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Answer the following questions. Each sub-part of the question is not related to the other part. Be sure to provide a written explanation in order to receive full credit. a) The foreign exchange market is in equilibrium, and there is a change in the consumption preference such that Canadian households decide to buy fewer American goods. If the Bank of Canada (BOC) wants to keep the exchange rate from changing, what should it do? What happens to the stock of official reserves held by the BOC? What happens to the balance of payments after the intervention by the BOC? Explain. (10 points)

b) Suppose you are a currency trader, and he observes the following exchange rates in the spot market: S£/US$ = 0.5133 SUS$/€ = 1.4568 S£/€ = 0.7192 ? You observe there is an arbitrage opportunity in trading £ and €, what should you do to capture the arbitrage profit? What is your arbitrage profit (measured in £)? Explain. (6 points) ? Also, discuss the adjustment mechanism (i.e., explain how the transactions you would eliminate the arbitrage profit). (9 points)

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Ritu Kharb
Ritu KharbLv5
28 Sep 2019

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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)

Et = ¥ 110 = $1

Et+1 = ¥ 95 = $1

Current Interest rate in the US = iUS= 8%

If the interest parity condition is expected to hold, interest rates in Japan (iJapan) 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.

Comment this discuss in few paragraph ?

Cultural Differences and Ethical Standards

Should you pay the 10 percent commission? Justify your response.

The type of country in which this scenario takes place. As Hill (2009) points out there are high and low context countries. Asian, Latin American, and Middle Eastern countries are high context countries where the message must be interpreted based on not only what was said, but the person's social status, and other cultural indicators present (Hill, 2009). In low context countries, what is said is the message and there is no need for further interpretations (Hill, 2009). Therefore, it would depend on where this interaction is occurring and who is asking for the commission (status, rank, business title, etc). These commissions may be a normal part of doing business in a certain region of the country. However, there are strict laws governing bribes (Mestre, 2015) and if I suspected that this commission was a bribe for business or personal advantage, then I would not pay the commission. This would eventually have a detrimental effect on my business and go against my ethics.

Does it make a difference if your competitors routinely pay such commissions? Explain why this may or may not have an impact on your decision.

As Mestre (2015) explains, bribes are so wide spread that the fundamental alter the business landscape in certain markets. As he states, there is a, "barrage of extortionate demands for bribes in foreign markets (p.2)." Unfortunately, bribes reward the corrupt and not eh efficient which a free market should award the most competitive and efficient company (Mestre, 2015). So these types of "commissions" are frequent around the world and should be calculated in to a SWOT (strengths, weaknesses, opportunities, and threats) analysis when deciding to enter a certain foreign market. A company needs to decide what risks they are willing to take to enter into a new market. Will they pay bribes furthering the decline of a market and risk large legal penalties? Or will they not pay the bribes knowing that this will make it harder for them to do business in that market?

Do you think there should be more or fewer attempt to regulate international ethics? Why? Justify your answer using the research you have done in preparation for this assignment.

The United Nations (UN) and the World Trade Organization (WTO) both have areas that monitor and regulate ethics (websites, ND). Additionally, the United States and other countries have, for example, anti-bribery laws that penalize both the bribe giver and taker (Mestre, 2015). Given all of the regulation, there is still wide spread corruption in the global marketplace (Mestre, 2015). Additionally, new technologies far exceed the pace of legislating new laws and policies (Herther, 2018). Therefore, it seems like a combination of corporate ethic policies, government intervention, and international trade agreements can help to combat unethical behavior in international business. It is important to have multiple areas of regulation as ethical behavior varies by country. For example, what Americans consider unethical may not be unethical in another country.

PART A

1. In which of the following situations is the Coase theorem likely to apply? Explain.

a. The neighbor who lives below you in the apartment building loves to play old John Denver records at loud volume early in the morning. In fact, his favorite song seems to be “Thank God I’m a Country Boy.” You hate old John Denver songs and this one in particular.

b. You have just moved to Beijing and quickly discover that you are allergic to smog. It causes you great pain in breathing and limits your ability to work. Furthermore, you have medical expenses related to treatment for its health effects on you.

c. Medical research in the 1990s has revealed a specific cause of birth defects related to a certain drug prescribed for pregnant women in the 1960s (thalidomide).

d. The water in the huge underground Ogalalla aquifer in the Great Plains region of the United States is being nitrate contaminated due to agricultural fertilizer use throughout the region. As a homeowner in this region, you find that your water must be treated in order to be safe for drinking.

