Principles of Macroeconomics

Steven A. Greenlaw, David Shapiro

Chapter 16

Exchange Rates and International Capital Flows - all with Video Answers

Educators

Chapter Questions

Problem 1

How will a stronger euro affect the following economic agents?
a. A British exporter to Germany.
b. A Dutch tourist visiting Chile.
c. A Greek bank investing in a Canadian government bond.
d. A French exporter to Germany.

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 2

Suppose that political unrest in Egypt leads financial markets to anticipate a depreciation in the Egyptian pound. How will that affect the demand for pounds, supply of pounds, and exchange rate for pounds compared to, say, U.S. dollars?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 3

Suppose U.S. interest rates decline compared to the rest of the world. What would be the likely impact on the demand for dollars, supply of dollars, and exchange rate for dollars compared to, say, euros?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 4

Suppose Argentina gets inflation under control and the Argentine inflation rate decreases substantially. What would likely happen to the demand for Argentine pesos, the supply of Argentine pesos, and the peso/U.S. dollar exchange rate?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 5

This chapter has explained that “one of the most economically destructive effects of exchange rate fluctuations can happen through the banking system,” if banks borrow from abroad to lend domestically. Why is this less likely to be a problem for the U.S. banking system?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 6

A booming economy can attract financial capital inflows, which promote further growth. However, capital can just as easily flow out of the country, leading to economic recession. Is a country whose economy is booming because it decided to stimulate consumer spending more or less likely to experience capital flight than an economy whose boom is caused by economic investment expenditure?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 7

How would a contractionary monetary policy affect the exchange rate, net exports, aggregate demand, and aggregate supply?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 8

A central bank can allow its currency to fall indefinitely, but it cannot allow its currency to rise indefinitely. Why not?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 9

Is a country for which imports and exports comprise a large fraction of the GDP more likely to adopt a flexible exchange rate or a fixed (hard peg) exchange rate?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 10

What is the foreign exchange market?

Kaylee Mcclellan

Kaylee Mcclellan

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Problem 11

Describe some buyers and some sellers in the market for U.S. dollars.

Kaylee Mcclellan

Kaylee Mcclellan

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Problem 12

What is the difference between foreign direct investment and portfolio investment?

Kaylee Mcclellan

Kaylee Mcclellan

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Problem 13

What does it mean to hedge a financial transaction?

Jennifer Stoner

Jennifer Stoner

Numerade Educator

Problem 14

What does it mean to say that a currency appreciates? Depreciates? Becomes stronger? Becomes weaker?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 15

Does an expectation of a stronger exchange rate in the future affect the exchange rate in the present? If so, how?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 16

Does a higher rate of return in a nation’s economy, all other things being equal, affect the exchange rate of its currency? If so, how?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 17

Does a higher inflation rate in an economy, other things being equal, affect the exchange rate of its currency? If so, how?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 18

What is the purchasing power parity exchange rate?

Kaylee Mcclellan

Kaylee Mcclellan

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Problem 19

What are some of the reasons a central bank is likely to care, at least to some extent, about the exchange rate?

Jennifer Stoner

Jennifer Stoner

Numerade Educator

Problem 20

How can an unexpected fall in exchange rates injure the financial health of a nation’s banks?

Kaylee Mcclellan

Kaylee Mcclellan

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Problem 21

What is the difference between a floating exchange rate, a soft peg, a hard peg, and dollarization?

Kaylee Mcclellan

Kaylee Mcclellan

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Problem 22

List some advantages and disadvantages of the different exchange rate policies.

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 23

Why would a nation “dollarize”—that is, adopt another country’s currency instead of having its own?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 24

Can you think of any major disadvantages to dollarization? How would a central bank work in a country that has dollarized?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 25

If a country’s currency is expected to appreciate in value, what would you think will be the impact of expected exchange rates on yields (e.g., the interest rate paid on government bonds) in that country? Hint: Think about how expected exchange rate changes and interest rates affect a currency's demand and supply.

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 26

Do you think that a country experiencing hyperinflation is more or less likely to have an exchange rate equal to its purchasing power parity value when compared to a country with a low inflation rate?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 27

Suppose a country has an overall balance of trade so that exports of goods and services equal imports of goods and services. Does that imply that the country has balanced trade with each of its trading partners?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 28

We learned that changes in exchange rates and the corresponding changes in the balance of trade amplify monetary policy. From the perspective of a nation's central bank, is this a good thing or a bad thing?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 29

If a developing country needs foreign capital inflows, management expertise, and technology, how can it encourage foreign investors while at the same time protect itself against capital flight and banking system collapse, as happened during the Asian financial crisis?

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator

Problem 30

Many developing countries, like Mexico, have moderate to high rates of inflation. At the same time, international trade plays an important role in their economies. What type of exchange rate regime would be best for such a country's currency vis $\dot{a}$ vis the U.S. dollar?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 31

What would make a country decide to change from a common currency, like the euro, back to its own currency?

Kaylee Mcclellan

Kaylee Mcclellan

Numerade Educator

Problem 32

A British pound cost $\$ 2.00$ in U.S. dollars in 2008 , but $\$ 1.27$ in U.S. dollars in $2017 .$ Was the pound weaker or stronger against the dollar? Did the dollar appreciate or depreciate versus the pound?

Oluwadamilola Ameobi

Oluwadamilola Ameobi

Numerade Educator