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Chapter 21: Q3. (page 451)

The exchange rate between the U.S. dollar and the British pound starts at \(1 = 拢0.5. It then changes to \)1 = 拢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

What do the plus signs and negative signs signify in the U.S. balance-of-payments statement? Which of the following items appear in the current account and which appear in the capital and financial account: U.S. purchases of assets abroad, U.S. services imports, foreign purchases of assets in the United States, U.S. goods exports, U.S. net investment income? Why must the current account and the capital and financial account sum to zero?

A meal at a McDonald鈥檚 restaurant in New York costs \(8. The identical meal at a McDonald鈥檚 restaurant in London costs 拢4. According to the purchasing-power-parity theory of exchange rates, the exchange rate between U.S. dollars and British pounds should tend to move toward:

a. \)2 = 拢1.

b. \(1 = 拢2.

c. \)4 = 拢1.

d. $1 = 拢4.

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

Suppose that a Swiss watchmaker imports watch components from Sweden and exports watches to the United States. Also, suppose the dollar depreciates, and the Swedish krona appreciates, relative to the Swiss franc. Speculate as to how each would hurt the Swiss watchmaker.

Suppose that the government of China is currently fixing the exchange rate between the US dollar and the Chinese yuan at a rate of \(1 = 6 yuan. Also, suppose that at this exchange rate, the people who want to convert dollars to yuan are asking to convert \)10 billion per day of dollars into yuan, while the people who want to convert yuan into dollars are asking to convert 36 billion yuan into dollars. What will happen to the size of China鈥檚 official reserves of dollars?

a. They will increase.

b. They will decrease.

c. They will stay the same.
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