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 34, Problem 3.6P
To determine
The effect of
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We noted that in 1900, the fixed exchange rate between the British pound and the U.S. dollar was 1 pound equals $5. What is the exchange rate today? Whose currency has gained the most in purchasing power? What caused this dramatic change in the exchange rate?
The figure below illustrates the market for Bahamian dollars, where the price of the Bahamian dollar is
valued in U.S. dollars. Assume that the Bahamian government wants to peg its currency to the U.S. dollar at
a 1:1 ratio (one U.S. dollar = one Bahamian dollar). But the current exchange rate is at 90 cents (10 cents
below the official peg).
What must the Bahamian central bank do to return to the $1 exchange rate
A. It would need to reduce the demand for the Bahamlan dollar.
B. It would need to reduce the supply of the Bahamian dollar.
C. It would need to Increase the supply of the Bahamian dollar.
D. It would need to Increase the demand for the Bahamlan dollar.
Part 2
Suppose you are a U.S. student and are thinking about visiting the Bahamas for spring break. You would
rather the central bank intervened ___ (before or after) spring break.
Part 3
Suppose that currently, the exchange rate is 1 Bahamian dollar for 1 U.S. dollar. The price of a Big Mac is $5
in the United States and 3.00…
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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- The spot exchange rate between the dollar and the Swiss franc is a floating, or flexible, rate. What are the effects of each of the following on this exchange rate? There is a large increase in Swiss demand for U.S. exports as U.S. culture becomes more popular in Switzerland. There is a large increase in Swiss demand for investments in U.S. dollar-denominated financial assets because of a Swiss belief that the U.S. economy and political situation are improving markedly. Political uncertainties in Europe lead U.S. investors to shift their financial investments out of Switzerland, back to the United States. U.S. demand for products imported from Switzerland falls significantly as bad press reports lead Americans to question the quality of Swiss products.arrow_forwardUsing data from The Economist's Big Mac Index for 2011, the following table shows the local currency price of a Big Mac in several countries as well as the actual exchange rate between each country and the United States. At the time of the data collection, a Big Mac would have cost you $4.07 in the United States and GBP 2.39 in the United Kingdom. The actual exchange rate between the British pound and the U.S. dollar was $1.63 per pound. The dollar price of a Big Mac purchased in the United Kingdom was, therefore, computed as follows: S1.63 Dollar price of a Big Mac in the United Kingdom= GBP 2.39 x GBP 1.0 = $3.90 For the price you paid for a Big Mac in the United States, you could have purchased a Big Mac in the United Kingdom and had some change left over for french fries! Complete the final column of the table by computing the dollar price of a Big Mac for the countries where this amount is not given. Note: Round your answers to the nearest cent. Big Mac Index: July 25, 2011 Local…arrow_forwardUsing data from The Economist's Big Mac index for 2011, the following table shows the local currency price of a Big Mac in several countries as well as the actual exchange rate between each country and the United States. At the time of the data collection, a Big Mac would have cost you $4.07 in the United States and GBP 2.39 in the United Kingdom. The actual exchange rate between the British pound and the U.S. dollar was $1.63 per pound. The dollar price of a Big Mac purchased in the United Kingdom was, therefore, computed as follows: NOTE: here are the options for drop down questions for when u get there The exchange rate that would have equalized the dollar price of a Big Mac in the United States and Brazil (that is, the PPP exchange rate for Big Macs) is __________ ($0.43 per real OR $1.96 per deal OR $2.33 per real OR $2.63 per real). This change would mean that the dollar had ________ (appreciated OR depreciated) against the real.arrow_forward
