7. Suppose the U.S. dollar appreciates relative to world currencies. Would Pier One Imports (a domestic chain selling “exotic” foreign goods) be pleased or upset? Explain.
8. In terms of the real exchange rate, what three variables could change to make the U.S. more competitive internationally? Explain.
9. Why might purchasing power parity fail to be completely accurate?
10. The news reports that the exchange rate for the dollar just hit its lowest value in a decade; it also reports that Caterpillar, a heavy equipment manufacturer, has just reported that sales of their earthmoving equipment have hit an all-time high and so has the value of their stock. On the other hand your parents just cancelled their plans for the family European vacation over the summer.
a. Why do Caterpillar and your parents have different opinions about the value of the dollar?
b. Caterpillar imports many parts and raw materials for their manufacturing processes and they sell many finished products abroad. Since they are happy about a low dollar, what must be true about the proportions of Caterpillar’s imports and exports?
c. Is it true that a strong dollar is good for America? After all that means Americans are able to exchange some of their GDP or a greater amount of foreign GDP! But if it is good for America is it good for all Americans? Explain.
Total points: 100
This question was asked on May 16, 2010.
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