ECO 550 Week 3 Chapter 5 and Chapter 6 Problems

As the dollar appreciated rising prices overseas in

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currencies that become cheaper as the dollar appreciates. As the dollar appreciated, rising prices overseas in the export country currencies and the resulting decline in sales and revenue would be offset by falling dollar costs for the payables owed in those currencies. In addition, Cummins could have established a short position in currency futures or option markets to hedge the declining cash flow from their export sales receipts. An appreciating dollar implies a lower value of Euro or Yen that implies a profit on the short position that can purchase foreign currency at declining prices for delivery on fixed strike price contracts. Cummins could also have entered into a currency swap contract that makes money as the dollar appreciates and export sales receipts decline. 7. Japan Air Lines faces a 5% effective increase in Yen prices. If the Yen then began to depreciate, this would put downward pressure on Boeing margins. Boeing would be forced to reduce margins to keep the Yen price of 747s from rising. Unchanged Yen prices by a Japanese competitor would increase this downward pressure on Boeing margins. 9. Lower unit labor cost and producer prices in Germany implies an increase in German exports to Spain and Portugal and a decline in Spanish and Portuguese exports to Germany Lower unit labor cost and producer prices in Germany implies an increase in German exports to Spain and Portugal and a decline in Spanish and Portuguese exports to Germany 10. A single monetary authority with a common currency is more appropriate (1) across multiple countries when trade flows are extensive ( e.g ., between Mexico and the U.S.), (2) when labor is mobile ( i.e ., between Canada and the U.S.), and (3) when macroeconomic shocks are very highly
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correlated. Not all three apply to NAFTA, as Mexico is very sensitive to oil price shocks but Canada is not, and the U.S. is somewhere in between. What three factors determine whether two economies with separate fiscal and monetary authorities should form a currency union? Give an illustration of each factor using NAFTA economies.
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