Chapter Questions
Explain the link between the Mexican demand for U.S. goods and the supply of pesos. Next, explain the link between the U.S. demand for Mexican goods and the supply of dollars.
The lower the dollar price of a peso, the higher is the quantity demanded of pesos and the lower is the quantity supplied of pesos. Do you agree or disagree? Explain.
What does it mean to say that the U.S. dollar has depreciated in value in relation to the Mexican peso? What does it mean to say that the Mexican peso has appreciated in value relative to the U.S. dollar?
Suppose the United States and Japan have a flexible exchange rate system. Explain whether each of the following events will lead to an appreciation or depreciation of the U.S. dollar and Japanese yen:a. U.S. real interest rates rise above Japanese real interest rates.b. The Japanese inflation rate rises relative to the U.S. inflation rate.c. An increase in U.S. income combines with no change in Japanese income.
Give an example of how a change in the exchange rate alters the relative price of domestic goods in terms of foreign goods.
What are the strong and weak points of the flexible exchange rate system? What are the strong and weak points of the fixed exchange rate system?
Explain the details of the purchasing power parity (PPP) theory.
A country whose currency is the primary reserve currency can likely borrow at lower interest rates than it could if its currency were not the primary reserve currency. Do you agree or disagree? Explain.
What does it mean to say that a currency is overvalued? undervalued?
Under a flexible exchange rate system, if the equilibrium exchange rate is $0.10 \mathrm{USD}=1 \mathrm{MXN}$ and the current exchange rate is $0.12=1 \mathrm{MXN},$ will the U.S. dollar appreciate or depreciate? Explain.
Under a fixed exchange rate system, setting the official price of a peso in terms of dollars automatically sets the official price of a dollar in terms of pesos. Do you agree or disagree? Explain.
Country $X$ wants to lower the value of its currency on the foreign exchange market. Under a flexible exchange rate system, how can it do that?
What is an optimal currency area?
Country 1 produces good $X,$ and country 2 produces good Y. People in both countries begin to demand more of good $\mathrm{X}$ and less of good $\mathrm{Y}$. Assume that there is no labor mobility between the two countries and that a flexible exchange rate system exists. What will happen to the unemployment rate in country $2 ?$ Explain.
How important is labor mobility in determining whether an area is an optimal currency area?
If everyone in the world spoke the same language, would the world be closer to or further from being an optimal currency area? Explain.