Given the following table showing various $/£ exchange rates and the respective Quantities of pounds demanded by U.S. buyers: $\begin{array} { c c } \$ / £ & \text { pounds demanded } \\ \hline \$ 2.50 / £ 1 & £ 1,000 \\ \$ 2.00 / £ 1 & £ 1,500 \\ \$ 1.50 / £ 1 & £ 1,800 \end{array}$ The demand for pounds between $2.00/£1 and $1.50/£1 is

A) elastic. B) unit-elastic. C) inelastic. D) elastic, unit-elastic, or inelastic - cannot be determined without more information. A) elastic. B) unit-elastic. C) inelastic. D) elastic, unit-elastic, or inelastic - cannot be determined without more information.

Exam 23: Price Adjustments and Balance-Of-Payments Disequilibrium

"The J curve occurs because of differences of short-run elasticities from long-run elasticities." Explain the reasoning behind this statement.

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Question 1

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The J curve phenomenon occurs when there is a temporary worsening of a country's trade balance before it improves in the long run. This is often seen in the context of currency depreciation, where in the short run, the quantity of imports and exports may not change significantly in response to changes in exchange rates. However, in the long run, the elasticities of imports and exports may adjust, leading to a more significant change in the trade balance.

The reasoning behind this statement lies in the concept of elasticity. In the short run, the demand for imports and the demand for exports may not be very responsive to changes in prices (in this case, exchange rates). This means that even if a country's currency depreciates, the quantity of imports and exports may not change significantly, leading to a temporary worsening of the trade balance.

However, in the long run, the elasticities of imports and exports are likely to be higher, meaning that the quantity of imports and exports will be more responsive to changes in prices. This can lead to a more significant improvement in the trade balance over time, as the effects of the currency depreciation become more pronounced.

Overall, the J curve phenomenon is a result of the differences in short-run and long-run elasticities of imports and exports, which can lead to a temporary worsening of the trade balance before it improves in the long run.

Which one of the following situations would represent a "small-country" case in the analysis of the elasticities approach to devaluation?

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Question 2

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Which one of the following was NOT supposed to occur in the "gold standard" International monetary system?

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Question 3

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In the "gold standard" framework of the period 1880-1914, suppose that the par value exchange rate is $2.00/£1. If the market exchange rate rises to $2.12/£1 because of a rise in U.S. demand for British goods, and if it costs $0.05 to ship gold between the two countries, there would be . Then, if the "rules of the game" were being followed, the money supply in the United States would after this movement of gold.

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Question 4

Given the following table showing various $/£ exchange rates and the respective Quantities of pounds demanded by U.S. buyers: \ /£ pounds demanded \ 2.50/£1 £1,000 \ 2.00/£1 £1,500 \ 1.50/£1 £1,800 The demand for pounds between $2.00/£1 and $1.50/£1 is

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Question 5

In which of the following cases can we conclude, without any further information, that a depreciation of a country's currency will worsen the country's trade balance (or current account balance).

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Question 6

Is the Marshall-Lerner condition of any relevance for the successful operation of the gold standard adjustment mechanism? Explain.

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Question 7

Assume a two-country world containing country A (whose currency is the dollar) and country B (whose currency is the peso). In this context, and using relevant graphs, explain how a depreciation of the dollar against the peso (for example, a 10% depreciation) conceptually affects the quantity of A's exports to B and the quantity of A's imports from B. (You can use either dollars or pesos on the vertical axes of your graphs. Also, assume that "pass-through" is complete.) Then carefully explain why economists say that such a depreciation could actually worsen the trade balance (or current account balance) of country A and indicate the Marshall-Lerner condition. Finally, define the "J curve" and give a very brief explanation of why it has the shape that it does.

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Question 8

The simple Marshall-Lerner condition would suggest that one of the following cases would produce a worsening of the trade balance if the country's currency depreciated. Which one? (The negative sign on elasticities is being ignored; also, assume that trade is initially balanced.)

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Question 9

Under either a gold standard or a pegged-rate system, what changes in the money supply are necessary in order for effective adjustment to take place? Why are these changes necessary?

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Question 10

If depreciation of a home currency occurs, foreign exporters to the home country could offset some of the impact of the depreciation by __ the price/cost ratio on goods sent to the home country; such a change in the price/cost ratio would mean that there was _ "pass-through" of the exchange rate change to foreign export prices.

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Question 11

If, in a demand curve/supply curve graph with the quantity of U.S. imports plotted on the horizontal axis and the price of U.S. imports in dollars plotted on the vertical axis, suppose that, from an initial equilibrium position, there is now a depreciation of the U.S. dollar relative to other currencies. (Assume that the supply curve is horizontal.) Other things equal, this depreciation of the dollar would cause the __________.

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Question 12

Briefly compare and contrast the price adjustment mechanism under fixed exchange rates to that under flexible exchange rates. Why is a price adjustment necessary under a fixed-rate system?

