Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
14th Edition
ISBN: 9781305506381
Author: James R. McGuigan, R. Charles Moyer, Frederick H.deB. Harris
Publisher: Cengage Learning
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Chapter 6, Problem 2E
To determine
The steps taken by domestic manufacturer to reduce the effect of exchange rate fluctuation.
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Students have asked these similar questions
Country A follows a fixed exchange rate policy that pegs its currency to the currency
of country B, which is its main trading partner in a world where international capital
is fully mobile. However, due to unresolved structural inefficiencies (for example,
excessive bureaucracy), prices in country A tend to increase more than prices in
country B. Over time, if nothing else changes, and provided that country A is
committed to its current exchange rate policy, which of the following problems is
not anticipated for country A?
a.
Economic recession.
O b. Growing deficit in international trade balance.
c. Worsening inflation.
Od. Decreasing reserve assets.
Oe. Growing external indebtedness.
How does the exchange rate fluctuations pose a risk to manufacturing companies that rely upon an export strategy to compete in foreign markets.
What are the advantages and disadvantages of a managed floating exchange rate system to the foreign company?
Chapter 6 Solutions
Managerial Economics: Applications, Strategies and Tactics (MindTap Course List)
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- List some advantages and disadvantages of the different exchange rate policies.arrow_forwardUnder a fixed exchange rate regime, the value of the currency is pegged to a specific currency. This provides stability and predictability for international businesses when engaging in cross-border transactions and making long-term investment decisions. Companies can better plan and forecast their international operations without worrying about sudden exchange rate fluctuations. Businesses with significant cross-border trade and investment activities can benefit from reduced currency risk as their transactions are shielded from short-term volatility in exchange rates. This can be particularly advantageous when dealing with countries with historically unstable currencies. Fixed exchange rates can act as a constraint on monetary policies, preventing excessive money supply growth that may lead to inflation. This can create a more stable economic environment for businesses to operate in. In a floating exchange rate system, currency values are determined by market forces, primarily supply…arrow_forwardEast Asian economies had opened their borders to Foreign Direct Investment and their productivity increased over the last decades. Under a flexible exchange rate regime, their currencies became weaker compared to their partners’ currencies. True or false?arrow_forward
- 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 servicesarrow_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_forwardIn 1961, Charles de Gaulle decided he did not want the French franc to be considered as a second-rate currency, so he chopped two zeros off the value of the franc, which meant the exchange rate was approximately FF5/$ instead of FF500/$ (he also ordered that the $ key on IBM punchcard machines be replaced by the FF symbol). This had no immediate impact on any domestic or international transactions, but was supposed to convince the French people to put inflation behind them and keep their currency in line with the Dmark and the British pound. Whether or not this change in currency values made any difference, the relative inflation rate did slow down and the value of the FF did rise relative to the dollar over the next two decades. At the same time, the current account balance improved slightly. Based on these factors, explain what happened to the growth rate, show how the NX and NFI curves must have shifted, and describe the underlying economic developments.arrow_forward
- The Purchasing Power Parity (PPP) theory of the exchange rate implies that the currency of a country A would depreciate against that of country B if: (a) the inflation rate in A exceeds that in B (b) the normal interest rate in A exceeds that in B (c) the growth rate of GDP in B exceeds that in A (d) foreign direct investment moves from B to Aarrow_forwardThe 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…arrow_forwardAn appreciation of the dollar against all currencies in the foreign exchange market would result in all of the following, except: a) a decrease in the dollar prices paid by U.S. importers. b) an increase in the cost of vacations in Florida for Japanese tourists. c) foreign holidays for U.S. residents to be less expensive. d) an increase in the foreign currency prices paid for U.S. exports. e) an increase in the demand for U.S. exports.arrow_forward
- Prices in Country A sharply rose due to a supply shortage and led to high levels of inflation in the economy. What effect is this price increase likely to have on domestic currency in the foreign exchange market? Country A's domestic currency will see an appreciation, in relation to currencies of other trading partners. Country A's domestic currency will see both appreciation and depreciation, in relation to currencies of other trading partners. Country A's domestic currency will see no change, in relation to currencies of other trading partners. Country A's domestic currency will see a depreciation, in relation to currencies of other trading partners. There is insufficient information to draw a conclusion.arrow_forwardWhich of the following would result from a weakening of the U.S. dollar relative to the Japanese yen? Lesser popularity for U.S. exports in Japan. Greater popularity for U.S. exports in Japan Happy U.S. tourists who are visiting Japan. Higher real interest rates in the United Statesarrow_forwardWhile floating exchange rates have several advantages, they can also lead to increased volatility in currency values. How do central banks strike a balance between allowing market forces to determine exchange rates and intervening to prevent excessive currency fluctuations that could negatively impact their economies?arrow_forward
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