Subpart (a):
The equilibrium dollar price of Canadian dollar.
Subpart (a):
Explanation of Solution
The exchange rate is the rate at which one currency is exchanged with another currency. The flexible exchange rate is the most prominent exchange rate system that prevails in the economy. According to the flexible exchange rate system, the exchange rate will be determined by equating the
The demand for money and supply of money are equated with each other in order to calculate the flexible exchange rate of the economy. From the table given about the first year demand and supply of Canadian dollar, the only
Concept introduction:
Exchange rate: It is the rate at which one currency is exchanged for another currency.
Flexible exchange rate: It is the rate of exchange which is determined by equating the demand for and supply of the currency in the market. Thus, the exchange rate will fluctuate according to the fluctuations in the demand for and supply of currency.
Appreciation: It is the process of increasing the value of a currency with respect to another currency.
Depreciation: It is the process of decreasing the value of a currency with respect to another currency.
Subpart (b):
The equilibrium dollar price of Canadian dollar.
Subpart (b):
Explanation of Solution
The year two Canadian dollar supply is given in the fourth column of the table and according to the values of the quantity demanded and the quantity supplied of the Canadian dollar in year 2, we can identify the dollar price which equates the quantity demanded and quantity supplied of the Canadian dollar in year 2 is at 120. At this price point, both the quantity demanded and the quantity supplied are equal to 15. Thus, the equilibrium dollar price of Canadian dollar in year 2 is 120.
Concept introduction:
Exchange rate: It is the rate at which one currency is exchanged for another currency.
Flexible exchange rate: It is the rate of exchange which is determined by equating the demand for and supply of the currency in the market. Thus, the exchange rate will fluctuate according to the fluctuations in the demand for and supply of currency.
Appreciation: It is the process of increasing the value of a currency with respect to another currency.
Depreciation: It is the process of decreasing the value of a currency with respect to another currency.
Subpart (c):
The equilibrium dollar price of Canadian dollar.
Subpart (c):
Explanation of Solution
The dollar price of Canadian dollar in year 1 was 115 and in year 2 was 120. This shows that the dollar price of Canadian dollar increased from 115 to 120 in the period of one year. This shows us that in order to purchase 1 Canadian dollar, 115 dollars were required in year 1 and it increased to 120 dollars in Year 2. Thus, in one year, the dollar price of Canadian dollar increased by 5 dollars. The process of increasing the value of the domestic currency with regards to the foreign currency is known as appreciation. Thus, Canadian dollar has appreciated relative to the dollar between year 1 and 2.
Concept introduction:
Exchange rate: It is the rate at which one currency is exchanged for another currency.
Flexible exchange rate: It is the rate of exchange which is determined by equating the demand for and supply of the currency in the market. Thus, the exchange rate will fluctuate according to the fluctuations in the demand for and supply of currency.
Appreciation: It is the process of increasing the value of a currency with respect to another currency.
Depreciation: It is the process of decreasing the value of a currency with respect to another currency.
Subpart (d):
The equilibrium dollar price of Canadian dollar.
Subpart (d):
Explanation of Solution
The dollar price of Canadian dollar increased from year 1 to year 2. This shows that 5 more dollars is required to purchase 1 Canadian dollar in year 2. Thus, the dollar has lost its value by 5. The process of losing the value of the currency related to another is known as depreciation. So, the dollar has
Concept introduction:
Exchange rate: It is the rate at which one currency is exchanged for another currency.
Flexible exchange rate: It is the rate of exchange which is determined by equating the demand for and supply of the currency in the market. Thus, the exchange rate will fluctuate according to the fluctuations in the demand for and supply of currency.
Appreciation: It is the process of increasing the value of a currency with respect to another currency.
Depreciation: It is the process of decreasing the value of a currency with respect to another currency.
Subpart (e):
The equilibrium dollar price of Canadian dollar.
Subpart (e):
Explanation of Solution
There are many reasons for the relative change in the price of currencies. They can be due to more rapid inflation in the US than in Canada, higher growth rate in the US than in Canada, or an increase in the real interest rate in the US over Canada.
Option (1):
The main reason for the change in the relative values of currencies in the international market is the rapid inflation in the US when compared to Canada. When there is inflation in the US, the prices of the US goods and services will increase and they will become costly in the international market. As a result, the Canada consumers will demand their domestic products due to higher prices of US products. This will reduce the demand for the US dollar. As a result, the dollar will depreciate its value which makes the relative change in the value of two currencies over the period. Thus, option (1) is correct.
Option (2):
When there is a higher interest rate in the US relative to that in Canada, the investors in Canada will shift their investment to the US in order to earn a higher interest income from their investment. This will increase the demand for the dollars and the supply of Canadian dollar, which will result in the appreciation of a dollar in the exchange market. Since the relative change in the situation is depreciation, this option cannot be true. Thus, option (2) is incorrect.
Option (3):
The faster growth of income in US over Canada’s can be a reason for the relative change in the exchange rate of the currencies. But, the higher growth of income will lead to faster growth of the US. This would result in a better rate of interest which will in turn lead to the appreciation of a dollar. Here, it is depreciation. Thus, option (3) is incorrect.
Concept introduction:
Exchange rate: It is the rate at which one currency is exchanged for another currency.
Flexible exchange rate: It is the rate of exchange which is determined by equating the demand for and supply of the currency in the market. Thus, the exchange rate will fluctuate according to the fluctuations in the demand for and supply of currency.
Appreciation: It is the process of increasing the value of a currency with respect to another currency.
Depreciation: It is the process of decreasing the value of a currency with respect to another currency.
