1. Show the effect of dollar appreciation and depreciation with the euro on the
ID: 1199302 • Letter: 1
Question
1. Show the effect of dollar appreciation and depreciation with the euro on the price of U.S. exports and imports by updating Table 15.2, as shown in the updated table.
3. If the U.S. economy is operating near full employment
and the exchange rate increases (the dollar
appreciates), explain why the Federal Reserve will
be less inclined to raise interest rates.
3. Based on the discussion in this chapter, update the
controversy over the value of the Chinese yuan
in foreign currency markets. Is China still using
central bank foreign exchange policy to maintain
the value of the yuan? What is the current policy of
the United States on this issue?
Explanation / Answer
1.
2. When the economy operates near 100% employment, the GDP equals the potential output. Inflation is inherent because of the bank's ability to issue credit to consumers and businesses with very little collateral. This floods the market with money, reducing the value of the dollar. If the exchange rate then increases, it counters the decrease in currency value above, where the population has disposable incomes which drove up prices and increased inflation. The exchange rate increase would play the role of an interest rate increase by slowing inflation. Without the increase, FEDs would increase interest rates to "force" bankruptcies, and bring unemployment back to healthy levels.
3. I am not sure of the answer.
R = EURO/$ Domestic price Jan 09: R = 0.76 June 09 R = 0.71 Effcect on X & M US exports:TV $1,000 $760 $710 X decreases US Imports:Car EURO 25,000 $32,895 $35,211 M decreases Domestic price Jan 08: R = 0.68 Jan 09: R = 0.76 US exports:TV $1,000 $680 $760 X increases US Imports:Car EURO 25,000 $36,765 $32,895 M increasesRelated Questions
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