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Several Problems

1. A. briefly discuss the economic reforms that have been taking place in latin America since the late 1980's

B. according to the Economic freedom of the world report which of these counties appear to have been successful in recent years?

2. How is the U.S. economy affected by:

A. a recession in Mexico (monetary policy and fiscal policy)
B. simulative monetary policies (monetary policy and fiscal policy)

3How and why do monetary and fiscal policy affect the exchange rate?

4.in the early 1980's the united states pursued a policy of fiscal expansion and monetary contraction

a. What do you suppose was the effect of that policy mix on US interest rates?
b. How did this affect the dollar exchange rate?
c. .What happened to the U.S. competitive position at home and aboard? What do you suppose happened to the US trade balance?
d. Trace the effects of reversal in the US policy mix that occurred between 1985 and 1988

Multiple choice
5. The demand for dollars in foreign exchange market::
a. is represented by a point in a diagram of foreign exhcnage supply and demand.
b. Depends in part on foreign demand for us goods
c. Depends on us demand for foreign goods and services
d. Is the ration of the dollars demanded to the amount of foreign currency supplied

2. When American buy Mercedes Benz automobiles made in Germany they are generating at:
a. supply of us dollars and a supply of a foreign currency
b. supply of us dollars and a demand for a foreign currency
c. demand for us dollars and a supply of a foreign currency
d. demand for US dollars and a demand for a foreign currency
3. If the exchange rate between the US dollar and the Japanese yen changes for $1=100 yen to $1=90 yen, then:
a. all Japanese producers and consumers will lose
b. US auto producers and autoworkers will loose
c. Us consumers of Japanese TV sets will benefit
d. Japanese tourist to the US will benefit
4. An increase in the US trade deficit could be caused by:
a. and appreciation of the dollar in terms of other currencies
b. an increase in the rate of inflation in the us
c. the imposition of a tariff on imported goods
d. a depreciation of the dollar in terms of other currencies

5. Suppose that today 1 British pound exchanges for $1.60. if next week 1 pound exchanges for $1.70 it is clear that:
a. the pound had depreciated relative to the dollar
b. the dollar as appreciated relative to the pound
c. both currencies have appreciated
d. the dollar had depreciated relative to the pound
6. Which of the following could be responsible for the depreciation of a country currency?
a. the country defaults on bonds held by foreigners
b. speculators anticipate a military attach from a neighboring country
c. the country experiences a sudden spurt in the rate of inflation while other nations do not
d. all of the above
7. One article title "money crisis pulling Asian students home" when Asian currencies depreciates against the US dollar for Asian students?
a. and education in the US becomes more expensive
b. and education in the US becomes cheaper
c. the cost of an education in the US remains the same
d. it now takes less Asian currency units to purchase $1 worth of us goods
8. In one article "Bush to seek protection for US steel firms," discussed the financial problems for the US steel industry because of low cost imported steel. When the value of the US dollar appreciates, imports become:
A. more expensive causing and increase in demand for domestically produced steel
B. more expensive causing and decrease in demand for domestically produced steel
C. less expensive causing a decrease in demand for domestically produced steel
D. less expensive causing an increase in demand for domestically produced st
9. The incompatible Trinity reminds us that a:
a. fixed exchange rate, independent monetary policy and free capital mobility cannot coexist.
b. Floating exchange rate independent monetary policy and free capital mobility cannot coexist
c. Floating exchange rate independent monetary policy and capital controls cannot coexist
d. Fixed exchange rate independent monetary policy and capital controls cannot coexist
10. After the European crisis of 1992, EMU members circumvented the incompatible Trinity problem by:
A. Pursing independent monetary policies
B. Letting their currencies float against each other currencies
C. Giving up independent monetary policy and establishing a central bank
D. Pegging their currencies to the yen

