Assume the country of Sluban ties its currency (the slu) to the dollar and the exchange...

Assume the country of Sluban ties its currency (the slu) to the dollar and the exchange rate will remain fixed. Sluban has frequent trade with countries in the eurozone and the United States. All traded products can easily be produced by all the countries, and the demand for these products in any country is very sen- sitive to the price because consumers can shift to wherever the products are relatively cheap. Assume that the euro depreciates substantially against the dollar during the next year.

a. What is the likely effect (if any) of the euro’s exchange rate movement on the volume of Sluban’s exports to the eurozone? Explain.

b. What is the likely effect (if any) of the euro’s exchange rate movement on the volume of Sluban’s exports to the United States? Explain.

Solutions

Expert Solution

a) Sluban has tied its currency to the dollar and the rate will remain fixed, hence it will move with the dollar. So when Euro depreciates against dollar, it will also depreciate against slu. For Sluban, its exports will become less competitive because since Slu has appreciated against the dollar, its exporters to Eurozone will receive less slu for their exports. Hence they will become less competitive as their cash inflow will decrease. This may result in lower investment in new technology and research which will make the exports less competitive futher. Hence the overall effect will be that the tootal volume of exports will decrease.

b) Since the slu is pegged to dollar there will not be any direct effect of the exchange rate movement on volume of trade to US. However since all traded products can easily be produced by all the countries, and the demand for these products in any country is very sensitive to the price because consumers can shift to wherever the products are relatively cheap, therefore Eorozone area will be able to provide the products at a cheaper rate due to their currency depreciating and their exports becoming more competitive. So the exports from Eurozone to US will rise, resulting in decrease in exports from Sluban to US.

jeff jeffy answered 1 year ago

Next > < Previous

Related Solutions

If a country ties its currency to a specific foreign currency and allows its holdings of...

If a country ties its currency to a specific foreign currency and allows its holdings of that currency to govern the country's money supply, this arrangement is known as a Select one: a. currency board. b. floating exchange rate. c. monetary union. d. Special Drawing Right.

An African country has a policy of fixing the exchange rate value of its currency to...

An African country has a policy of fixing the exchange rate value of its currency to the U.S. dollar. Banks in the country have a business model in which the banks pay competitive interest rates to attract U.S. dollar deposits, and the banks then use these funds to make higher-interest loans denominated in the local currency. How likely would an unexpected devaluation of the local currency be to lead to banking crisis? Why?

21. If a small country fixes its exchange rate against a large country’s currency, and the...

21. If a small country fixes its exchange rate against a large country’s currency, and the small country initially has a higher inflation rate than the large country, the two inflation rates will be equalized because A. the higher inflation in the small country appreciates its real exchange rate, reducing net exports and output, and reducing the inflation rate to the same rate as in the large country. B. the higher inflation in the small country depreciates its real exchange...

6. Suppose a country wants to fix the exchange rate of its domestic currency higher than...

6. Suppose a country wants to fix the exchange rate of its domestic currency higher than what markets alone would bring about. (a) Suppose the central bank officially sets the higher-than-market exchange rate for the domestic currency, but otherwise undertakes no action. Which would result, a surplus of the currency or a shortage of the currency? (b) Suppose the central bank does undertake an action to achieve its desired fixed exchange rate. Which would the central bank do, buy the...

Suppose that country A pegs its currency to country B’s currency, and A has excessively high...

Suppose that country A pegs its currency to country B’s currency, and A has excessively high inflation. Country B is only likely to help A if: a. both are members of the International Monetary Fund. b. country B has a free trade agreement with country A. c. country B’s output is above its preferred level. d. country B does not trade at all with country A. e. country B’s output is below its preferred level.

Find the historical exchange rate of US dollar to CHF (Switzerland) and explain if the currency...

Find the historical exchange rate of US dollar to CHF (Switzerland) and explain if the currency has appreciated or depreciated in relation to the US dollar. List some examples as to why this might have happened. For instance, an international event (one event is fine). Approach this from the event side, explore what happened to the exchange rate as an outcome of this particular event.

One function of the foreign exchange market is to convert the currency of one country into...

One function of the foreign exchange market is to convert the currency of one country into the currency of another. A second function of the foreign exchange market is to provide insurance against foreign exchange risk. The most common approach to exchange rate forecasting is fundamental analysis. This relies on variables such as money supply growth, inflation rates, nominal interest rates, and balance-of-payment positions to predict future changes in exchange rates. Identify a country outside of the U.S. and its...

In the following table, provide exchange rates between The Netherlands currency and the U.S. dollar (US$)....

In the following table, provide exchange rates between The Netherlands currency and the U.S. dollar (US$). Please use indirect quote (for example: US$1 = CF900). This information can be found through internet data research. Table 1. Netherlands’ exchange rates* Years Exchange rates % change 2008 N/A 2009 2010 2011 2012 2013 2014 2015 2016 2017 * Provide the exchange rates for the last business day of each year In five to seven sentences, discuss what the data tells...

Japan is the country of Macroville's largest trading partner. Macroville's currency is the dollar. Japan uses...

Japan is the country of Macroville's largest trading partner. Macroville's currency is the dollar. Japan uses the Yen currency. Recently, the Japanese central bank raised interest rates. a) Using a correctly labeled graph of the foreign exchange market for Macroville, show the impact of the Japanese central bank decision. b) Given your answer in part (a), what will happen to Marcoville’s exports and imports to and from Japan? Explain. c) Identify what will happen to the Macroville dollar, as a...

Describe the stages of a currency crisis when a country has a fixed exchange rate.

Subjects