2. One of the most striking aspects of cities in the former Soviet Union is the poor condition of public places. Streets, parks, libraries, museums, concert halls, and public gathering places of every description are all in very poor condition, revealing years of neglect and lack of maintenance.

Explain this phenomenon in light of the definition of property rights and the transition from socialism to a market economy.

3. Suppose that the marginal benefit associated with corn production is MB = 2.5. The marginal private cost of production is MPC = 2 + 0.1Q, where Q measures bushels of corn produced in thousands. The marginal damages caused by pollution in corn production are given by MD = 0.05Q.

a. Compute the privately optimal output and the socially optimal output.

b. Compute new solutions for an increase in MB to MB = 3. Explain what has happened and why. c. Demonstrate the effects of an increase in MD to MD = 0.075 compared to the solutions in part a.

4. Policy analysts in the Department of Natural Resources have estimated that the marginal benefits from water pollution abatement are given by the function MB ¼ 0.90 À 0.03A, where A is a measure of the abatement intensity. Industry experts have estimated that the marginal cost of abatement activity is MC = 0.30 + 0.09A.

a. Determine the optimal level of abatement activity.

b. Explain what happens when new technology reduces the marginal cost of abatement to MC = 0.25 + 0.06A. 5. Consider the pollution reduction mechanism known as emissions trading. a. What is the economic rationale for permitting emissions trading?

b. If the objective is to minimize the cost of emissions reductions, explain what economic principle should be followed in allocating emissions reductions between two countries.

c. Suppose the marginal cost curves for emissions reductions in countries A and B are MCA = 10 + 0.04qA and MCB = 5 + 0.02qB. What is the most efficient allocation of an emission reduction of q0 between the two countries? (Assume that the emissions reductions of the two countries must add up to the total emissions reduction: q0 = qA = qB.)

PART B

1. Which of the following do you consider pure public goods? Private goods? Why?

a. Wilderness areas

b. Satellite television

c. Medical school education

d. Public television programs

e. Automated teller machine (ATM)

2. Indicate whether each of the following statements is true, false, or uncertain, and justify your answer.

a. Efficient provision of a public good occurs at the level at which each member of society places the same value on the last unit.

b. If a good is nonrival and excludable, it will never be produced by the private sector.

c. A road is nonrival because one person’s use of it does not reduce another person’s use of it.

d. Larger communities tend to consume greater quantities of a nonrival good than smaller communities.

3. Tarzan and Jane live alone in the jungle and have trained Cheetah both to patrol the perimeter of their clearing and to harvest tropical fruits. Cheetah can collect 3 pounds of fruit an hour and currently spends 6 hours patrolling, 8 hours picking, and 10 hours sleeping.

a. What are the public and private goods in this example?

b. If Tarzan and Jane are each currently willing to give up one hour of patrol for 2 pounds of fruit, is the current allocation of Cheetah’s time Pareto efficient? Should he patrol more or less?

4. The aircraft company Airbus receives much of its funding from European governments. Airbus recently decided to build a new 550-seat mega-jetliner, with duty-free shopping courts and restaurants on board. The project has experienced production delays as well as cost overruns, and it now appears that there will be very few buyers. An industry expert says the idea from the start was “nonsense”

Is public sector production of aircrafts ever justified?

Explain why it could lead to the apparently ill-advised decision to build the mega-jetliner.

5. Suppose that there are only two fishermen, Zach and Jacob, who fish along a certain coast. They would each benefit if lighthouses were built along the coast where they fish. The marginal cost of building each additional lighthouse is $100. The marginal benefit to Zach of each additional lighthouse is 90 − Q, and the marginal benefit to Jacob is 40 − Q, where Q equals the number of lighthouses.

a. Explain why we might not expect to find the efficient number of lighthouses along this coast.

b. What is the efficient number of lighthouses? What would be the net benefits to Zach and Jacob if the efficient number were provided?

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