MT445-6: Evaluate the effects of globalization and international trade on the U.S. economy.

Exchange rates can be understood as the price of one currency in terms of another currency. They affect the macroeconomic performances of countries since the exchanges have impact on international trade and flows of international investment. Exchange rate regimes (systems) are the frame under which the price of the exchange rate is determined. There are several types of exchange rate systems. Based on this background, thoroughly respond to the following questions.

Assignment Questions

1. Explain how exchange rates are determined under the fixed exchange rate system. Then, thoroughly discuss the advantages and disadvantages of the fixed exchange rate system.

2. Explain how exchange rates are determined under a floating exchange rate system. Then, thoroughly discuss the advantages and disadvantages of each system.

3. Explain how exchange rates are determined under a pegged exchange rate system. Then thoroughly discuss the advantages and disadvantages of a pegged exchange rate system.

4. In an open economy, trade is allowed between countries. Assume a consumer purchases $1,000 worth of furniture manufactured in China. Answer the following:

a.Which component(s) of GDP are impacted by this purchase?

b.Does GDP increase, decrease or stay the same? Briefly explain.

c.Does your answer change if the company in China is a U.S. owned company?Why?