- Using data from The Economist's Big Mac index for 2011, the following table shows the local currency price of a Big Mac in several countries as well as the actual exchange rate between each country and the United States. At the time of the data collection, a Big Mac would have cost you $4.07 in the United States and GBP 2.39 in the United Kingdom. The actual exchange rate between the British pound and the U.S. dollar was $1.63 per pound. The dollar price of a Big Mac purchased in the United Kingdom was, therefore, computed as follows: NOTE: here are the options for drop down questions for when u get there The exchange rate that would have equalized the dollar price of a Big Mac in the United States and Brazil (that is, the PPP exchange rate for Big Macs) is __________ ($0.43 per real OR $1.96 per deal OR $2.33 per real OR $2.63 per real). This change would mean that the dollar had ________ (appreciated OR depreciated) against the real.arrow_forwardIn 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…arrow_forwardSuppose 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_forward
- Using data from The Economist's Big Mac Index for 2019, the following table shows the local currency price of a Big Mac in several countries as well as the actual exchange rate between each country and the United States. At the time of the data collection, a Big Mac would have cost you $5.74 in the United States and GBP 3.29 in the United Kingdom. The actual exchange rate between the British pound and the U.S. dollar was $1.25 per pound. The dollar price of a Big Mac purchased in the United Kingdom was, therefore, computed as follows: Dollar price of a Big Mac in the United KingdomDollar price of a Big Mac in the United Kingdom = = GBP 3.29×$1.25GBP 1.00GBP 3.29×$1.25GBP 1.00 = = $4.11$4.11 For the price you paid for a Big Mac in the United States, you could have purchased a Big Mac in the United Kingdom and had some change left over for fries! Complete the final column of the table by computing the dollar price of a Big Mac for the countries where this amount is…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_forwardIn April 2002, the price of a Big Mac in the UK was £1.99. Using data from The Economist's Big Mac Index for April 2002, the following table shows the local currency price of a Big Mac in several countries and the actual exchange rate. At the time, a Big Mac in the United States would have cost you 2.49 pounds. The actual exchange rate between the pound and the euro was £0.69 per British pound. The euro price of a Big Mac in the United States was, therefore, 2.49 British pounds x £0.69 per British pound = £1.71, which is less than you'd have paid in the UK. For the price you paid for a Big Mac in the UK, you could have purchased a Big Mac in the United States and had some change left over for french fries. Big Mac Index: April 2002 Country Local Price Actual Exchange Rate Argentina 2.49 pesos £0.23 per peso Brazil 3.6 reais £0.29 per real United States 2.49 pounds £0.69 per pound Euro zone 2.67 euros £0.62 per euro Poland 5.9 zloty £0.17 per zloty Switzerland 6.3 francs £0.42 per franc…arrow_forward
- As the price level decreases, the cost of borrowing money will (remain the same/increase/decrease) , causing the quantity of output demanded to (rise/increase/fall/remain the same) . This phenomenon is known as the (exchange rate/interest rate/wealth) effect. Additionally, as the price level decreases, the impact on the domestic interest rate will cause the real value of the dollar to (rise/decrease/falll) in foreign exchange markets. The number of domestic products purchased by foreigners (exports) will therefore (rise/increase/fall/remain the same) , and the number of foreign products purchased by domestic consumers and firms (imports) will (rise/decrease/fall/remain the same) . Net exports will therefore (rise/increase/fall/remain the same) , causing the quantity of domestic output demanded to (fall/increase/remain the same/rise) . This phenomenon is known as the (exchange rate/interest rate/wealth) effect.arrow_forwardWhat effect would an appreciation of the U.S. dollar, relative to the Chinese Yuan, have on both the quantity of our exports to China and the quantity of our imports from China.arrow_forwardSuppose that, initially, the foreign exchange market between the United Kingdom and Canada is in equilibrium. However, over time, the supply of the Canadian euro shifts to the left, causing the pound to (depreciate/appreciate) against the Canadian euro. Which of the following is a disadvantage of this change in the supply of foreign currency for the United Kingdom? a)UK exporting firms find it easier to sell goods on Canadian markets. b)UK consumers face lower prices on Canadian goods. c)UK exporting firms find it more difficult to compete in the Canadian market. d)UK consumers face higher prices on Canadian goods.arrow_forward
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