Managerial Economics: A Problem Solving Approach
5th Edition
ISBN: 9781337106665
Author: Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher: Cengage Learning
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Chapter 11, Problem 11.2IP
To determine
The effect of Brexit on the exchange rate of euro or dollar.
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When Great Britain voted to leave the Eurozone, the pound depreciated 17% against the dollar. It also raised fears that the Eurozone would fall apart. Explain how this fear would affect the euro/dollar exchange rate.
You read in the paper that the dollar has strengthened in value relative to the euro. How is this change in the exchange rate value of the dollar likely to affect exports to Europe and imports from Europe?
Changes in the value of a nation's currency affect the nation's net exports, and thus GDP. How might this make a large country, like
the U.S., more willing to adopt a flexible exchange rate regime than a small country, like Belgium.
Chapter 11 Solutions
Managerial Economics: A Problem Solving Approach
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- Currency traders expect the dollar to depreciate. What impact will this have on equilibrium in the foreign exchange market? The dollar will appreciate, and the equilibrium quantity of dollars will decrease. The dollar will depreciate, and the equilibrium quantity of dollars exchanged will decrease. The dollar will appreciate, and the equilibrium quantity of dollars will increase. The dollar will depreciate, and the change in the equilibrium quantity of dollars exchanged cannot be determined.arrow_forwardThere is a flexible exchange rate system and only two countries in the world, the United States and Mexico. If the inflation rate in the United States rises relative to the inflation rate in Mexico, it follows that both the dollar and the peso will appreciate, although the peso will appreciate before the dollar appreciates. both the dollar and the peso will depreciate, although the peso will depreciate before the dollar depreciates. the dollar will appreciate, and the peso will depreciate. There is not enough information to answer the question. the dollar will depreciate, and the peso will appreciate.arrow_forwardThe current Euro-Dollar exchange rate is 1 Euro= $1.16. Ten years ago, in October 2010, the exchange rate was 1 Euro = $1.38. Compared to 10 years back, the Euro is Stronger as compared to the US Dollar The same as compared to the US Dollar Weaker as compared to the US Dollar Cannot be compared to the US Dollararrow_forward
- Suppose we discover that the Canadian dollar suddenly depreciates against the Euro. What could be responsible for this: Prices of goods and services in Europe rise more than prices in Canada OR Canadian tourist destinations become more attractive than those in Europe OR Interest rates in Europe rise more than interest rates in Canada? Choose one and explain.arrow_forwardDuring the Great Financial crisis of 2008, the risk premium on the swiss franc diminished. What should have been the consequences on the exchange rate of the swiss franc vs the euro?arrow_forwardIt costs 100 GBP to buy a certain basket of goods in the UK. It costs 200 USD to buy the same basket in the US. 1 year deposit rates are 10% in both countries. Everyone expects these numbers to remain the same indefinitely. What is the current exchange rate between USD and GBP implied by purchasing power parity? What is the current exchange rate between USD and GBP implied by the overshooting model? Today, the Bank of England announces that it is going to lower the short-term interest rate to 5% in May 2024 and to return it to 10% in May 2025. It also says that the price level will go up and, eventually, it will cost 150 GBP to buy the same basket of goods in the UK. The price adjustment will be completed by May 2026. What is the current exchange rate between USD and GBP implied by the overshooting model? Under the circumstance described in (3), what will be the exchange rate between USD and GBP in May 2024?arrow_forward
- U.S. consumer spending reached record highs in 2021 coming out from the covid-19 slump. It is expected that 15% of incomes is spent on imported goods and services. How could this affect exchange rate of the U.S. dollar against our major trading partnerarrow_forwardNow assume that the COVID-19 pandemic is over and the vaccine worked out. The economy recovered and came back on track. Explain the exchange rate overshooting. Why is the exchange rate overshooting an important phenomenon? What does it help to explain?arrow_forwardWhen a foreign business or individual comes to Canada and buys Canadian goods and services explain the impact on the Canadian dollar. Use supply and demand curves for Canadian dollars on the foreign exchange market in your explanation.arrow_forward
- To keep the U.S. dollar from depreciating against the Japanese yen, the U.S. Federal Reserve must Buy Yen and sell U.S. dollars. Buy both Yen and U.S. dollars. Sell Yen and buy U.S. dollars. Sell both Yen and U.S. dollars.arrow_forwardTravis takes two trips to Ecuador. On his first trip, he finds that one US dollar is worth 25000 Ecuadorian Sucre. On his return trip, he finds that the dollar is now worth 24000 Ecuadorian Sucre. What is a likely result of this change in exchange rates?arrow_forwardConsider a country that is facing a supply crisis, and is planning to increase their imports as a way to make more goods available for households and businesses. Which movement in the exchange rate would benefit that policy? 1-Making the domestic currency stronger, which would harm exports but benefit imports 2-Making the domestic currency stronger, which would benefit both exports and imports 3-Making the domestic currency weaker, which would benefit both exports and imports 4-Making the domestic currency weaker, which would harm exports but benefit importsarrow_forward
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