Chapter 22 or 35 International Finance: Pre-Class & ln-Class Activities Packet Namell.D. Number: Section: Date: Part 3. Discussion Questions and Problems 1. Explain the link between the Mexican demand for U.S. goods and the supply of pesos. Next, explain the link between the U.S. demand for Mexican goods and the supply of dollar. 2. The lower the dollar price of a peso, the higher the quantity demanded of pesos, and the lower the quantity supplied of pesos. Do you agree or disagree? Explain. 3. What does it mean to say that the U.S. dollar has depreciated in value in relationship to the Mexican peso? What does it mean to say that the Mexican peso has appreciated in value relative to the U.S. Dollar? 4. Suppose the United States and Japan have a exible exchange rate system. Explain whether each of the following events will lead to an appreciation or depreciation in the U.S. dollar and Japanese yen. a. U.S. real interest rates rise above Japanese real interest rates. b. The Japanese ination rate rises relative to the U.S. ination rate. c. U.S. income increases with no change in Japanese 5. What are the strong and weak points of the exible exchange rate system? What are the strong and weak points of the fixed exchange rate system? 6. Explain the details of the purchasing power parity (PPP) theory. 7. Explain how a growing budget decit can affect the value of a country's currency on the foreign exchange market. 8. What does it mean to say that a currency is overvalued? undervalued? 9. Under a exible exchange rate system, if the equilibrium exchange rate is 0.10 USD = 1 MXN and the current exchange rate is 0.12 = 1 MXN, will the U.S. dollar appreciate or depreciate? Explain. 10. What is an optimal currency area? Chapter 22 or 35. International Finance : Pre-Class & In-Class Activities Packet Name/ I.D. Number: Section: Date: Part 4. Economics Equations and Graphs 1. Use the following information to answer questions (A) - (C) 6. Use the following graph to answer questions (A) & (B). U.S. Dollar Equivalent Currency per U.S. Dollar BANCO DE MEXICO V5849376 THE UNITED STATES OF AMERICA B 05040302 Y B 29 Thurs. Fri. Thurs. Fri. 8 05040302 Y 20 VEINTE PESOS ONE DOLLAR Gaz Russia (ruble) 0.0318 0.0317 31.4190 31.5290 Exchange Rate Exchange Rate (dollar price peso price per peso) S MXN These two curves per dollar) SUSE Brazil (real) 0.3569 0.3623 2.8020 2.7601 are linked to each other. The Mexican supply of pesos India (rupee) 0.0204 0.0208 48.9100 47.8521 mirrors the Mexican demand for dollars. 10 These two curves A. Between Thursday and Friday, did the U.S. dollar appreciate or are linked to each other. The U.S. depreciate against the Russian ruble? Why? demand for pesos X mirrors the U.S. supply of dollars. DUSD B. Between Thursday and Friday, did the U.S. dollar appreciate or Quantity of Pesos Quantity of Dollars depreciate against the Brazilian real? Why? (a) (b) Market for Pesos Market for Dollars C. Between Thursday and Friday, did the U.S. dollar appreciate or The demand for Mexican Pesos in graph (a) is linked to the supply of U.S. depreciate against the Indian rupee? Why? Dollars in graph (b): When Americans demand pesos, they supply dollars. The supply of pesos in graph (a) is linked to the demand for dollars in graph (b): 2. If *1 (Yen) equals $ 0.0093, what does $1 equal? when Mexicans demand dollars, they supply pesos. A. What happens in the market for Pesos when the dollar price per peso is 3. If $1 equals 7.7 krone (Danish), what does 1 krone equal? $0.12 instead of $0.10 (as shown in graph a)? Shortage Or Surplus of Pesos? In that case, Is the Peso Appreciating Or Depreciating vis-a-vis the U.S. Dollar? (Circle your answers). Why? 4. If $1 equals 31 rubles, what does 1 ruble equal? 5. If the exchange rate is $0.08 = 1 MXN, what is the cost in dollars of a B. What happens in the market for U.S. Dollar when the Peso price per dollar Mexican table priced at 500 pesos? is 8 Pesos instead of 10 Pesos (as shown in graph b)? Shortage Or Surplus of the U.S. Dollar? In that case, is the U.S. Dollar Appreciating Or Depreciating vis-a-vis the Mexican Peso? (Circle your answers). Why? 6