Mexico and the United States are trade partners. Each country has a zero current account balance and is operating in long-run equilibrium. Assume that the inflation rate in the United States is slowing relative to Mexico's inflation rate. (a) How will the inflation rate change in the United States affect: (i) Mexico's demand for U.S. goods and services? (ii) net exports of Mexico? Explain. (b) Illustrate the impact of the change you identified in part (a) on a fully labeled AD–AS model for the economy of Mexico. Use arrows to indicate any changes in AD, real GDP, and price level. (c) Ceteris paribus, will the national income of the United States increase, decrease, or remain the same? (d) On side-by-side and fully labeled foreign exchange market graphs, illustrate the impact of the change in relative inflation on the supply of Mexican pesos and on demand for U.S. dollars. Use arrows to indicate the change in the equilibrium exchange rate for each currency. Part 2: The United Kingdom and Australia are trade partners, each with a current account balance of zero. Australia's national income increases relative to the United Kingdom. (e) On a fully labeled foreign exchange market graph, illustrate the impact of the relative change in national income on the British pound sterling (GBP) with the price in terms of Australian dollars (AUD). (f) Based on your response to part (e), has the Australian dollar appreciated or depreciated? (g) Assume the new exchange rate is 2 AUD per 1 GBP. Calculate the price of the Australian dollar in terms of British pounds sterling. Part 3: Respond succinctly and precisely to each of the following scenarios. Hint: these are beginning with a currency value change; start from there, and do not consider what caused the change. (h) The countries Zeta and Epsilon are trade partners. The currency of Epsilon depreciates relative to the currency of Zeta. Ceteris paribus, how will this change affect: (i) Epsilon’s net exports? Explain. (ii) the capital and financial account of Epsilon?
Mexico and the United States are trade partners. Each country has a zero current account balance and is operating in long-run equilibrium. Assume that the inflation rate in the United States is slowing relative to Mexico's inflation rate.
(a) How will the inflation rate change in the United States affect:
(i) Mexico's
(ii) net exports of Mexico? Explain.
(b) Illustrate the impact of the change you identified in part (a) on a fully labeled AD–AS model for the economy of Mexico. Use arrows to indicate any changes in AD, real GDP, and
(c) Ceteris paribus, will the national income of the United States increase, decrease, or remain the same?
(d) On side-by-side and fully labeled foreign exchange market graphs, illustrate the impact of the change in relative inflation on the supply of Mexican pesos and on demand for U.S. dollars. Use arrows to indicate the change in the equilibrium exchange rate for each currency.
Part 2: The United Kingdom and Australia are trade partners, each with a current account balance of zero. Australia's national income increases relative to the United Kingdom.
(e) On a fully labeled foreign exchange market graph, illustrate the impact of the relative change in national income on the British pound sterling (GBP) with the price in terms of Australian dollars (AUD).
(f) Based on your response to part (e), has the Australian dollar appreciated or depreciated?
(g) Assume the new exchange rate is 2 AUD per 1 GBP. Calculate the price of the Australian dollar in terms of British pounds sterling.
Part 3: Respond succinctly and precisely to each of the following scenarios. Hint: these are beginning with a currency value change; start from there, and do not consider what caused the change.
(h) The countries Zeta and Epsilon are trade partners. The currency of Epsilon
(i) Epsilon’s net exports? Explain.
(ii) the capital and financial account of Epsilon?
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