1. Effects of Exchange Rate Changes In the fall of 2004 the dollar...

  1. Home
  2. Homework Library
  3. Business
  4. Economics
  5. 1. Effects of Exchange Rate Changes In the fall of 2004 the dollar...


Transcribed TextTranscribed Text

1. Effects of Exchange Rate Changes In the fall of 2004 the dollar was depreciating against the euro. Jean-Claude Trichet, the president of the European Central Bank (the ECB), decried the depreciation of the dollar as "brutal" and "unwelcome." a. Explain why Europeans felt threatened by the decline in the dollar. How do you think Trichet's comments affected the value of the dollar at the time? b. The dollar is currently appreciating against the euro and other currencies. How might this affect the US trade balance? 2. The Old Model I Consider the following short article about Argentina. https://www.msn.com/en-us/money/markets/peso-plunges-as-argentina-hikes-interest-rate-to-60-percent/ar- BBMEJtg?li=BBnbfcN&ocid_UP97DHP a. Suppose that the "domestic" currency is the Argentinian peso, while the "foreign currency" is the US dollar. Use the Old Model to depict the determination of an initial exchange rate (pesos per dollar). b. The first and second paragraphs of the article describe how the Argentinian peso depreciated after President Macri announced a request for a loan from the IMF to cover his budget deficit. Use the Old Model to depict how this announcement affect the value of the peso. [Hint: How were speculators responding to the news that Argentina needed to borrow from the IMF? How did this affect the demand and supply of foreign exchange (dollars)?] c. Depict how raising Argentinian interest rates (to 60 percent!) would offset the depreciation in part "b." 3. The Old Model II Consider the traditional model of exchange rate determination developed in class. The home country is the "domestic" country, and the exchange rate is the price of foreign currency. Initially, the exchange rate is flexible. As depicted in the following graph, the exchange market is initially in equilibrium at an exchange rate of E1. Now suppose that the U.S. imposes a tariff on imports of foreign goods and services. FES E, - d FE FE. FE a. What will happen to our imports? To the trade balance? b. What will happen to the demand for foreign exchange? Depict this on the graph. c. What will happen to the value of the dollar?

Solution PreviewSolution Preview

These solutions may offer step-by-step problem-solving explanations or good writing examples that include modern styles of formatting and construction of bibliographies out of text citations and references. Students may use these solutions for personal skill-building and practice. Unethical use is strictly forbidden.

    By purchasing this solution you'll be able to access the following files:

    for this solution

    PayPal, G Pay, ApplePay, Amazon Pay, and all major credit cards accepted.

    Find A Tutor

    View available Economics Tutors

    Get College Homework Help.

    Are you sure you don't want to upload any files?

    Fast tutor response requires as much info as possible.

    Upload a file
    Continue without uploading

    We couldn't find that subject.
    Please select the best match from the list below.

    We'll send you an email right away. If it's not in your inbox, check your spam folder.

    • 1
    • 2
    • 3
    Live Chats