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

Assume that General Motors employs labor and materials,whose costs are denominated in dollars,in the production of automobiles.If the dollar's exchange value appreciates by 10 percent against the yen,the yen-denominated cost of a GM vehicle falls by 10 percent.

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.

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

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 monetary approach emphasizes the effects of currency depreciation on the purchasing power of money,and the resulting impact on domestic expenditure levels.

Currency devaluation is initiated by governmental policy rather than the free-market forces of supply and demand.

Suppose the U.S.price elasticity of demand for imports equals 0.4 and the foreign demand elasticity for the U.S.exports equals 0.2.According to the Marshall-Lerner condition,a depreciation of the dollar's exchange value will improve the U.S.balance of trade.

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

The extent to which a change in the exchange rate leads to changes in import and export prices is known as:

According to the absorption approach (B = Y - A),currency devaluation improves a nation's trade balance if:

According to the J-curve effect,currency depreciation:

The elasticity approach to currency depreciation emphasizes the relative price effects of depreciation and suggests that depreciation best improves a country's trade balance when the elasticities of demand for the country's imports and exports are high.

Table 14.1.Hypothetical Costs of Producing an Automobile for Toyota Inc.of Japan -Refer to Table 14.1.Assuming that Toyota obtains all inputs from Japanese suppliers and that the yen/dollar exchange rate is 200 yen per dollar.The dollar-equivalent cost of a Toyota automobile equals:

Which analysis considers the extent by which foreign and domestic prices adjust to a change in the exchange rate in the short run:

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.

According to the absorption approach,currency devaluation best improves a country's trade balance when its economy is at maximum capacity.

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

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 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:

Which of the following is true for the J-curve effect? It: