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Exchange rates and balance of payments: US and France

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1) Explain how each of the following will affect the relative values of the dollar and the French franc:

-Income growth higher in the United States than in France.
-Inflation higher in France than in the United States.
-A real interest rate higher in the United States than in France.

2) What are the three categories of transactions in the balance of payments? Give an example of each.

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Solution Summary

This solution answers 2 questions about international finance between the United States and France:

1. What factors affect the dollar-franc exchange rate and how?
2. What are the three categories of transactions in the balance of payments?

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1. Explain how each of the following will affect the relative values of the dollar and the French franc:
-Income growth higher in the United States than in France.
-Inflation higher in France than in the United States.
-A real interest rate higher in the United States than in France.
a) Higher incomes will prompt Americans to buy more goods from other countries, including France. ...

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