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Questions and Answers of Economics

What is the strategy of speculating in the forward market? In what other ways can one speculate on exchange-rate changes?
Distinguish between stabilizing speculation and destabilizing speculation.
If the exchange rate changes from $1.70 = £1 to $1.68 = £1, what does this mean for the dollar? For the pound? What if the exchange rate changes from $1.70 = £1 to $1.72 = £1?
Suppose $1.69 = £1 in New York and $1.71 = £1 in London. How can foreign-exchange arbitragers profit from these exchange rates? Explain how foreign-exchange arbitrage results in the same
Table shows supply and demand schedules for the British pound. Assume that exchange rates are flexible.a. The equilibrium exchange rate equals____. At this exchange rate, how many pounds will be
Suppose the spot rate of the pound today is $1.70 and the three-month forward rate is $1.75.a. How can a U.S. importer who has to pay 20,000 pounds in three months hedge his or her foreign-exchange
Suppose the interest rate (on an annual basis) on three-month Treasury bills is ten percent in London and six percent in New York, and the spot rate of the pound is $2.a. How can a U.S. investor
Table gives hypothetical dollar/franc exchange values for Wednesday, May 5, 2008.a. Fill in the last two columns of the table with the reciprocal price of the dollar in terms of the franc.b. On
Assume a speculator anticipates that the spot rate of the franc in three months will be lower than today’s three-month forward rate of the franc, $0.50 = 1 franc.a. How can this speculator use $1
You are given the following spot exchange rates:$1 = 3 francs, $1 = 4 schillings, and 1 franc = 2 schillings. Ignoring transaction costs, how much profit could a person make via three-point arbitrage?
In a free market, what factors underlie currency exchange values? Which factors best apply to long- and short-term exchange rates?
Why are international investors especially concerned about the real interest rate as opposed to the nominal rate?
What predictions does the purchasing-power-parity theory make concerning the impact of domestic inflation on the home country’s exchange rate? What are some limitations of the
If a currency becomes overvalued in the foreign-exchange market, what will be the likely impact on the home country’s trade balance? What if the home currency becomes undervalued?
Identify the factors that account for changes in a currency’s value over the long term.
Explain how the following factors affect the dollar’s exchange rate under a system of market-determined exchange rates: (a) A rise in the U.S. price level, with the foreign price level held
What is meant by exchange-rate overshooting? Why does it occur?
What methods do currency forecasters use to predict future changes in exchange rates?
Assuming market-determined exchange rates, use supply and demand schedules for pounds to analyze the effect on the exchange rate (dollars per pound) between the U.S. dollar and the UK pound under
Explain why you agree or disagree with each of the following statements:a. “A nation’s currency will depreciate if its inflation rate is less than that of its trading partners.”b. “A nation
The appreciation in the dollar’s exchange value from 1980 to 1985 made U.S. products (less/more) expensive and foreign products (less/more) expensive, (decreased, increased) U.S. imports, and
Suppose the dollar/franc exchange rate equals $0.50 per franc. According to the purchasing-power- parity theory, what will happen to the dollar’s exchange value under each of the following
Suppose that the nominal interest rate on three-month Treasury bills is 8 percent in the United States and 6 percent in the United Kingdom, and the rate of inflation is 10 percent in the United
What is meant by the term mechanisms of international adjustment? Why does a deficit nation have an incentive to undergo adjustment? What about a surplus nation?
What is meant by the quantity theory of money? How did it relate to the classical price-adjustment mechanism?
Keynesian theory suggests that under a system of fixed exchange rates, the influence of income changes in surplus and deficit nations helps promote current-account equilibrium. Explain.
What are some major disadvantages of the automatic adjustment mechanism under a system of fixed exchange rates?
How does a currency depreciation affect a nation’s balance of trade?
Three major approaches to analyzing the economic impact of currency depreciation are (a) the elasticities approach, (b) the absorption approach, and (c) the monetary approach. Distinguish among the
What is meant by the Marshall-Lerner condition? Do recent empirical studies suggest that world elasticity conditions are sufficiently high to permit successful depreciations?
