1. Explain how each of the following will affect the relative values of the doll

Question

1. Explain how each of the following will affect the relative values of the dollar and the French franc:

-Income growth higher in the United States than in France.

-Inflation higher in France than in the United States.

-A real interest rate higher in the United States than in France.

    2. Classify each of the following as debits or credits in the U.S. balance of payments.               

a. Americans buy chocolate from the Swiss.

b. U.S. gives foreign aid to Bosnia.         

c. British investors purchase U.S. government bonds

d. American tourists travel to Australia

e. Volk

swagen earns profits in the United States from its new cars.

f. Toyota builds a new plant in Ohio.

g. Capital Records sells rock and roll music in Sweden.

h. German consumer buy Ronco Vegematics made in United States.

i. Procter & Gamble earns profits in their Mexican facility.

j. Russian tourists travel to United States.

Explanation / Answer

1)
a) The value of the dollar should rise as more rapidly rising GNP in the United States leads to a relative
increase in demand for dollars.
b) The value of the dollar should fall in line with purchasing power parity.
2)

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