1. Explain how each of the following will affect the relative values of the doll

Question

1. Explain how each of the following will affect the relative values of the dollar and the French franc:

a. Income growth higher in the United States than in France.

b. Inflation higher in France than in the United States.

c. A real interest rate higher in the United States than in France.

2. Classify each of the following as debits or credits in the U.S. balance of payments. Americans buy chocolate from the Swiss. U.S. gives foreign aid to Bosnia. British investors purchase U.S. government bonds American tourists travel to Australia Volkswagen earns profits in the United States from its new cars Toyota builds a new plant in Ohio Capital Records sells rock and roll music in Sweden

3. What will happen to a country that fixes the price of foreign exchange below equilibrium?

Explanation / Answer

1)

a. Income growth higher in the United States than in France. : this will result in appreciation of the value of dollar as more money will come in US due to growth opporunity that will demand more dollars

b. Inflation higher in France than in the United States. : Higher inflation is negative for currency value as it reduces the purchasing power, so in this case franc will depreciate against dollar

c. A real interest rate higher in the United States than in France. : A real higher interest rate maens dollar assets earns more than franc, so thatswhy demand will lead to appreciation of the value of dollar

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