Currency Exchange Dynamics and Impacts

Suppose that the government of China is currently fixing the exchange rate between the U.S. dollar and the Chinese yuan at a rate of $1 = 6 yuan. Also suppose that at this exchange rate, the people who want to convert dollars to yuan are asking to convert $10 billion per day of dollars into yuan, while the people who are wanting to convert yuan into dollars are asking to convert 36 billion yuan into dollars. What will happen to the size of China's official reserves of dollars?

• They Will stay the same

• They will decrease

• They will increase

Generally speaking, the dollar price of euros is determined

• • 
    in a currency exchange market that equates the supply of euros with the demand for dollars.

  
  

• by the European Union (EU).
  

• in a currency exchange market that equates the supply of euros with the demand for euro

• by the World Trade Organization (WTO).
  

Answer explanation

1. The dollar price of the euro is determined in a currency exchange market that equates the supply of euros with the demand for euros.

The dollar price of euros might increase if

• • 
    there was an increase in European purchases of large U.S. aircraft.

  
  

• the demand for euros increased or the supply of euros decreased.

• the demand for euros decreased or the supply of euros increased.

• 
  there was a decrease in U.S. purchases of large European aircraft.

Answer explanation

A factor that might increase the dollar price of the euro could be the result of an increase in the demand for the euro or a decrease in the supply of the euro. Examples: Increase in demand: More Airbus aircraft are purchased by U.S. airlines. Decrease in supply: Less Boeing aircraft are purchased by European airlines

The dollar price of euros might decrease if

• 
  there was an increase in U.S. purchases of large European aircraft

• 
  the demand for euros increased or the supply of euros decreased

• there was a decrease in European purchases of large U.S. aircraft

• the demand for euros decreased or the supply of euros increased

Consider the following statement: "A rise in the dollar price of euros necessarily means a fall in the euro price of dollars." This statement is

• • false, because if it takes more dollars to purchase one euro, then it takes more euros to buy a dollar.
    

• 
  true, because if it takes more dollars to purchase one euro, then it takes more euros to buy a dollar

• false, because if it takes more dollars to purchase one euro, then it takes fewer euros to buy a dollar

• true, because if it takes more dollars to purchase one euro, then it takes fewer euros to buy a dollar

1. 
   Consider the following: The dollar price of a Big Mac in the United States is $3.50. The euro price of this same good in Germany is 1.75 euros. Purchasing power parity suggests that

• $1 = 1 euro
  

• $0.5 = 1 euro
  

• $1 = 0.5 euros

• $1 = 2 euros
  

Suppose that the government of China is currently fixing the exchange rate between the U.S. dollar and the Chinese yuan at a rate of $1 = 6 yuan. Also suppose that at this exchange rate, the people who want to convert dollars to yuan are asking to convert $10 billion per day of dollars into yuan, while the people who want to convert yuan into dollars are asking to convert 36 billion yuan per day into dollars. What will happen to the size of China's official reserves of dollars?

• They will stay the same.
  

• They will decrease.
  

• • 
    They will increase. Correct

  
  

Other things equal, if the United States continually runs trade deficits, foreigners will own _______ blankU.S. assets.

• less and less
  

• the same amount of
  

• more and more Correct
  

The major causes of the large U.S. trade deficits between 1997 and 2007 include

• • 
    economic growth in other nations has outpaced the United States and a decrease in the saving rate.

  
  

• an increase in imports resulting from economic growth and a decline in the saving rate.

• 
  increasing oil prices and increased imports by China

• • 
    an increase in the saving rate and an increase in exports to China.

  
  

A trade deficit

• encourages more international trade to occur.
  

• • 
    allows the United States to consume outside its production possibilities curve, but that gain reduces future consumption. Correct

  
  

• • 
    lowers income for all Americans.

  
  

• • 
    allows the United States to consume outside its production possibilities curve, and that gain increases future consumption