Let the exchange rate be defined as the number of dollars per British pound. Assume there is a relatively lower rate of inflation in the U.S. relative to that of Britain.
(a.) Would this event cause the demand for the dollar to increase or decrease relative to the demand for the pound? Why?
(b.) Has the dollar appreciated or depreciated relative to the pound?
(c.) Does this change in the value of the dollar make imports cheaper or more expensive for Americans? Are American exports cheaper or more expensive for importers of U.S. goods in GreatBritain? Illustrate by showing the price of a U.S. cell phone in Britain, before and after the change in the exchange rate.
(d.) If you had a business exporting goods to Britain, and U.S.inflation fell as discussed above in this example, would you plan to expand production or cut back? Why?
Let the exchange rate be defined as the number of dollars per British pound. Assume there is a relatively lower rate of inflation in the U.S. relative to that of Britain.
(a.) Would this event cause the demand for the dollar to increase or decrease relative to the demand for the pound? Why?
(b.) Has the dollar appreciated or depreciated relative to the pound?
(c.) Does this change in the value of the dollar make imports cheaper or more expensive for Americans? Are American exports cheaper or more expensive for importers of U.S. goods in GreatBritain? Illustrate by showing the price of a U.S. cell phone in Britain, before and after the change in the exchange rate.
(d.) If you had a business exporting goods to Britain, and U.S.inflation fell as discussed above in this example, would you plan to expand production or cut back? Why?
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Related questions
Which of the following statements is accurate in regards to the US dollar:
| A. |
The central bank is responsible for printing the domestic currency and the value of the currency is adjusted to maintain a fixed level to another currency. |
| B. |
The central bank has no ability to print the domestic currency and dollarization was adopted to minimize domestic inflation. |
| C. |
Banks are responsible for printing the domestic currency and there is a floating exchange rate. |
| D. |
The central bank (e.g. Federal Reserve) is responsible for printing the domestic currency and there is a floating exchange rate. |
Suppose that monetary policy in the United States leads to an increase in interest rates relative to those in Japan. Which of the following will occur in the capital account:
| A. |
The demand for yen will increase. |
| B. |
The dollar will appreciate relative to the yen. |
| C. |
The supply of dollars will increase. |
| D. |
The dollar will depreciate relative to the yen. |
An expansionary monetary policy by the Fed would tend to:
| A. |
Lower the U.S. inflation rate, make exports cheaper, make imports more expensive, and raise the value of the dollar. |
| B. |
Raise the U.S. inflation rate, make exports more expensive, make imports cheaper, and lower the value of the dollar. |
| C. |
Raise the U.S. inflation rate, make exports cheaper, make imports more expensive, and raise the value of the dollar. |
| D. |
Lower the U.S. inflation rate, make exports more expensive, make imports cheaper, and lower the value of the dollar. |
