Chapter 10 QN1: define exchange rate, foreign currency, and foreign exchange market?

Exchange rate: the number of units of foreign currency that can be acquired with one unit of domestic money. Foreign currency: supplies of foreign exchange. Foreign exchange: supplies of foreign currencies.

Definitions:
Exchange rate: the number of units of foreign currency that can be acquired with one unit of domestic money. Foreign currency: supplies of foreign exchange. Appreciated: when a currency has increased in value relative to another currency. Depreciated: when a currency has decreased in value relative to another currency.

Foreign exchange market: the market of buying and selling the differnet currencies of the wourld. Credit: in the balance of payments, any item that results in a payment by foreigners to Americans. Merchandise exports: foreign purchases of U.S goods. Debit: in the balance of payments, any transaction that results in payment to foreigners by Americans.

Merchandise imports: U.S purchases of foreign goods. Net transfer payments: in the current account, the difference between transfer payments received from and transfer payments made to foreigners; also called net unilateral transfer. Trade deficit: when merchandise imports are greater than exports. Trade surplus: when merchandise exports are greater than imports.

Cracking the code: How movements in the exchange rate affect the dollar price of the foreign good? Yen price of dollar price of Japnese auto exchange rate japanese auto 2,000,000 $1=150yen $13,333 2,000,000 $1=100yen $20,000 2,000,000 $1=50yen $40,000

Cracking the code

Funding the yen/mark exchange rate. $1=100yen, $1=1.5marks, 100yen=1.5marks 100/100yen=1.5/100marks Yen=0.015marks 1.5/1.5marks=100/1.5yen 1mark=67yen

Cracking the code

The cost of an IBM computer in Japan. Dollar price exchange rate yen price of of US goods US goods 1500 100 150,000yen

QN2 distinguish between a change in the quantity demanded of foreign exchange and a change in demand for foreign exchange. Do the same for the quantity supplied and the supply of foreign exchange?

e E1

a b

e e e1

a
b D

quantity of dollar/month

quantity of dollar/month

No, they are not same according to above mentioned diagram.

QN4: defend the following statement. The balance of payments always balance?
The method is done in order to have balance between surplus and deficit.

QN5: explain how the trade balance, the balance of gooods and services, and the balance of payments differ? Balance of payment:the record of transactions between the united states and its trading partners in the rest of the world over a particular period of time. Trade balance: the difference between merchandise exports and imports. Balance of goods and services: net exports of services plus the trade balance.

QN6: how is surplus in the current account related to a deficit in the capital account? How is a deficit in the current account related to a surplus in the capital account? It includes monetary transactions of imports and exports. Surplus in capital account= inflow Deficit in capital account= outflow i. Current account: a) Exports of CGS + - Imports of CGS + sruplus b) Short term load + - deficit c) Foreign aid - +

i. Capital account:the financial flow of funds and securities between the united states and the world. capital inflow: purchases of U.S financial securities by foreigners and borrwing from foreign sources by U.S firms and residents. (buying of your assets by foreigners) (deficit) capital outflow: purchases of foreign financial securities by foreigners and borrowing from foreign sources by U.S firms and residents. (buying of foreign assets by your) (surplus) Official reserve account:

QN7 if interest rates in the United States were lower than rates in the rest of the world, would the United states be more likely to be experiencing a net capital inflow or a net capital outflow? Ceteris paribus, would the current account be in surplus or deficit?

Capital outflow will take place. Others wil be attracted than dollar. The current account be in surplus.

QN8 if the demand for U.S exports falls, what will happen to the exchange rate? What will happen to the trade balance and the balance of goods and services?

Demand of currency will be lower. Trade balance of U.S will also be lowered.

Dollars value will be lessen and native currency will be pereferred.

QN9: what would happen to the exchange rate if foreigners decided to sell U.S securities?

QN10: what is the difference between the trade balace and the current account balance?
Trade balance: the difference between merchandise exports and imports. Current account balance: the balance of goods and services plus net unilateral transfers.