ECON 0110 Lecture Notes - Lecture 9: French Wine, Renminbi

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blacklizard105

1 Nov 2015

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At the present time, 1 euro costs about . 33. Alternatively, . 00 costs about 1/1. 33 = . 75 euros. To simplify, let us assume that 1 euro trades for . 00; (1 e = . 00) Suppose a bottle of wine costs 100 euros in france. Thus, in terms of dollars, the bottle of wine would cost . Now, suppose lots of americans suddenly wish to convert dollars to euros (perhaps to purchase wine). Thus, the demand for euros increases and americans will need to give up more than. Suppose the new exchange rate becomes (1 e = . 50) This means that the euro has increased in value. In foreign exchange terms, the euro has appreciated or become stronger. On the other hand, the dollar has become less valuable. Now = 1 / 2. 50 = 0. 40 euros. A change in the exchange rate can have a big effect on imports and exports.

Related Questions

1. In which market will a company arrange to receive currency for a transaction at a future date?

Select one:

a. the forward market

b. the currency futures market

c. the arbitrage market

d. the forward spot market

2. The U.S. dollar is overvalued and the peso is undervalued in the foreign exchange market

Select one:

a. if a visitor to Mexico from the United States can buy more goods in the United States
than he can buy in Mexico when he converts dollars to pesos.

b. if a visitor to Mexico from the United States can buy the same amount of goods in
Mexico as he can buy in the United States when he converts dollars to pesos.

c. if a visitor to Mexico from the United States can buy more goods in Mexico than he can
buy in the United States when he converts pesos to dollars.

d. if a visitor to Mexico from the United States can buy more goods in Mexico than he can
buy in the United States when he converts dollars to pesos.

3. Given the following data (t is current time; t+1 is time after one period)

E_t = Â¥ 110 = $1

E_t+1 = Â¥ 95 = $1

Current Interest rate in the US = i_US= 8%

If the interest parity condition is expected to hold, interest rates in Japan (i_Japan) should equal approximately:

Select one:

a. 3.38%

b. 8%

c. -5.64%

d. None of the above.

4. Suppose the Japanese interest rate is I% while the interest rate in Britain is 3%. Interest rate parity predicts that relative to the Japanese Yen,

Select one:

a. the British pound will depreciate by 4%.

b. the British pound will appreciate by 2%.

c. the British pound will depreciate by 2%.

d. the British pound will appreciate by 4%.

5. Suppose the U.S. grows more slowly than Canada. The best medium term prediction is that the

Select one:

a. U.S. interest rates will rise.

b. U.S. dollar will appreciate against the Canadian dollar.

c. U.S. dollar will depreciate against the Canadian dollar.

6. Purchasing Power Parity (PPP) implies that

Select one:

a. In the long run, a forward exchange rate can purchase an interest rate swap for the same
price as the spot rate.

b. In the medium run, a forward exchange rate can purchase an interest rate swap for the
same price as the spot rate.

c. The short run, a given amount of money can buy the same amount of goods, whether
they are purchased at home or abroad.

d. the long run, a given amount of money can buy the same amount of goods, whether
they are purchased at home or abroad.

7. The current account balance will fall if

Select one:

a. the real exchange rate depreciates and disposable income goes up

b. the real exchange rate appreciates or disposable income goes up

c. the real exchange rate depreciates or disposable income goes down

d. the real exchange rate appreciates and disposable income goes down

8. A person who paid $10 for an umbrella in the U.S. sees the exact same umbrella in a store in London, England for 6 British pounds. If the person could expect the real exchange rate to be 1 U.S. umbrella per 1 English umbrella, then the person could infer that the nominal exchange rate is

Select one:

a. 0.6 U.S. dollars per 1 English pound.

b. 1.67 U.S. dollars per 1 English pound.

c. 0.6 English pounds per I U.S. dollar.

d. 1.67 English pounds per 1 U.S. dollar.

9. A U.S. wine merchant travelling in France has found a French wine of the same quality as a U.S. wine they regularly sell. She assumes that the real exchange rate should be 1 case of U.S. wine equals one case of French wine. The French wine merchant will sell her a case of the French wine for 350 euros. She knows that a case of the equivalent U.S. wine sells for $400. The euro is selling in France for $1.20. Assuming transportation costs are zero, the U.S. wine merchant should

Select one:

a. buy the French wine and sell it in the U.S. and make a profit.

b. buy the U.S. wine and sell it in France and make a profit.

c. It doesn't matter either way; there is no profit in the deal.

d. None of the above.

10. In a fixed exchange rate system, how do countries address the problem of currency market pressures that threaten to lower or raise the value of their currency?

Select one:

a. If demand falls, then countries must increase demand by buying up the excess supply
with domestic currency.

b. If demand rises, countries must fill the excess demand for foreign currency by selling
their reserves.

c. If demand rises, then countries can adjust the value of the exchange rate to the desired
level.

d. A and B only.

Please no cursive or typed out

1. (65 points total).

a) (5 points) Fill in the Table below.

