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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Question
Chapter 34, Problem 3.4P
Subpart (a):
To determine
To show graphically the
Subpart (b):
To determine
To determine the impact of a contractionary
Subpart (c):
To determine
To determine the impact of expansionary fiscal policy on the exchange rate.
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Students have asked these similar questions
Using the concept of "carry trade," explain how a decrease in U.S. interest rates could affect the EUR/USD exchange rate. Given this change in exchange rate, how would firms and customers be affected?
professors note
Supply and demand for currencies can be tricky, not least due to the confusing idea that what we are buying or selling is money itself!
Once you can wrap your mind around the idea that money is what is being obtained for other money, the next set of questions relates to what would or could make the price of one money change in terms of another.
To this effect, I'd recommend a primer from Investopedia: Six Factors That Influence Exchange Rates.
For your consideration in responding to this post, I suggest reading on how the Carry Trade has the capacity to magnify systemic risk.
In the foreign exchange market, the supply curve for the dollar is upward sloping. That is, when the exchange rate (foreign
currency per dollar) increases, the quantity of dollars supplied increases.
Assuming actors have not yet had time to change their expectations about the future exchange rate, when the exchange rate
increases, why is the supply curve of dollars in the foreign exchange market upward sloping?
Foreign goods and services are less expensive to import.
U.S. firms profit more by selling their goods and services domestically rather than selling to foreigners.
The expected profitability of purchasing a dollar today to sell in the future rises.
U.S. goods are less expensive for foreigners to purchase.
Suppose that the Federal Reserve cannot convince the public of its commitment to fight inflation in the United States in the near future. a) What would be the effect on the expected appreciation of the U.S. dollar? b) What would be the effect on the spot exchange rate for the U.S. dollar? Explain your answer using a graph.
Chapter 34 Solutions
Principles of Economics (12th Edition)
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