Draw the demand for and supply of the U.S. dollar in each of the following cases. Diagram and explain in words the effect of each of the following events in the short run. Make sure to properly label the axes. In each case, assume the two countries under consideration are important trading partners. (a) There is an increase in the real interest rates in the United States relative to Japan. (b)
Investment returns in the United States decrease relative to expected returns in Japan. (c) Inflation in Japan fell relative to the inflation rate in the United States. (d) The Japanese expect the value of the U.S. dollar to decline. (e) The Federal Reserve raised interest rates fearing the inflationary pressures of a booming U.S. economy.
What will be an ideal response?
(a) Both holders of yen and holders of U.S. dollars would now favor U.S. assets. This results in a shift of the demand curve for U.S. dollars to the right. The supply curve for U.S. dollars would likely shift to the left. Consequently, the U.S. dollar appreciates while the yen depreciates.
(b) Investment in the United States becomes relatively unattractive. As a result, both holders of yen and holders of dollars prefer yen denominated assets. This will increase the supply of U.S. dollars and decrease the demand for U.S. dollars. The dollar depreciates while the yen appreciates.
(c) This makes Japan's products more attractive so it will decrease the demand for U.S. dollars and increase the supply of U.S. dollars as more dollar holders seek Japanese goods. The dollar depreciates while the yen appreciates.
(d) The demand for U.S. dollars decreases, causing the yen to appreciate while the dollar depreciates.
(e) In the short run, the dollar may appreciate due to the higher interest rates, increasing the demand for U.S. dollars and decreasing the supply as people seek to earn these higher rates.
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All else equal, if the risk associated with U.S. stocks is perceived to have fallen compared to financial assets in other countries, then the market equilibrium value of the exchange rate for the U.S. dollar will:
A. rise. B. be equal to the value chosen by the Federal Reserve. C. become fixed. D. fall.
Refer to Figure 6.1. Suppose the economy is originally in steady state at k*1. If the saving rate increases from s1 to s2, the capital-labor ratio will begin to ________, and real GDP per worker will ________
A) rise; rise B) rise, fall C) fall, fall D) fall; rise
The difference between economies of scale and economies of scope is:
a. economies of scale occur whenever inputs can be shared in the production of different products b. economies of scope occur whenever inputs can be shared in the production of different products c. economies of scale can occur when two or more products are produced d. economies of scope can occur when two or more products are produced e. both b and d
Which of the following responses to a positive externality enhances society's welfare?
a. taxes b. subsidies c. effluent fees d. quotas e. a cut in funding