1. Explain how each of the following will affect the relative values of the dollar and the French franc:

a. Incomegrowth higher in the United States than in France.

b. Inflationhigher in France than in the United States.

c. A real interestrate higher in the United States than in France.

2. Classify each of the following as debits or credits in the U.S. balance of payments.

Americans buy chocolate from the Swiss.

U.S. gives foreign aid to Bosnia.

Britishinvestors purchase U.S. government bonds

American tourists travel to Australia

Volkswagen earns profits in the UnitedStates from its new cars

Toyotabuilds a new plant in Ohio

CapitalRecords sells rock and roll music in Sweden

3. What will happen to a country that fixes the price of foreign exchange below equilibrium?

4. What factors will shift the supply and demand for currency?

5. What are the three categories of transactions in the balance of payments? Give an example of each.

6. Economists sometimes say that the current exchange rate system is a dirty float system. What does this mean?

7. What are the main arguments presented against flexible exchange rates?