1. Why is the U.S. dollar the most commonly held foreign exchange reserve currency in the world? 2. What do yot think has limited the appeal of (a) the euro and (b) the Chinese yuan as reserve currencies? 3. Under what conditions might the (a) euro and (b) the yuan increase their share of foreign exchange reserves? 4. What would have to occur for the dollar to lose its central role as the world's most widely held reserve currency? 5. If the U.S. dollar lost its role as the most popular reserve currency in the world, what would the implications be for the U.S. economy? For international businesses?
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1) Which groups within the United States are most likely to be harmed by Chinese currency manipulation to lower the value of the renminbi? Why? Are there U.S. groups that benefit when the renminbi is weaker relative to the dollar? 2) Why might China have decided at a certain point that changing course and propping up the value of its currency was in its economic interest? 3) When it comes to the role of international institutions, what are some arguments for their punishing currency manipulators? What are some arguments against their doing so?
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3. Consider the United States and the countries it trades with the most (measured in trade volume): Canada, Mexico, China, and Japan. For simplicity, assume these are the only four countries with which the United States trades. Trade shares (trade weights) and U.S. nominal exchange rates for these four countries are as follows: Country (currency) Canada (dollar) Mexico (peso) China (yuan) Japan (yen) Share of Trade 36% 28% 20% 16% S per FX in 2015 $ per FX in 2016 0.8271 0.6892 0.0683 0.0538 0.1608 0.1522 0.0080 0.0086 a. Compute the percentage change from 2015 to 2016 in the four U.S. bilateral exchange rates (defined as U.S. dollars per unit of foreign exchange, or FX) in the table provided b. Use the trade shares as weights to compute the percentage change in the nominal effective exchange rate for the United States between 2015 and 2016 (in U.S. dollars per foreign currency basket). c. Based on your answer to (b), what happened to the value of the U.S. dollar against this basket between 2015 and 2016? How does this compare with the change in the value of the U.S. dollar relative to the Mexican peso? Explain your answer.
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Search online to obtain and or prepare charts of the monthly average direct exchange rates for the past two years for the U.S. dollar versus (1) the Japanese yen, (2) the European euro, (3) the British pound, and (4) the Mexican peso. Your four charts should each have time on the horizontal axis and the direct exchange rate on the horizontal axis. Questions for Discussion a. Has the dollar strengthened or weakened during this time against each of the currencies? b. What major economic or political factors could have caused the changes in the four foreign currencies' exchange rates versus the U.S. dollar? c. Select one major factor from part (b) for each currency and present an argument showing how a change in that factor could cause the change in the exchange rate.
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