Principles of Economics (12th Edition)
12th Edition
ISBN: 9780134078779
Author: Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher: PEARSON
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Chapter 33, Problem 2.6P
To determine
Impact of lower exchange rate on trade.
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Who would demand U.S. dollars in the foreign exchange market?
U.S. firms and households wishing to purchase foreign goods and services
Foreigners wishing to purchase U.S goods and services
U.S. households wishing to purchase U.S. goods and services
What effect does a high exchange rate have on imports, exports, and that country's production?
In 1992, 18.6 million Canadians visited the United States, but only 11.8 million U.S. residents visited Canada. By 2002, roles had been reversed: more U.S. residents visited Canada than vice versa.
Why did the tourism reverse direction? Canada didn’t get any warmer from 1992 to 2002 – but it did get cheaper. The reason is a large change in the exchange rate: in 1992 Canadian dollar was worth $0.80, but by 2002 it had fallen in the value by 20% to about $0.65. This means that Canadian goods and services, particularly hotel rooms and meals, were about 20% cheaper for Americans in 2002 compared to 1992. American vacations had become 20% more expensive for Canadians. Canadians responded by vacationing in their own country or in other parts of the world.
Foreign travel is an example of a good that has a high price elasticity of demand: elasticity=4.1.
One reason is that foreign travel is a luxury good for most people – you may regret not going to Paris this year, but you can live…
Chapter 33 Solutions
Principles of Economics (12th Edition)
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- For small, open economies that export and import a large volume of goods and services, a fixed exchange rate often make sense. Why does it make sense? And at what cost to the country?arrow_forwardHow and why will switching from a flexible to fixed exchange rate regime affect exports as a percentage of GDP/ Exports-GDP-ratioarrow_forwardIf a country has a floating exchange rate, then will a rise in the exchange rate be bad or good for importers?arrow_forward
- How do international investment activities affect exchange rates?arrow_forwardWhich of the following affects the demand for U.S. dollars in the foreign exchange market? Multiple Choice domestic demand for U.S. stocks domestic demand for U.S.-made cars foreign demand for U.S. exports European demand for eurosarrow_forwardWhich of the following is included in a nation's current account? a) Purchases of foreign assets b) Borrowings from abroad c) Foreign purchases of U.S. financial assets d) Investment income receipts e) Purchases of foreign real propertyarrow_forward
- Suppose that yesterday, the U.S. dollar-Japanese yen exchange rate was $1=¥0.553546. The price of one Japanese yen in terms of a U.S. dollar was ___ . Suppose that today the U.S. dollar-Japanese yen exchange rate falls to $1=¥0.533585 for one dollar. This means that between yesterday and today, the U.S. dollar has ___ against the Japanese yen. The price of a Mexican peso in terms of the U.S. dollar is now ___ .arrow_forwardExplain the relationship between the interest rate and the exchange rate in a country. Explain in terms of capital flows between countries and show what happens to a country's currency value in terms of another country's currency when interest rates differ between two countries. Explain as clearly as possible using country A and country B as your example.arrow_forwardGiven the definition of the exchange rate , if the Canadian dollar is the domestic currency and US dollar the foreign currency, what does a nominal exchange rate of 1.15 means?arrow_forward
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