charpter 36 - Key Question 36-2 Indicate whether each of...

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Key Question 36-2 Indicate whether each of the following creates a demand for, or a supply of, European euros in foreign exchange markets: a. A U.S. airline firm purchases several Airbus planes assembled in France.---------create a demand for euros in foreign exchange markets b. A German automobile firm decides to build an assembly plant in South Carolina.-----create supply c. A U.S. college student decides to spend a year studying at the Sorbonne in Paris.----- Create a demand for euros in foreign exchange markets d. An Italian manufacturer ships machinery from one Italian port to another on a Liberian freighter. e. The United States economy grows faster than the French economy. f. A United States government bond held by a Spanish citizen matures, and the loan is paid back to that person. g. It is widely believed that the euro will depreciate in the near future. A demand for euros is created in (a),(c),(e), and (f), but see note below for e. A supply of euros is created in (b), (d), and (g). Note: Answer for (e) assumes U.S. demand for French goods will grow faster than French imports of U.S. goods. Question 36-5 “A rise in the dollar price of yen necessarily means a fall in the yen price of dollars.” Do you agree? Illustrate and elaborate: “The critical thing about exchange rates is that they provide a direct link between the prices of goods and services produced in all trading nations of the world.” Explain the purchasing-power-parity theory of exchange rates. If the yen appreciates relative to the dollar, it takes more dollars to purchase one yen. At the same time, it takes fewer yen to buy a dollar, meaning that the yen price of dollars has fallen. Through exchange rates, residents of all trading nations can express the prices of goods and services in other trading nations in terms of their domestic currencies. 1
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A change in the exchange rate between any two countries will automatically lead to an adjustment in the prices of all goods and services in both countries in terms of the other’s currency. The determination of these price conversions represents the most basic and visible function of exchange rates. For example, the recent realignment of the yen and the dollar values has appreciably increased the dollar prices of all Japanese goods and services. This represents a significant decrease in purchasing power for American consumers of Japanese products. Similarly, the yen prices of all American goods and services have decreased, increasing purchasing power of Japanese consumers for American products. The purchasing power parity theory of exchange rates holds that exchange rates change to equal the ratios of the nations’ price levels. If a certain item costs $100 in the U.S. and 22,900 yen in Japan, then the exchange rate should be $1 = 229 yen. It should take the same amount of dollars to buy the item anywhere in the world if exchange rates adjust to maintain purchasing power parity. Question 36-6
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charpter 36 - Key Question 36-2 Indicate whether each of...

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