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ECO 550 Chapter 6—Managing Exports
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Chapter 6—Managing Exports

MULTIPLE CHOICE

1.    Using demand and supply curves for the Japanese yen based on the $/¥ price for yen, an increase in US INFLATION RATES would
a.    Decrease the demand for yen and decrease the supply of the yen.                                                         
b.    Increase the demand for yen and decrease the supply of the yen. 
c.    Increase the demand and increase the supply of yen.
d.    Decrease both the supply and the demand of yen.
e.    Have no impact on the demand or supply of the yen.
               
2.    If the British pound (₤) appreciates by 10% against the dollar:
a.    both the US importers from Britain and US exporters to Britain will be helped by the appreciating     pound.        
b.    the US exporters will find it harder to sell to foreign customers in Britain. 
c.    the US importer of British goods will tend to find that their cost of goods rises, hurting its bottom line.
d.    both US importers of British goods and exporters to Britain will be unaffected by changes in   foreign exchange rates.
e.    all of the above.

3.    Purchasing power parity or PPP says the ratios composed of: 
a.    interest rates explain the direction of exchange rates.
b.    growth rates explain the direction of exchange rates.
c.    inflation rates explain the direction of exchange rates.
d.    services explain the direction exchange rates.
e.    public opinion polls explain the direction of exchange rates.

4.    If Ben Bernanke, Chair of the Federal Reserve Board, begins to tighten monetary policy by raising US interest rates next year, what is the likely impact on the value of the dollar?
    a.    The value of the dollar falls when US interest rates rise.
    b.    The value of the dollar rises when US interest rates rise.
    c.    The value of the dollar is not related to US interest rates.
    d.    This is known as Purchasing Power Parity or PPP.
    e.    The Federal Reserve has no impact at all on interest rates.

5.    If the domestic prices for traded goods rises 5% in Japan and rises 7% the US over the same period, what would happened to the Yen/US dollar exchange rate?   HINT:  S1/S0 = (1+h) / (1+ f) where S0 is the direct quote of the yen at time 0, the current period.
a.    The direct quote of the yen ($/¥) rises, and the value of the dollar falls.
b.    The direct quote of the yen ($/¥) falls, and the value of the dollar rises.
c.    The direct quote of the yen would remain the same.
d.    Purchasing power parity does not apply to inflation rates.
e.    Both a and d.


6.    US and Canada can both grow wheat and can do mining.  Use the following table to look for which country has a comparative advantage in mining.  (HINT: Find the cost of mining in terms of wheat in each country.)

    Absolute Cost in US    Absolute Cost in Canada
Wheat            $5            C$8
Mining            $10            C$12

a.    Canada has a comparative advantage in mining.
b.    The US has a comparative advantage in mining.
c.    No comparative advantage in mining exists for either nation.
d.    We must first know the exchange rate to be able to answer this question.
e.    Both a and b.


7.    The optimal currency area involves a trade-off of reducing transaction costs but the inability to use changes in exchange rates to help ailing regions.  If the US, Canada, and Mexico had one single currency (the Peso-Dollar) we would tend to see all of the following EXCEPT:
a.    Even more intraregional trade of goods across the three countries. 
b.    Lower transaction costs of trading within North America.
c.    A greater difficulty in helping Mexico as you can no longer deflate the Mexican peso.
d.    Less migration of workers across the three countries.
e.    An elimination of correlated macroeconomic shocks across the countries.


    8.    If the value of the U.S. dollar rises from  1.0 per dollar to  1.3 per dollar,
a.    imports of automobiles from Germany will decline
b.    American inflation will increase
c.    German exports of all traded goods will decline
d.    American exports to Germany will decrease
e.    sales by American manufacturers for the export markets will increase.

    9.    An appreciation of the U.S. dollar has what impact on Harley-Davidson (HD), a U.S. manufacturer of motorcycles?
a.    domestic sales of HD motorcycles increase and foreign sales of HD motorcycles increase
b.    domestic sales of HD motorcycles decrease and foreign sales of HD motorcycles increase
c.    domestic sales of HD motorcycles increase and foreign sales of HD motorcycles decrease
d.    domestic sales of HD motorcycles decrease and foreign sales of HD motorcycles decrease
e.    only manufacturers who produce traded goods are affected

    10.    In the last twenty-five years, the Yen and German mark and now the Euro have
a.    fluctuated widely against the dollar
b.    appreciated against the dollar and then depreciated against the dollar
c.    exchanged without restrictions
d.    all of the above
e.    none of the above

11.        In an open economy with few capital restrictions and substantial import-export trade, a rise in interest rates and a decline in the producer price index of inflation will
a.    raise the value of the currency
b.    lower the nominal interest rate
c.    increase the volume of trading in the foreign exchange market
d.    lower the trade-weighted exchange rate
e.    increase consumer inflation.

    12.    When a manufacturer's home currency appreciates substantially,
a.    domestic sales decline
b.    foreign sales decline
c.    company-owned foreign plant and equipment will increase
d.    margins often decline
e.    all of the above

    13.    An increase in the exchange rate of the U.S. dollar relative to a trading partner can result from
a.    higher anticipated costs of production in the U.S.
b.    higher interest rates and higher inflation in the U.S.
c.    higher growth rates in the trading partner's economy
d.    a change in the terms of trade
e.    lower export industry productivity


    14.    The purchasing power parity hypothesis implies that an increase in inflation in one country relative to another will over a long period of time
a.    increase exports
b.    reduce the competitive pressure on prices
c.    lower the value of the currency in the country with the higher inflation rate
d.    increase foreign aid
e.    increase the speculative demand for the currency

    15.    Trading partners should specialize in producing goods in accordance with comparative advantage, then trade and diversify in consumption because
a.    out-of-pocket costs of production decline
b.    free trade areas protect infant industries
c.    economies of scale are present
d.    manufacturers face diminishing returns
e.    more goods are available for consumption

    16.    European Union labor costs exceed U.S. and British labor costs primarily because
a.    worker productivity is lower in the EU
b.    union wages are higher in the EU
c.    layoffs and plant closings are more restrictive in the U.S. and Britain
d.    the amount of paid time off is higher in the EU
e.    labor-management relations are better in the EU

    17.    Companies that reduce their margins on export products in the face of appreciation of their home currency may be motivated by a desire to
a.    sacrifice market share abroad but build market share at home
b.    increase production volume to realize learning curve advantages
c.    sell foreign plants and equipment to lower their debt
d.    reduce the costs of transportation
e.    all of the above


    18.    In a recession, the trade balance often improves because
a.    service exports exceed manufactured good exports
b.    banks sell depressed assets
c.    fewer households can afford luxury imports
d.    direct investment abroad declines
e.    the capital account exceeds the current account

PROBLEM

    1.    Suppose nominal interest rates in the U.S. rise from 4.6% to 5% and decline in Britain from 6% to 5.5%, while U.S. consumer inflation remains unchanged at 1.9% and British inflation declines from 4% to 3%. In addition suppose, real growth in the U.S. is forecasted for next year at 4% and in Britain real growth is forecasted at 5%. Finally, suppose producer price inflation in the U.S. is declining from 2% to 1% while in Britain producer price inflation is rising from 2% to 3.2%. Explain what effect each of these factors would have on the long-term trend exchange rate (  per $) and why?
 

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ECO 550 Chapter 6—Managing Exports
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