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

The J-curve effect implies that following a currency appreciation,a country's trade balance:

Figure 14.1US market for Imported Toyotas -In Figure 14.1,D represents the US demand curve for Toyotas and MC0 represents the marginal cost of producing Toyotas.Assume that Toyota behaves like a monopolist in the US market.A shift in the marginal cost curve from MC0 to MC1 leads to

According to the Marshall-Lerner condition,a currency depreciation is least likely to lead to an improvement in the home country's trade balance when:

Appreciation of the dollar's exchange value worsens the international competitiveness of Boeing Inc.,whereas a dollar depreciation improves its international competitiveness.

When manufacturing automobiles,suppose that General Motors uses labor and materials whose costs are denominated in dollars and pounds respectively.If the dollar's exchange value appreciates by 15 percent against the pound,the pound-denominated cost of a GM vehicle rises by 15 percent.

The absorption approach to currency depreciation is represented by one of the following equations:

According to the Marshall-Lerner condition,currency depreciation will worsen a country's balance of trade if the country's elasticity of demand for imports plus the foreign demand elasticity for the country's exports exceeds 1.0.

The Marshall-Lerner condition deals with the impact of currency depreciation on:

A depreciation of the dollar results in Whirlpool dishwashers becoming less competitive in Europe.

According to the Marshall-Lerner condition,currency depreciation has no effect on a country's trade balance if the elasticity of demand for its exports plus the elasticity of demand for its imports equals:

The Marshall-Lerner condition illustrates

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 dollar-equivalent cost of a Toyota automobile equals:

Suppose a country devalues its currency.If the country's demand for imports is inelastic,the price increase resulting from the devaluation results in a relatively small decrease in the volume of imports,causing to total import expenditures to increase.

As yen-denominated costs become a larger portion of Ford's total costs,a dollar appreciation results in a smaller increase in the yen-denominated cost of a Ford auto than occurs when all input costs are dollar denominated.

Complete currency pass-through arises when a 10 percent depreciation in the value of the dollar causes U.S.:

According to the absorption approach,currency devaluation best improves a country's balance of trade if the country operates at full employment with no excess production capacity.

The extent to which changing currency values result in changing prices of imports and exports is known as the J-curve effect.

According to the Marshall-Lerner approach,a currency depreciation will best lead to an improvement on the home country's trade balance when the:

By increasing relative U.S.production costs,a dollar depreciation tends to increase U.S.export prices in foreign-currency terms,which results in an increase in the quantity of U.S.goods exported abroad.

If foreign manufacturers cut manufacturing costs and profit margins in response to a depreciation in the U.S.dollar,the effect of these actions is to: