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Chapter 21: Q3. (page 451)

The exchange rate between the U.S. dollar and the British pound starts at \(1 = £0.5. It then changes to \)1 = £0.75. Given this change, we would say that the U.S. dollar has ______ while the British pound has _______.

a. depreciated; appreciated

b. depreciated; depreciated

c. appreciated; depreciated

d. appreciated; appreciated

Short Answer

Expert verified

The correct option is option (c): appreciated; depreciated

Step by step solution

01

Depreciation and appreciation of currencies

An exchange rate determined by market forces can, and often does, constantly change, just as stock and bond prices do.

When a currency appreciates, fewer units are needed to buy a single unit of other currency. In contrast, in the case of depreciation purchasing power of the currency falls.

Thus, the depreciation of one currency implies an appreciation of other currency and vice-versa.

02

Relationship between US dollar and British pound

The initial exchange rate between the US dollar and the British pound is $1= 0.5 pounds. The change in the exchange rate is $1 = 0.75 pounds.

The purchasing power of the US dollar has increased by 0.25, as is evident from the given exchange rates.

Thus, given the changes, one can say that the US dollar has appreciated while the British pound has depreciated.

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Most popular questions from this chapter

An American company wants to buy a television from a Chinese company. The Chinese company sells its TVs for 1,200 yuan each. The current exchange rate between the U.S. dollar and the Chinese yuan is \(1 = 6 yuan. How many dollars will the American company have to convert into yuan to pay for the television?

a. \)7,200

b. \(1,200

c. \)200

d. $100

Is it accurate to think of a fixed exchange rate as a simultaneous price ceiling and price floor? Explain.

Other things equal, if the United States continually runs trade deficits, foreigners will own _______ US assets.

a. more and more

b. less and fewer

c. the same amount of

Explain why the U.S. demand for Mexican pesos slopes downward and the supply of pesos to Americans slopes upward. Assuming a system of flexible exchange rates between Mexico and the United States, indicate whether each of the following will cause the Mexican peso to appreciate or depreciate, other things equal:

a. The United States unilaterally reduces tariffs on Mexican products.

b. Mexico encounters severe inflation.

c. Deteriorating political relations reduce American tourism in Mexico.

d. The U.S. economy moves into a severe recession.

e. The United States engages in a high-interest-rate monetary policy.

f. Mexican products become more fashionable to U.S. consumers.

g. The Mexican government encourages U.S. firms to invest in Mexican oil fields.

h. The rate of productivity growth in the United States diminishes sharply.

Suppose that a country has a trade surplus of \(50 billion, a balance on the capital account of \)10 billion, and a balance on the current account of −\(200 billion. The balance on the capital and financial account is:

a. \)10 billion.

b. \(50 billion.

c. \)200 billion.

d. −$200 billion.
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