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International Finance: EU versus America

1. How are each of the following events likely to affect the U.S. trade balance?
a. the European price level increases relative to the U.S. price level
b. the dollar appreciates in value relative to the currencies of its trading partners
c. the U.S. government offers subsidies to firms that export goods

2. How are each of the following events likely to affect the value of the dollar relative to the euro?
a. interest rates in the European Union increase relative to the United States
b. the European Union price level rises relative to the U.S. price level
c. the European central bank intervenes by selling dollars on currency markets

3. If the demand for a domestic currency decreases in a country using a fixed exchange rate system, what must the central bank do to keep the currency value steady?

4. What happens to the supply curve for dollars in the currency market under the following conditions?
a. Americans wish to buy more Japanese consumer electronics
b. the United States wishes to prop up the value of the yen

Solution Preview

1. How are each of the following events likely to affect the U.S. trade balance?

a. the European price level increases relative to the U.S. price level
U.S. products will be cheaper than European product. In this instance, international trade will be favorable for the U.S.

b. the dollar appreciates in value relative to the currencies of its trading partners
Trading partners will find it costly to buy U.S. products. There will be a trade slowdown in the U.S.

c. the U.S. government offers subsidies to firms that export goods
Local firms in the U.S. will be encouraged to produce ...

Solution Summary

The solution compares the European Union with United States' in the context of trade, price level, value of the dollar and interest rates given various economic scenarios.

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