11. One article is titled "money crisis pulling Asian students home" when Asian currencies depreciate against the US dollar for Asian students:
a. and education in the United states becomes more expensive
b. and education in the United States becomes cheaper
c. the cost of an education in the US remains the same
d. it now takes less asian currency units to purchase $1 worth of US goods
12. In one article "Bush to seek protection for US steel firms" discusses the financial problems for the US steel industry because of low cost imported steel. When the value of the US dollar appreciates import become:
a. More expensive causing increase in demand for domestically produced steel
b. More expensive causing an decrease in demand for domestically produced steel
c. Less expensive causing a decrease in demand for domestically produced steel
d. Less expensive causing an increase in demand for domestically produced steel.
13. The Incompatible Trinity reminds us that a:
a. fixed exchange rate, independent monetary policy and free capital mobility cannot coexist
b. floating exchange rate independent monetary policy, and free capital mobility cannot coexist
c. floating exchange rate, independent monetary policy, and capital controls cannot co exist
d. fixed exchange rate, independent monetary policy, and capital controls cannot coexist.
14. After the European crisis of 1992, EMU members circumvented the incompatible trinity by:
a. Pursing independent monetary policies
b. Letting their currencies float against each others currencies
c. Giving up independent monetary policy and establishing a common central bank
d. Pegging their currencies to the yen

Books used in this course international economics a policy approach 10th E Krelnin
International economics and international economic policy
King 4th E

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Solution Preview

1. A. briefly discuss the economic reforms that have been taking place in latin America since the late 1980's
Economic reforms in Latin America noticeably increased in the 1990s. The region's economies are now more open to trade and investment and, in most countries, high inflation and the prevalence of state-owned monopolies are things of the past. According to the new Economic Freedom of the World: 2004 Annual Report, Latin American countries increased their economic freedom ratings from 5.0 in 1985 to 5.4 in 1990 to 6.5 on a 10-point scale by the end of that decade.
Policies fully inconsistent with market reforms were removed. Fiscal irresponsibility and debt mismanagement were modified..

B. according to the Economic freedom of the world report which of these counties appear to have been successful in recent years?
Chile has achieved high growth rates that have enabled it to cut the poverty rate by half and maintain a robust and stable democracy. The combined production of seven Latin American countries-Argentina, Brazil, Chile, Colombia, Costa Rica, Mexico, Venezuela-increased 93 percent between 1991 and 2000, rising from $27 billion to $52 billion. These appear to be successful countries.

2. How is the U.S. economy affected by:

A. a recession in Mexico (monetary policy and fiscal policy)
A recession in Mexico would have a corresponding recession effect in the USA. Mexico's economic sluggishness is partially attributable to the high level of integration between the U.S. and Mexican economies, especially after the North American Free Trade Agreement (NAFTA). Since NAFTA's ratification, Mexico has risen in the trade ranks to become the U.S. second-largest trading partner (after Canada), with a quarter-trillion dollars worth of trade crossing the U.S.-Mexican border every year. The slowdown of the U.S. economy has had a major impact on Mexico, and the September 11 terrorist attacks have exacerbated the situation.
B. simulative monetary policies (monetary policy and fiscal policy)
A simulative monetary and fiscal policies would lead to more growth and continued progress in reducing unemployment. The remarkable strength and resiliency of the American economy--an economy that has shown the capacity to grow and become more productive in the face of serious adverse shocks--deserve most of the credit for these developments. Highly simulative monetary and fiscal policies have also played a role, of course

3How and why do monetary and fiscal policy affect the exchange rate?
Monetary and Fiscal Policy with Fixed Exchange Rates
An economy with fixed exchange rates is much more restricted in its monetary and fiscal policies than one with flexible exchange rates.
Since a nation's foreign reserves are limited, the amount of currency stabilization that can be achieved with direct intervention is quite small. Monetary and Fiscal Policy with Fixed Exchange Rates
If a nation's foreign reserves are limited, it must adjust its economy to maintain the exchange rate.Using Monetary and Fiscal Policy Increase the Value of the Dollar There are three options for raising the value of the dollar:
Increase the private demand for dollars via contractionary monetary policy.
Decrease the private supply of dollars via contractionary monetary and fiscal policy.
Use some combination of both
Increase the Private Demand for Dollars
The primary way to ...

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