Contrast a fixed-rate exchange rate system and a flexible-rate exchange system in terms of a foreign currency shortage precipitated by an increase in U.S. demand for a foreign good.
What will be an ideal response?
Perhaps the most significant problem with the fixed-rate system is that it can result in currency shortages,. Suppose we had a fixed-rate system with the price of 1 euro set at $1.00, and for a while, $1.00 is the equilibrium price. That is, at a price of $1.00, the quantity of euros demanded (by U.S. importers of European products and others wanting euros) equals the quantity supplied (by European importers of U.S. products and others). Suppose that some event happens to increase U.S. demand for European goods. The demand for euros will increase. That is, at any given dollar price of euros, U.S. consumers want more euros, shifting the demand curve to the right. The result is a shortage of euros—a shortage that must be corrected in some way. As a solution to the shortage, the United States may borrow euros, or perhaps ship Europe some of its reserves of gold. The ability to continually make up the shortage (deficit) in this manner, however, is limited, particularly if the deficit persists for a substantial amount of time. In contrast, if the exchange rate is flexible, however, no shortage develops. Instead, any increase in demand for a foreign good forces the exchange rate higher. At this higher exchange rate, the quantity of foreign currency demanded doesn’t increase as much, and the quantity of foreign currency supplied increases as a result of the now relatively lower cost of imports from the United States. These changes will combine to result in a new exchange rate.
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Which two factors make regulating mergers complicated?
A) First, the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice must both approve mergers. Second, the concentration ratios that are used to evaluate the degree of competition the merged firms face are flawed. B) First, the time it takes to reach a decision to approve a merger is so long that the firms often have new owners and mangers. Second, by law, government officials are not allowed to consider the impact of foreign trade (exports and imports) on the degree of competition in the markets of the merged firms. C) First, it is not always clear what market firms are in. Second, the newly merged firm might be more efficient than the merging firms were individually. D) First, firms may lobby government officials to influence their decision to approve the merger. Second, by the time the government officials reach a decision regarding the merger, the firms often decide not to merge.
If managers increase the size of the order they place, the ordering cost ________ and the carrying cost ________.
A) rises; rises B) rises; falls C) falls; rises D) falls; falls
Specialization and international trade lead to
A) an outward shift in the production possibilities curve. B) an inward shift in the consumption possibilities frontier. C) a lower opportunity cost of domestic production of all goods. D) an enhanced level of consumption.
An international organization created at the Bretton Woods conference in 1944 that helps coordinate international financial flows and can arrange short-term loans between countries is called? the:
A) World Bank.
B) International Monetary Fund.
C) U.S. Treasury.
D) U.S. Agency for International Development.