Number of workers	Units of output	MPN
0	0
1	20
2	38
3	53
4	66
5	77
6	86
7	93

b. (10 points) Define the marginal product of labor and explain how it relates to the production function (with N on horizontal axis and Y on vertical axis). What shape does a production function typically take and why? Does this production function take the 'typical' shape?

c)(5 points) Assume that you sell your output to Europe for a US price = $10. The exchange rate is this time is $1.07 per Euro. What is the price of your product in Euros? Please round to 2 decimal places.

d) (5 points) You can hire all the workers you want at $80 per worker. Along with the US price = $10, calculate the number of workers that you will hire and the associated profit in REAL terms (as we did in class, we 'assume away' all other costs of production). Please give me the marginal REAL profit of each worker hired and then add them up and that is the total profit in real terms.

e)(5 points) Inflation data in the US is weaker than the Fed would like and thus, expectations change such that the Fed is less likely to raise interest rates. As a result, the new and updated exchange rate is $1.23 per Euro. What has happened to the value of the US dollar and what is the new Euro price of your product, assuming that your American price stays at $10?

f).(5 points) Given the change in conditions you decide to raise the price of your product in US dollar terms so that the Euro price stays the same as it was before the change in the exchange rate (part c above). What is the new US dollar price? Please show all work.

g) (10 points) What has happened to the marginal revenue product (MRPN) for each worker (has it gone up or down?) and why given the change in price? Be sure to define what the marginal revenue product is and what it means in 'laypersons' terms.

h) (10 points) Given that the US$ price of your product has changed, explain how and why you would change your behavior. Please provide the intuition beginning your answer with... at the same level of labor input I am no longer ......... (please be as specific as possible). Again, explain in REAL terms, not nominal terms.

i. (5 points) Calculate the new level of profits in REAL terms given the change in condition including the change in the exchange rate, the change in the US $ price of your product. and the change in your behavior.

j)(5 points) The Fed has had its eye on inflation for a long time and have been disappointed in that inflation has been too low. Is the change in the value the dollar vs the Euro a welcome development for the Fed? Why or why not? Assume that these conditions changed in a similar way for many US firms.

1 . In Zagora, a worker can produce either 5 books or 10 gadgets in an hour. In Plovdiv, a worker can produce either 3 books or 5 gadgets in an hour. Which statement about this situation is true?

A. Zagora has a comparative advantage in the production of books.

B. Zagora has a comparative advantage in the production of gadgets.

C. Zagora has the absolute advantage in both types of production, and workers in Plovdiv can't possibly compete against the super-productive workers in Zagora.

D. Plovdiv workers are clearly earning lower wages, and workers in Zagora can't be expected to compete against the low-wage workers in Plovdiv.

E. None of the above.

2. Free trade has the effect of:

A. making every individual in an economy better off.

B. decreasing an economy's production possibilities.

C. making all producers in an economy better off.

D. increasing the purchasing options of consumers in an economy.

E. making all workers in an economy worse off.

3. Protectionist measures are enacted because they:

A. allow countries to preserve culturally important ways of life at a very low cost.

B. typically benefit a large number of people at a cost to only a very small number.

C. typically benefit a small number of people greatly and impose small costs on a large number of people.

D. make everyone in an economy better off.

E. preserve a nation's critical natural resources.

4. Restrictions on imports of foreign steel into the U.S. will:

A. help both U.S. steel producers and U.S. automobile producers.

B. help U.S. steel producers and hurt U.S. automobile producers.

C. hurt U.S. automobile producers, but help U.S. automobile consumers.

D. hurt foreign steel producers and help U.S. steel consumers.

E. help both U.S. steel producers and foreign steel producers.

5. Suppose Bulgaria is accused of "dumping" milk on the Ukrainian market. As a result, the Ukrainian government is considering an embargo against milk from Bulgaria. As a result of this proposed embargo:

A. Ukrainian consumers of milk, such as small children, would be made better off, as would Ukrainian milk producers.

B. Ukrainian consumers of milk, such as small children, would be helped, but Ukrainian milk producers would be hurt.

C. Ukrainian consumers of milk, such as small children, would be hurt, as would milk producers in both Bulgaria and Ukraine.

D. milk producers in Bulgaria would be helped due to the resulting increase in milk prices.

E. Ukrainian consumers of milk, such as small children, would be made worse off, but Ukrainian milk producers would be made better off.

6. The term "balance of payments" refers to a nation's:

A. merchandise exports minus imports.

B. record of all international transactions.

C. capital inflows minus outflows.

D. official reserves inflows minus outflows.

E. capital outflows minus inflows.

7. If a bottle of French wine priced at 100 francs can be purchased for $50, the exchange rate is:

A. 0.50 francs per dollar.

B. 4.00 francs per dollar.

C. 0.50 dollars per franc.

D. 2.00 dollars per franc.

E. None of the above

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ECON 0110 Lecture Notes - Lecture 9: French Wine, Renminbi

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