How does the J-curve effect relate to the time path of currency depreciation?
What implications does currency pass-through have for a nation whose currency depreciates?
How can currency depreciation-induced changes in household money balances promote payments equilibrium?
Assume the United States exports 1,000 computers at a price of $3,000 each and imports 150 UK autos at a price of £10,000 each. Assume that the dollar/pound exchange rate is $2 per pound.a.
What factors underlie a nation’s decision to adopt floating exchange rates or fixed exchange rates?
How do managed floating exchange rates operate? Why were they adopted by the industrialized nations in 1973?
Why do some developing countries adopt currency boards? Why do others dollarize their monetary systems?
Discuss the philosophy and operation of the Bretton Woods system of adjustable pegged exchange rates.
Why do nations use a crawling-peg-exchange rate system?
What is the purpose of capital controls?
What factors contribute to currency crises?
Why do small nations adopt currency baskets against which they peg their exchange rates?
What advantage does the SDR offer to small nations seeking to peg their exchange rates?
Present the case for and the case against a system of floating exchange rates.
Distinguish among external balance, internal balance, and overall balance.
What are the most important instruments of international economic policy?
What is meant by the terms expenditure-changing policy and expenditure-switching policy? Give some examples of each.
What institutional constraints bear on the formation of economic policies?
Under a system of fixed exchange rates and high capital mobility, is monetary policy or fiscal policy better suited for promoting internal balance? Why?
What is meant by the terms policy agreement and policy conflict?
What are some obstacles to successful international economic policy coordination?
A nation’s need for international reserves is similar to an individual’s desire to hold cash balances. Explain.
What are the major factors that determine a nation’s demand for international reserves?
The total supply of international reserves consists of two categories: (a) owned reserves and (b) borrowed reserves. What do these categories include?
What advantages does a gold exchange standard have over a pure gold standard?
What are special drawing rights? Why were they created? How is their value determined?
What facilities exist for trading nations that wish to borrow international reserves?
What caused the international debt problem of the developing nations in the 1980s? Why did this debt problem threaten the stability of the international banking system?
What is a euro-dollar? How did the Eurodollar market develop?
What risks do bankers assume when making loans to foreign borrowers?
Distinguish between debt-to-export ratio and debt service/export ratio.
What options are available to a nation experiencing debt-servicing difficulties? What limitations apply to each option?
What methods do banks use to reduce their exposure to developing-nation debt?
How can debt/equity swaps help banks reduce losses on developing-nation loans?
Use the production possibility curve to demonstrate how economics is often described as the study of scarcity and choice.
Use demand and supply curves (that means draw, label correctly and fully explain any movements along or shifts) to analyse the probable effects on market equilibrium of the following events1. On the
Carefully explain, using appropriate diagrams and figures, the relationship between the law of diminishing returns and short run cost curves.
What is an oligopoly and why is it that prices tend to be stable under it?
