With a system of floating exchange rates, holding everything else constant, a Me

Question

With a system of floating exchange rates, holding everything else constant, a Mexican trade deficit with the United States will result in:

a. An increase in Mexico’s domestic money supply.

b. More expensive Mexican imports into the United States.

c. A reduction in Mexico’s inflationary pressures.

d. An appreciation of the dollar in relation to the peso.

Consider the impact on Ford autos produced in the U.S. and exported to Mexico, when the Mexican peso depreciated in the mid-1990s. The most likely consequences for Ford is:

a. Ford will buy more parts used in auto production which are made in Mexico.

b. Ford will shut down any production facilities it has in Mexico.

c. Production costs for Ford will increase because of the peso depreciation.

If Japanese banks sell their U.S. assets such as Treasury debt, which of the following is true:

a. Dollars will be converted to yen through the capital account, and holding everything else constant, the dollar will depreciate.

b. Dollars will be converted to yen through the current account, and holding everything else constant, the dollar will depreciate.

c. Dollars will be converted to yen through the capital account, and holding everything else constant, the dollar will appreciate.

d. Dollars will be converted to yen through the current account, and holding everything else constant, the dollar will appreciate.

When a country's real exchange rate appreciates:

a. Its nominal exchange must have also appreciated.

b. Foreign goods become more expensive in terms of domestic purchasing power.

c. It could result if the domestic exchange rate is pegged in terms of the foreign exchange rate and foreign inflation rates are relatively high compared to domestic inflation rates.

d. It could result if the domestic exchange rate is pegged in terms of the foreign exchange rate and domestic inflation rates are relatively high compared to foreign inflation rates.

Explanation / Answer

1 An appreciation of the dollar in relation to the peso.

2 Ford will buy more parts used in auto production which are made in Mexico.

3 Dollars will be converted to yen through the capital account, and holding everything else constant, the dollar will depreciate.

4Foreign goods become more expensive in terms of domestic purchasing power.

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