Question

Tuesday Feb 18 Que Name Problem Set 7 Econ 2301 1. If the exchange rate between the U.S. and Mexico (let's look at price of one dollar in Mexican pesos) changes from 12 pesos - $1 to 18 pesos = $1 (as happened between about 2013 and spring 2016, a. the dollar has appreciated in value b. the peso has deprecated in value c. the dollar has depreciated in value d. the peso has appreciated in value e. a and b are true . cand d are true 2. To "demand a Sin a model in which there are only two countries, the U.S. and Mexico, means a. To have dollars and be willing to exchange them for pesos b. To have pesos and be willing to exchange them for dollars c. Something else (neither a nor bare true) 3. The value of the dollar would appreciate as a result of a. An increase in the demand for dollars b. An increase in the demand for pesos c. A decrease in the supply of pesos 4. One reason the $ might appreciate is because a. Foreigners find the price level in their country falling while the price level in the U.S. is constant b. Foreigners find their economies are entering recessions and their output and incomes are falling so they wish to buy more goods from the U.S. c. Foreigners fear that their economies are not doing well and may be unstable (politically or economically), whereas the U.S. looks relatively prosperous and stable, so they seek to buy assets like stocks or real estate in the U.S. d. Foreigners fear that the U.S. economy is not doing well and may be unstable (politically or economically), whereas their own economy looks prosperous and stable, so they seek to buy assets like stocks or real estate in their own country 5. If the dollar appreciates (rises in value against another currency or other currencies this causes: a. The relative price of U.S. goods to increase for foreigners b. The relative price of foreign goods to decrease for Americans c. U.S. exports to fall and U.S. Imports to rise d. All of the above

Answer 1

1. E. a and b are true.

Appreciation of currency means the increase in the value of the currency wrt foreign currency. Here, thw value of dollars is increasing wrt pesos.

2. B . To have pesos and be willing to exchange them for dollars.

They will demand the currency, they don't have.

3. A. Increase in demand for dollars.

Demand curve will shift to the right and value of dollar will appreciate.

4. C.

Domestic instability and foreign prosperity is one of the major reason for domestic currency depreciation and for currency appreciation. Since demand for foreign currency will rise. (NoTe: domestic means foreigners in the answer and foreign means US).

5. D. All of the above.

6. C.

If we return to gold standard, government will not be able to use monetary policy. Money supply will be fixed without the increase in gold supply.

7. C. Dollar has depreciated, pound had appreciated.

Since, demand for dollars by British has fallen and supply of dollars by American s have risen.

8. D.

When British interest rates rise, American will demand more pounds so that they can invest in Britain by supplying more dollars. Hence, supply of dollars will increase and demand for dollars will fall (no one wants to invest in lower interest paying country) and hence, dollar will depreciate.

Let me know if you have any doubt :)