1. The principal function of the foreign exchange market is the transfer of funds, thus purchasing power, from one nation and currency to another.
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- Other things the same, if the U.S. price level falls, then the supply of dollars in the market for foreign-currency exchange increases, so the exchange rate rises. the supply of dollars in the market for foreign-currency exchange increases, so the exchange rate falls. the supply of dollars in the market for foreign-currency exchange decreases, so the exchange rate rises. the supply of dollars in the market for foreign-currency exchange decreases, so the exchange rate falls.In some cases, governments will intervene in the currency markets to incresae or decrease the value of the country's currency. Which of the following is an example of direct intervention in foreign exchange markets? A. The European Central Bank lowers interest rates to increase the value of the euro. B. The Japanese government purchasing JPY with USD to increase the value of the Japanese yen. C. China imposing barriers on imports from Europe. D. The U.S. lowers interest rates to decrease the value of the U.S. dollar.Suppose that yesterday, the U.S. dollar was trading on the foreign exchange market at 0.75 eurosper U.S. dollar and today the U.S. dollar is trading at 0.80 euros per U.S. dollar. Which of the twocurrencies (the U.S. dollar or the euro) has appreciated and which has depreciated today?b) Suppose that the exchange rate for the Mexican peso fell from 15 pesos per U.S. dollar to 10 pesosper U.S. dollar. What is the effect of this change on the quantity of U.S. dollars that people plan tobuy in the foreign exchange market?c) Suppose that the exchange rate rose from 80 yen per U.S. dollar to 90 yen per U.S. dollar. What isthe effect of this change on the quantity of U.S. dollars that people plan to sell in the foreignexchange market?
- Suppose that the country of Gizmovia wants to maintain the exchange rate of its currency, the gizmo, at $0.50, but the current equilibrium exchange rate for the gizmo is $0.75. If Gizmovia uses exchange market intervention to decrease the value of its currency to $0.50, it should ________ gizmos and _____ dollars in the foreign exchange market. A) sell; buy B) buy; buy C) sell; sell D) buy; sellSuppose that if you purchase a big Mac in Coral Springs, FL in the US, it will cost you $3.95. On the other hand, if you purchase the same big Mac in Florianopolis in southern Brazil, it will cost you 18.85 Brazilian real. The current exchange rate is $1 US buys 5.60 real. In this case, according to the law of one price, the exchange rate should be that $1 US buys time we predict that the US dollar should real, and hence, over ---- O 5.95; appreciate O 5.95; depreciate O 4.77; appreciate 4.77; depreciate9. A) Where does the market for foreign currency come from? How does this market work if we use the flexible exchange rate system? Using terms from lecture what happens to both countries currency if there is a shift of supply or demand? There were terms given that are used to describe changes in currency exchange rates, define and use these terms. B) What is the equation used to get the U.S. price of a foreign good? If a Mexican good costs 50 pesos and the exchange rate is $3/peso what is the U.S. price? C) If the demand for pesos goes up what happens to the exchange rate? Answer for the U.S. dollar and the Mexican peso. Now the demand to invest in Mexican real estate goes up what now happens to exchange rates?
- Suppose a country trades with three countries: Brazil (20% of trade), China (45%), and France(35%). Over the last year, the currency of this country has depreciated by 4% against theBrazilian real, appreciated by 3% against the Chinese yuan, and depreciated by 7% against theeuro. What has happened to the effective exchange rate of the country?1 Suppose that two countries, Indonesia and Vietnam, produce coffee. The currency unit used in Indonesia is the Rupiah (IDR). The currency unit used in Vietnam is the Dong (VND). In Vietnam, coffee sells for 4,500 dong (VND) per pound. The exchange rate is 1.57 VND per 1 IDR, EVND/IDR = 1.57. 2 If the law of one price holds, what is the price of coffee in Indonesia, measured in Rupiah (assume we are talking about the same type of coffee)? Please round your answer to the nearest whole number. Assume the price of coffee in Indonesia is actually 3000 IDR per pound. Compute the relative price of coffee in Indonesia versus Vietnam (round your answer to 2 decimal places). Where will coffee traders buy coffee? Where will they sell coffee in this case? How will these transactions affect the price of coffee in Vietnam? In Indonesia?You own a local company. In the past year, you successfully expanded your sales market into Europe, and you now have profits and cash denominated in euros. You want to convert the euros to your home country currency to repatriate the profits and pay taxes. You are a. not required to convert the euros to the home currency to pay taxes. b. a demander of the euro in the foreign exchange market. c. a supplier of your home country's currency in the foreign exchange market. d. a demander of your home country's currency in the foreign exchange market.
- 1. You notice that the price of a Big Mac in Argentina is 40 pesos. Here in the USA the price is $4.00. a. What is the purchasing power parity exchange rate between Argentina and the USA? b. If the actual exchange rate is 15 pesos to the $ is the Argentine currency undervalued or overvalued. c. Assume that inflation in Argentina during the next year is expected to be 15% and that inflation in the USA is expected to be around zero. What would you expect to happen to the $/peso exchange rate? 2. You are changing planes in London for a flight to Paris where you will connect with your flight to Capetown. You are picking up reading material for the flight and are looking at the prices listed on the Economist magazine which conveniently lists prices in several different global currencies. You note that the price in Pounds is 2.40 pounds and the price in Euros is 2 Euros. The exchange rate for the dollar (your credit card was issued in the USA) is $1.59/pound and $1.3837/euro. Should…1. In 1960 a U.S. dollar sold for 620 Italian lire. If PPP held in 1960, what would the PPP value of the exchange rate have been in 1987 if Italian prices rose 12 times and U.S. prices rose 4 times between 1960 and 1987?Suppose that the United States decides to fix the dollar-euro exchange rate. If the U.S. central bank observes that the quantity supplied of euros exceeds the quantity demanded of euros at the fixed exchange rate, to maintain the exchange rate, the U.S. central bank will A.) realize a decrease in its reserves of euros. B.) need to appreciate the dollar. C.) realize an increase in its reserves of euros. D.) need to reduce the domestic supply of dollars.