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Lesson52 OA Foreign Exchange Markets ANSWERS

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12 views1 page

Lesson52 OA Foreign Exchange Markets ANSWERS

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mgkoscheev
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Foreign Exchange Market

Problem Set

1. Mexico discovers huge reserves of oil and starts exporting oil to the United States. Describe how this would affect
the following:
a. The nominal peso-U.S. dollar exchange rate. The increased purchase of Mexican oil will cause U.S.
individuals (and firms) to increase their demand for the peso. To purchase pesos, individuals will
increase their supply of U.S. dollars to the foreign exchange market, causing a rightward shift in the
supply curve of U.S. dollars. This will cause the peso price of the dollar to fall (the amount of pesos per
dollar will fall). The peso has appreciated and the U.S. dollar has depreciated as a result.
b. Mexican exports of other goods and services. This appreciation of the peso means it will take more U.S.
dollars to obtain the same quantity of Mexican pesos. If we assume that the price level (measured in
Mexican pesos) of other Mexican goods and services does not change, other Mexican goods and
services become more expensive to U.S. households and firms. The dollar cost of other Mexican goods
and services will rise as the peso appreciates. So Mexican exports of goods and services other than oil
will fall.
c. Mexican imports of goods and services. U.S. goods and services become cheaper in terms of pesos, so
Mexican imports of goods and services will rise.

2. Balance of payments accounts record all of a country’s international transactions during a year.
a. Two major subaccounts in the balance of payments accounts are the current account and the capital account. In
which of these subaccounts will each of the following transactions be recorded?
i. A United States resident buys chocolate from Belgium. (1 point)
The transaction will be recorded in the current account.

ii. A United States manufacturer buys computer equipment from Japan. (1 point)
The transaction will be recorded in the current account.

b. How would an increase in the real income in the United States affect the United States current account balance?
Explain. (2 points)
1 Point: The current account balance will decrease or move toward a deficit.
1 Point: The increase in income causes imports to increase.

c. Using a correctly labeled graph of the foreign exchange market for the United States dollar, show how an
increase in United States firms’ direct investment in India will affect the value of the United States dollar relative
to the Indian currency (the rupee). (2 points)
1 Point: Correctly-labeled graph of the foreign exchange market for the U.S. dollar

1 Point: Shifting the supply of U.S. dollars to the right and showing a depreciation of the dollar.

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