current account balance and the exchange rate when the following happens? Suppose that New Zealand firms become more profitable relative to foreign firms and so increase their payment of dividends (everything else held constant). The value for net foreign income therefore ________ and the value of the current account balance will _______. Payment of NZ dividends to foreign owners affects the _______ or/of $NZ while payments of foreign dividends to NZ owners of foreign companies affects the _______ for/of $NZ. Therefore the impact of the change in profit of NZ firms is…
Consider the following open economy. The real exchange rate is fixed and equal to one. Consumption, investment, government spending, and taxes are given by:C = 8 + 0.6(Y - T), I = G = T = 0.Imports/ exports are given by:Q = 0.4Y, X = 0.4Y*,where an asterisk denotes a foreign variable a. Suppose that the domestic country takes foreign income Y* as given. The equilibrium output in the domestic economy is? b. Following a), if the domestic government increases spending by 6 units (i.e., G increases from 0 to 6), the equilibrium output in the domestic country will increase by ____. and the trade balance will ________ (increase/decrease) by _____. c. Assume the foreign economy has the same equations as the domestic economy. Both governments consider the impact of the other country on the domestic economy. If G=0, then the equilibrium output in both countries is ______ and the trade balance is ______. d. Following c), if the domestic government increases spending by 6 units as in b) and G=0…
Country A’s goods have become relatively less expensive for Country B’s buyers due to a change in the exchange rate between those two country’s currencies. All other things remaining constant, this could be because Country B’s currency has __________ relative to Country A’s currency. a) shifted b) appreciated c) stagnated d) depreciated
A country has been experiencing a persistent deficit in its current account balance due to high levels of imports compared to exports, along with significant outflows of income payments and transfers. To address this issue, the government is considering implementing a range of policies, including devaluation of the currency, imposition of tariffs, and promotion of export industries. The goal is to correct the balance of payments imbalance and improve the country's international financial position. The question is: In this scenario, the primary objective of the government's policies is to: A) Increase the country's reliance on imports B) Decrease foreign investment in the country C) Correct the balance of payments deficit D) Eliminate all forms of international trade
Answer the followings: 1. A depreciation of the dollar on the foreign exchange market would result in: A) a decrease in the dollar prices paid by U.S. importers. B) foreign holidays for U.S. residents to be less expensive. C) a decrease in the demand for U.S. exports. D) an increase in the foreign currency prices paid for U.S. exports. 2. The exchange rate for one U.S. dollar is 1.2 Euros and 1.5 British pounds. Exactly six months later, the exchange rate for one U.S. dollar is 0.9 Euro and 1.7 British pounds. We can say: A) the dollar has depreciated relative to both British pounds and Euros. B) the dollar has appreciated relative to both British pounds and Euros. C) the dollar has appreciated relative to Euros and depreciated relative to British pounds. D) the dollar has appreciated relative to British pounds and depreciated relative to Euros. 3. The cost of a trip to New York, US, was $5000. Two weeks later, the US dollar appreciated against the British pound. If the price of the…
Balance of payments accounting. For the following international transactions, identify the balance of payments accounts and whether the transaction would generate an inflow or an outflow of foreign exchange for the two countries involved. ■ TIAA-CREF—the pension fund of American college professors—purchases 1 million shares of South Africa’s Standard Bank for $16 million. ■ Air France purchases $2.5 million of jet fuel at Boston’s Logan Airport. Payment is made directly from Air France’s bank account with State Street in Boston. ■ Hong Kong–based Cathay Pacific pays a $25 million annual lease on two Boeing 777s to U.S.-based lessor GE Capital.