Exam 14: Exchange Rate Adjustments and the Balance-of-payments

Assume an economy operates at full employment and faces a trade deficit.According to the absorption approach,currency devaluation will improve the trade balance if domestic:

The ____ effect suggests that following a currency depreciation a country's trade balance worsens for a period before it improves.

Assume the Canadian demand elasticity for imports equals 0.2,while the foreign demand elasticity for Canadian exports equals 0.3.Responding to a trade deficit,suppose the Canadian dollar depreciates by 20 percent.For Canada,the depreciation would lead to a:

Assume that Ford Motor Company obtains some of its inputs in Mexico (foreign sourcing).As the peso becomes a larger portion of Ford's total costs,a dollar depreciation leads to a (an) ____ in the peso cost of a Ford vehicle and a (an) ____ in the dollar cost of a Ford compared to the cost changes that occur when all input costs are dollar denominated.

The dominant use of dollars in invoicing U.S.trade helps explain the partial pass-through of changes in the dollar's exchange rate to U.S.import prices.

How do movements in exchange rates affect domestic costs,in the presence of foreign sourcing?

Table 14.1.Hypothetical Costs of Producing an Automobile for Toyota Inc.of Japan -Refer to Table 14.1.Assume that Toyota Inc.imports steel from U.S.suppliers,whose costs are denominated in dollars,while all other inputs are obtained from Japanese suppliers whose costs are denominated in yen.If the yen's exchange value appreciates from 200 yen = $1 to 100 yen = $1,the yen cost of a Toyota automobile equals:

The analysis of the effects of currency depreciation include all of the following except the:

The J-curve effect implies that in the short run a currency depreciation will result in a balance of trade surplus for the home country.As time passes,however,the home country's balance of trade will move toward deficit.

Because of the J-curve effect and partial currency pass-through,a depreciation of the domestic currency tends to increase the size of a:

The effect of currency depreciation on the purchasing power of money balances and the resulting impact on domestic expenditures is emphasized by the:

According to the J-curve effect,a depreciation of the pound's exchange value has:

According to the Marshall-Lerner condition,a currency devaluation will be successful in improving a country's balance of trade (exports minus imports) if the

Empirical research suggests that most countries' price elasticities of demand for imports and exports are very inelastic,suggesting that currency depreciation would result in a worsening of a country's balance of trade.

Suppose the U.S.economy is operating at full capacity and the dollar's exchange value depreciates.According to the absorption approach,the United States would have to accept reductions in domestic spending if the U.S.trade balance is to improve as a result of the depreciation.

Complete currency pass through suggests that if the dollar's exchange value depreciates by 10 percent,imports will become 10 percent more expensive to Americans while U.S.exports will become 10 percent cheaper to foreigners.

The time period that it takes for companies to form new business connections and place new orders in response to currency depreciation is known as the:

The absorption approach to currency devaluation deals with the income effects of devaluation while the elasticity approach to devaluation deals with the price effects of devaluation.

The Marshall-Lerner condition asserts that if the sum of a country's elasticity of demand for imports and the foreign elasticity of demand for the country's exports equals 1.0,a depreciation of the country's currency will not affect its balance of trade.

In the early 1990s,the yen sharply appreciated against the dollar.To protect themselves from export reductions caused by the yen's appreciation,Japanese auto companies transferred increasing amounts of auto production from the United States to Japan.