04 Jun Complete “Study Questions” 10, 13, and 14 at
Question
Complete “Study Questions” 10, 13, and 14 at the end of chapter 12 in the textbook.
10. Assuming market-determined exchange rates, use supply and demand schedules for pounds
to analyze the effect on the exchange rate (dollars per pound) between the U.S. dollar and
the UK pound under each of the following circumstances:
a. Voter polls suggest that the UK’s conservative government will be replaced by radicals who pledge to nationalize all foreign-owned assets.
b. Both the UK and U.S. economies slide into recession, but the UK recession is less severe than the U.S. recession.
c. The Federal Reserve adopts a tight monetary policy that dramatically increases U.S. interest rates.
d. Britain’s oil production in the North Sea decreases, and exports to the United States fall.
e. The United States unilaterally reduces tariffs on UK products.
f. Britain encounters severe inflation, while price stability exists in the United States.
g. Fears of terrorism reduce U.S. tourism in the United Kingdom.
h. The British government invites U.S. firms to invest in British oil fields.
i. The rate of productivity growth in Britain decreases sharply.
j. An economic boom occurs in the United Kingdom, which induces the UK consumers to purchase more U.S.-made autos, trucks, and computers.
k. Ten-percent inflation occurs in both the United Kingdom and the United States.
13. Suppose the dollar/franc exchange rate equals $0.50 per franc. According to the purchasing-power-parity theory, what will happen to the dollar’s exchange value under each of the following circumstances?
a. The U.S. price level increases by 10 percent and the price level in Switzerland stays constant.
b. The U.S. price level increases by 10 percent and the price level in Switzerland increases by 20 percent.
c. The U.S. price level decreases by 10 percent and the price level in Switzerland increases by 5 percent.
d. The U.S. price level decreases by 10 percent and the price level in Switzerland decreases by 15 percent.
14. Suppose that the nominal interest rate on three-month Treasury bills is 8 percent in the United States and 6 percent in the United Kingdom, and the rate of inflation is 10 percent in the United States and 4 percent in the United Kingdom.
a. What is the real interest rate in each nation?
b. In which direction would international investment flow in response to these real interest rates?
c. What impact would these investment flows have on the dollar’s exchange value?
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