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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 Preview

    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. ...

    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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