One of the approaches for the Southern Company to comply with the Clean Air Act is to adopt fuel-switching technology. Do you think this strategic flexibility would have value to Southern Company’s
Explain several dimensions of the shareholder-principal conflict with manager-agents known as the principal-agent problem. To mitigate agency problems between senior executives and shareholders,
Corporate profitability declined by 20 percent from 2008 to 2009. What performance percentage would you use to trigger executive bonuses for that year? Why? What issues would arise with hiring and
In the Southern Company Managerial Challenge, which alternative for complying with the Clean Air Act creates the greatest real option value? How exactly does that alternative save money? Why? Explain
In 2006, firms in the drug industry earned an average return on net worth of 22 percent, compared with an average return of 14 percent earned by over 1,400 firms followed by Value Line. Which theory
In the context of the shareholder wealth-maximization model of a firm, what is the expected impact of each of the following events on the value of the firm? Explain why.a. New foreign competitors
In 2008–2009, the price of jet and diesel fuel used by air freight companies decreased dramatically. As the CEO of FedEx, you have been presented with the following proposals to deal with the
How would each of the following actions be expected to affect shareholder wealth?a. Southern Company adopts fuel-switching technology at its largest power plants.b. Ford Motor Company pays $2.5
1. What is the maximum amount it would be worth to shareholders to elicit high CEO effort all of the time rather than low CEO effort all of the time?2. If you decide to pay 1 percent of this amount
1. Should Hydro as an aluminum producer invest in wind power in light of the Utsira pilot project? Why or why not?2. Should value-maximizing managers more generally invest in wind power? Why or why
For each of the determinants of demand in Equation (a), identify an example illustrating the effect on the demand for hybrid gasoline-electric vehicles such as the Toyota Prius. Then do the same for
Gasoline prices above $3 per gallon have affected what Enterprise Rental Car Co. can charge for various models of rental cars. SUVs are $37 with one-day return and subcompacts are $41 with one-day
The Ajax Corporation has the following set of projects available to it:*Note: All projects have equal risk.Ajax can raise funds with the following marginal costs:First $250 million...........
The demand for MICHTEC’s products is related to the state of the economy. If the economy is expanding next year (an above-normal growth in GNP), the company expects sales to be $90 million. If
Two investments have the following expected returns (net present values) and standard deviation of returns:Which one is riskier?Why?
The manager of the aerospace division of General Aeronautics has estimated the price it can charge for providing satellite launch services to commercial firms. Her most optimistic estimate (a price
1. Make a list of some of the issues that will need to be resolved if American Airlines decides to routinely charge different prices to customers in the same class of service.2. Would you expect
The Potomac Range Corporation manufactures a line of microwave ovens costing $500 each. Its sales have averaged about 6,000 units per month during the past year. In August, Potomac’s closest
The price elasticity of demand for personal computers is estimated to be −2.2. If the price of personal computers declines by 20 percent, what will be the expected percentage increase in the
The Olde Yogurt Factory has reduced the price of its popular Mmmm Sundae from $2.25 to $1.75. As a result, the firm’s daily sales of these sundaes have increased from 1,500/day to 1,800/day.
The subway fare in your town has just been increased from a current level of 50 cents to $1.00 per ride. As a result, the transit authority notes a decline in ridership of 30 percent.a. Compute the
If the marginal revenue from a product is $15 and the price elasticity of demand is −1.2, what is the price of the product?
The demand function for bicycles in Holland has been estimated to beQ = 2,000 + 15Y − 5.5PWhere Y is income in thousands of euros, Q is the quantity demanded in units, and P is the price per unit.
In an attempt to increase revenues and profits, a firm is considering a 4 percent increase in price and an 11 percent increase in advertising. If the price elasticity of demand is −1.5 and the
The Stopdecay Company sells an electric toothbrush for $25. Its sales have averaged 8,000 units per month over the past year. Recently, its closest competitor, Decayfighter, reduced the price of its
The Sydney Transportation Company operates an urban bus system in New South Wales, Australia. Economic analysis performed by the firm indicates that two major factors influence the demand for its
The Reliable Aircraft Company manufactures small, pleasure-use aircraft. Based on past experience, sales volume appears to be affected by changes in the price of the planes and by the state of the
Federal excise taxes on gasoline vary widely across the developed world. The United States has the lowest taxes at U.S. $0.40 per gallon (or £0.07 per liter), Canada has taxes of $0.60 per gallon,
What conceptual determinant of auto demand price elasticity is most closely associated with the differences in switching cost across the target customers in the previous case study—low switching
Illustrate the relationship between product positioning and customer targeting using the facts of the Ford dealership direct mail coupon example. Which customer is least likely and second least
1. Identify the change in total revenue (the marginal revenue) from the fourth shirt per day. What price reduction was necessary to sell four rather than three shirts?2. What is the change in total
Consider the Sherwin-Williams Company example (see Table). Suppose one is interested in developing a simple regression model with paint sales (Y) as the dependent variable and selling price (P) as

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