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Question 13

Suppose that a 5% depreciation of the U.S. dollar raises the dollar price of a U.S. import Good by 5%. This situation would be characterized as a situation of "pass- Through" (or "exchange-rate pass-through"), and U.S. consumers of the imported good Would spend a larger dollar amount on the imported good than they did before the Depreciation of the dollar if their demand for the good is .

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Question 14

If a home country depreciates or devalues its currency by 10 percent, and if there is "complete pass-through" as well as horizontal supply curves of exports and imports, then The price of the country's exports in terms of foreign currency will and the Price of the country's imports in terms of home currency will .

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Question 15

If country A depreciates its currency against country B's currency, then, other things Equal,

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Question 16

Suppose that there is an increase in the supply of foreign exchange due to an inflow of foreign investment in a flexible-rate system. Explain how this would affect the balance on current account, being careful to explain any assumptions about the foreign exchange market that are critical to your discussion.

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Question 17

If, in a demand curve/supply curve graph with the quantity of U.S. exports plotted on the horizontal axis and the price of U.S. exports in dollars plotted on the vertical axis, suppose that, from an initial equilibrium position, there is now a depreciation of the U.S. dollar relative to other currencies. (Assume that the supply curve is horizontal.) Other things equal, this depreciation of the dollar would cause the __________.

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Question 18

If, under the gold standard, the par value of the Swiss franc in terms of the dollar is $0)80, and if it costs $0.01 to move one franc's worth of gold between the countries, then The "gold export point" from the United States is at , and the "gold import Point" into the United States is at .

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Question 19

Using the information in the table in Question #10 above, the arc elasticity of demand for Pounds between the $2.50/£1 exchange rate and the $2.00/£1 exchange rate is (ignoring The negative sign) __________.

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Question 20

Showing 1 - 20 of 24

"The J curve occurs because of differences of short-run elasticities from long-run elasticities." Explain the reasoning behind this statement.

Which one of the following situations would represent a "small-country" case in the analysis of the elasticities approach to devaluation?

Which one of the following was NOT supposed to occur in the "gold standard" International monetary system?

Given the following table showing various $/£ exchange rates and the respective Quantities of pounds demanded by U.S. buyers: \ /£ pounds demanded \ 2.50/£1 £1,000 \ 2.00/£1 £1,500 \ 1.50/£1 £1,800 The demand for pounds between $2.00/£1 and $1.50/£1 is

In which of the following cases can we conclude, without any further information, that a depreciation of a country's currency will worsen the country's trade balance (or current account balance).

Is the Marshall-Lerner condition of any relevance for the successful operation of the gold standard adjustment mechanism? Explain.

The simple Marshall-Lerner condition would suggest that one of the following cases would produce a worsening of the trade balance if the country's currency depreciated. Which one? (The negative sign on elasticities is being ignored; also, assume that trade is initially balanced.)

Under either a gold standard or a pegged-rate system, what changes in the money supply are necessary in order for effective adjustment to take place? Why are these changes necessary?

Briefly compare and contrast the price adjustment mechanism under fixed exchange rates to that under flexible exchange rates. Why is a price adjustment necessary under a fixed-rate system?

If country A depreciates its currency against country B's currency, then, other things Equal,

If, under the gold standard, the par value of the Swiss franc in terms of the dollar is $0)80, and if it costs $0.01 to move one franc's worth of gold between the countries, then The "gold export point" from the United States is at , and the "gold import Point" into the United States is at .

Using the information in the table in Question #10 above, the arc elasticity of demand for Pounds between the $2.50/£1 exchange rate and the $2.00/£1 exchange rate is (ignoring The negative sign) __________.

Early Trade Theories: Mercantilism and the Transition to the Classical World of David Ricardo

The Classical World of David Ricardo and Comparative Advantage

Extensions and Tests of the Classical Model of Trade

Introduction to Neoclassical Trade Theory: Tools to Be Employed

Gains From Trade in Neoclassical Theory

Offer Curves and the Terms of Trade

The Basis for Trade: Factor Endowments and the Heckscher-Ohlin Model

Empirical Tests of the Factor Endowments Approach

Post Heckscher-Ohlin Theories of Trade and Intra-Industry Trade

Economic Growth and International Trade

International Factor Movements

The Instruments of Trade Policy

The Impact of Trade Policies

Arguments for Interventionist Trade Policies

Political Economy and Us Trade Policy

Economic Integration

International Trade and the Developing Countries

The Balance-Of-Payments Accounts

The Foreign Exchange Market

International Financial Markets and Instruments: an Introduction

The Monetary and Portfolio Balance Approaches to External Balance

National Income and the Current Account

Economic Policy in the Open Economy Under Fixed Exchange Rates

Economic Policy in the Open Economy Under Flexible Exchange Rates

Prices and Output in the Open Economy: Aggregate Supply and Demand

Fixed or Flexible Exchange Rates

The International Monetary System: Past, Present, and Future

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