Want to see more full solutions like this?
Chapter 21 Solutions
Macroeconomics
- 16:10 ← BEC 3701 - Assignments-... KWAME NKRUMAH UNIVERSITY TEACHING FOR EXCELLENCE SCHOOL OF BUSINESS STUDIES DEPARTMENT OF ECONOMICS AND FINANCE ADVANCED MICRO-ECONOMICS (BEC 3701) Assignments INSTRUCTIONS: Check instructions below: LTE 1) Let u(q1,q2) = ln q₁ + q2 be the (direct) utility function, where q₁ and q2the two goods. Denote P₁ and P2 as the prices of those two goods and let M be per period money income. Derive each of the following: a) the ordinary or Marshallian demand functions q₁ = d₂ (P₁, P₂, M) for i = 1,2 [3 Marks] b) the compensated or Hicksian demand functions q₁ = h₂ (P₁, P2, M) for i = 1,2 [3 Marks] c) the Indirect Utility Function uº = v(P₁, P2, M) [3 Marks] d) the Expenditure Function E(P1, P2, U°) [3 Marks] e) Draw a diagram of the solution. There should be two graphs, one above the other; the first containing the indifference curves and budget constraint that characterize the solution to the consumer's choice problem; the second characterizing the demand…arrow_forwardHow would you answer the question in the News Wire “Future Living Standards”? Why?arrow_forwardal Problems (v) T (ix) F 1. Out of total number of 2807 women, who were interviewed for employment in a textile factory, 912 were from textile areas and the rest from non-textile areas. Amongst the married women, who belonged to textile areas, 347 were having some work experience and 173 did not have work experience, while for non-textile areas the corresponding figures were 199 and 670 respectively. The total number of women having no experience was 1841 of whom 311 resided in textile areas. Of the total number of women, 1418 were unmarried and of these the number of women having experience in the textile and non-textile areas was 254 and 166 respectively. Tabulate the above information. [CA. (Foundation), May 2000 Exactly (14) of the total employees of a sugar mill were these were married and one-halfarrow_forward
- How did Jennifer Lopez use free enterprise to become successful ?arrow_forwardAn actuary analyzes a company’s annual personal auto claims, M and annual commercialauto claims, N . The analysis reveals that V ar(M ) = 1600, V ar(N ) = 900, and thecorrelation between M and N is ρ = 0.64. Compute V ar(M + N ).arrow_forwardDon't used hand raitingarrow_forward
- Answer in step by step with explanation. Don't use Ai.arrow_forwardUse the figure below to answer the following question. Let I represent Income when healthy, let I represent income when ill. Let E [I] represent expected income for a given probability (p) of falling ill. Utility у в ULI income Is есте IM The actuarially fair & partial contract is represented by Point X × OB A Yarrow_forwardSuppose that there is a 25% chance Riju is injured and earns $180,000, and a 75% chance she stays healthy and will earn $900,000. Suppose further that her utility function is the following: U = (Income) ³. Riju's utility if she earns $180,000 is _ and her utility if she earns $900,000 is. X 56.46; 169.38 56.46; 96.55 96.55; 56.46 40.00; 200.00 169.38; 56.46arrow_forward
- Use the figure below to answer the following question. Let là represent Income when healthy, let Is represent income when ill. Let E[I], represent expected income for a given probability (p) of falling ill. Utility & B естве IH S Point D represents ☑ actuarially fair & full contract actuarially fair & partial contract O actuarially unfair & full contract uninsurance incomearrow_forwardSuppose that there is a 25% chance Riju is injured and earns $180,000, and a 75% chance she stays healthy and will earn $900,000. Suppose further that her utility function is the following: U = (Income). Riju is risk. She will prefer (given the same expected income). averse; no insurance to actuarially fair and full insurance lover; actuarially fair and full insurance to no insurance averse; actuarially fair and full insurance to no insurance neutral; he will be indifferent between actuarially fair and full insurance to no insurance lover; no insurance to actuarially fair and full insurancearrow_forward19. (20 points in total) Suppose that the market demand curve is p = 80 - 8Qd, where p is the price per unit and Qd is the number of units demanded per week, and the market supply curve is p = 5+7Qs, where Q5 is the quantity supplied per week. a. b. C. d. e. Calculate the equilibrium price and quantity for a competitive market in which there is no market failure. Draw a diagram that includes the demand and supply curves, the values of the vertical- axis intercepts, and the competitive equilibrium quantity and price. Label the curves, axes and areas. Calculate both the marginal willingness to pay and the total willingness to pay for the equilibrium quantity. Calculate both the marginal cost of the equilibrium quantity and variable cost of producing the equilibrium quantity. Calculate the total surplus. How is the value of total surplus related to your calculations in parts c and d?arrow_forward
- Principles of Macroeconomics (MindTap Course List)EconomicsISBN:9781285165912Author:N. Gregory MankiwPublisher:Cengage LearningPrinciples of Economics, 7th Edition (MindTap Cou...EconomicsISBN:9781285165875Author:N. Gregory MankiwPublisher:Cengage LearningBrief Principles of Macroeconomics (MindTap Cours...EconomicsISBN:9781337091985Author:N. Gregory MankiwPublisher:Cengage Learning
- Principles of Economics 2eEconomicsISBN:9781947172364Author:Steven A. Greenlaw; David ShapiroPublisher:OpenStaxExploring EconomicsEconomicsISBN:9781544336329Author:Robert L. SextonPublisher:SAGE Publications, IncPrinciples of Economics (MindTap Course List)EconomicsISBN:9781305585126Author:N. Gregory MankiwPublisher:Cengage Learning