THE CASE STUDY

The Global Context The "made in the USA" financial crisis comes at the same time economic policymakers are confronting the emergence of a group of rising powers, from China and India to the Gulf states and Russia. We are now living in a rapidly shifting economic environment. Following 35 years of strong economic output by the Group of Seven economies, during which they commanded approximately 65 percent of the global output and the so-called "BRIC"Brazil, Russia, India, Chinaeconomies accounted for about 7 percent, we have seen the Group of Seven's share falling to 58 percent over the past five years and the BRIC's share rising to more than 11 percent. By 2030, according to Brookings expert Homi Kharas, the two groups are expected to converge towards parity, with each accounting for about one-third of world output. The BRICs and other emerging economies are booming, integrating into the global economy, and learning to assert their interests more forcefully. This revolution in national income shares is emblematic of a broader global dispersion of wealth and economic dynamism. In contrast to the shift of the world's financial epicenter from the City of London to Wall Street in the interwar period, stockThe Global Context The "made in the USA" financial crisis comes at the same time economic policymakers are confronting the emergence of a group of rising powers, from China and India to the Gulf states and Russia. We are now living in a rapidly shifting economic environment. Following 35 years of strong economic output by the Group of Seven economies, during which they commanded approximately 65 percent of the global output and the so-called "BRIC"Brazil, Russia, India, Chinaeconomies accounted for about 7 percent, we have seen the Group of Seven's share falling to 58 percent over the past five years and the BRIC's share rising to more than 11 percent. By 2030, according to Brookings expert Homi Kharas, the two groups are expected to converge towards parity, with each accounting for about one-third of world output. The BRICs and other emerging economies are booming, integrating into the global economy, and learning to assert their interests more forcefully. This revolution in national income shares is emblematic of a broader global dispersion of wealth and economic dynamism. In contrast to the shift of the world's financial epicenter from the City of London to Wall Street in the interwar period, stock

Question 13.

1.The graph below shows the foreign exchange market from the perspective of the Japanese economy, with the U.S. dollar as its foreign currency. Suppose that a decline in investor expectations within Japan now causes aggregate demand there to fall, reducing output and prices.

a.Show the effects of this change on supply and demJHJKSDJDSand for foreign exchange (dollars) in the figure, and explain the reasons for these changes.

b.Had the Japanese exchange rate relative to the dollar been floating, how would this contraction of the Japanese economy altered the value of its currency?

c.Suppose instead, though, that the Japanese central bank was pegging the yen to the dollar at the exchange rate shown as in the figure. Use the figure to determine first the nature of the intervention that would be required to maintain that peg, and second how that intervention will change as a result of the shifts in curves that you found in part (a)

2.Suppose that a company in India initially owns a factory worth 45 million rupees, that it has borrowed 1 million US dollars to finance its construction, and that these are its only assets and liabilities.

a.If the exchange rate is initially 40 rupees per dollar, what is the initial value of the company, in rupees?

b.If the rupee now depreciates by 20% what does the value of the company in rupees become?

c.Would the effect of the depreciation on the value of the company be any different if it was measured in dollars?

3.In class you saw a graph of the exchange value of the US dollar relative to five other currencies, since the beginning of this century. Relative to the currency of each country, indicate whether the dollar has appreciated or depreciated from 2002 to 2017