Names ___________________________________________________________________________________________________
Answer all questions immediately below (5 points each, 60 points free! Happy Thanksgiving):
1. ___________ 5. ___________
2. ___________ 6. ___________
3. ___________ 7. ___________
4. ___________ 8. ___________
For Questions 1-8: What will be the effect, ceteris paribus, on the market for the dollar (i.e., the market for the dollar, foreign currency/$) for each of the following situations? For each of the following questions note what happens to the equilibrium exchange rate (e) and the equilibrium quantity of foreign exchange (QFE). State whether the variable has increased (), decreased (), or note if the effect is indeterminate because of contrary forces (); for instance, if one factor increases while another factor decreases it. Assume all changes are ceteris paribus. Example for an increase in the demand for foreign exchange: e, QFE. Choose from the options below and answer with the corresponding letter at the beginning of the assignment. Each answer below is used only once.
a. e, QFE b. e, QFE c. e, QFE d. e, QFE? e. e, QFE? f. e?, QFE
g. e, QFE h. e?, QFE
See the above graphic for questions 1 and 2, illustrating two countervailing influences on the lira-dollar relationship.
1. Turkeys inflation rate has dramatically decreased over the last year.[footnoteRef:1] What is the effect of this on the market for the dollar (?/$)? [1: By a Thousand Cuts: Inflation in Turkey has Fallen Steeply, The Economist (November 2, 2019).]
FC/$
Supply of Dollars
Demand for Dollars
Q of Foreign Exchange Transactions
______e (FC/$) ________QFE
2. Turkeys has cut their policy interest rate three times, by a cumulative ten percentage points over the last four months.[footnoteRef:2] What is the effect of this on the market for the dollar (?/$)? [2: By a Thousand Cuts: Inflation in Turkey has Fallen Steeply, The Economist (November 2, 2019).]
FC/$
Supply of Dollars
Demand for Dollars
Q of Foreign Exchange Transactions
______e (FC/$) ________QFE
3. Argentina has imposed capital controls on its citizens. From now on ordinary Argentines purchases of dollars will be capped at $10,000 a month.[footnoteRef:3] This will overall decrease the demand for dollars. What is the effect of limiting Argentines purchases of dollars on the market for the dollar (peso/$)? Assume no change in US purchases of pesos. [3: Argentinas beleaguered government imposes capital controls, The Economist (September 2, 2019).]
FC/$
Supply of Dollars
Demand for Dollars
Q of Foreign Exchange Transactions
______e (FC/$) ________QFE
4. Last week the US slapped fresh import tariffs on Mexicos $2bn tomato industry after the two countries failed to reach a deal on trade.[footnoteRef:4] Assume no change in Mexican tariffs on US goods. What is the effect on this on the Market for the dollar (peso/$)? [4: Nikou Asgari and Jude Webber, Salad days in doubt as US-Mexico friction hits imports, Financial Times (May 14, 2019).]
FC/$
Supply of Dollars
Demand for Dollars
Q of Foreign Exchange Transactions
______e (FC/$) ________QFE
See the following graphic for question 5.
Image result for Kindleberger and world trade
5. During the Great Depression, there was a dramatic decline in World trade, from 3 billion to less than 1 billion. Both US imports and exports dramatically declined. What is the effect of this on the market for the dollar (foreign currency/$)?
FC/$
Supply of Dollars
Demand for Dollars
Q of Foreign Exchange Transactions
______e (FC/$) ________QFE
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