Module 43
The United States has which of the following exchange rate regimes?
a. fixed
b. floating
c. fixed, but adjusted frequently
d. fixed, but managed e. floating within a target zone
a. Restrict imports
b. Increase the price of Imported goods
c. Benefit domestic consumers of imported goods
d. Hurt domestic producers of goods facing import competition
e. Generate additional government revenue for the domestic government.
Using foreign exchange reserves to buy its own currency
Using monetary policy to change the interest rates
Implementing foreign exchange controls.
Which of the following would result if China imposed an import quota on telephones that influenced the amount of trade?
a. The price of telephones in China would decrease.
b. The Chinese government would collect more taxes
on imported telephones.
c. More telephones made outside of China would be
sold in China.
d. More telephones made in China would be sold
in China.
e. More telephones from all sources would be sold
in China.
A devaluation makes domestic goods cheaper in terms of foreign currency, which leads to higher exports. At the same time, it makes foreign goods more expensive in terms of domestic currency, which reduces imports. The effect is to increase the balance of payments on the current account.
Similarly, a revaluation makes domestic goods more expensive in terms of foreign currency, which reduces exports and makes foreign goods cheaper in domestic currency, which increases imports. So a revaluation reduces the balance of payments on the current account.
Explain the pros and cons of protectionism
Pros: Protectionism promotes domestic employment, protects infant industry, creates diversity of production, and prevent dumping.
Infant industries are industries that are just getting started. They are in no condition to copmete with foreign industries that have all of the advantages of being well established. The argument is that these infant industries will be able to compete after they have developed.
Sake of diversity, a nation should not rely too heeavily on others. Trade barriers can promote diversity.
Dumping is a technical term in international trade. It describes a situation where foreign producers are selling a product in the domestic market for less than it cost to produce it. The foreign firms would like toe stablish a foothold in our markets, so they are willing to absorb the loss. Domestic producers argue that prices will soon rise once the foreign firms have put them out of business. Trade barriers can be used to prevent dumping.
Cons: Trade protectionism weakens the industry. Without competition, companies within the industry have no need to innovate. Eventually, the domestic product will decline in quality. It will be lower quality and more expensive than what foreign competitors produce.Increasing U.S. protectionism will further slow economic growth. It would cause more layoffs, not fewer.
Explain what would happen when a country cuts its interest rate in the foreign exchange market.
These two countries trade freely and allow investments to flow across their borders as well. If the interest rate on investments in Alpha rises while the return on investments in Beta remains unchanged, what would happen to the value of each country and how will the imports and exports of each country be affected?
With higher returns in Alpha, the supply of Beta's currency will rise. It also is possible that the demand for Beta's currency will decline as more of Alpha's investors undertake domestic investments. Beta's currency will depreciate in value.
Since Alpha's currency is appreciating, ALpha's exports will fall and its imports will rise. Alpha's net exports will fall. since Beta's currency is depreciating, Beta's exports ill rise and its imports will fall. Beta's net exports will rise.
These changes make sense. Alpha's current account is declining, but its financial account is rising. Beta's current account is improving, but its mirror image, the financial account, is worsening.