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Chapter 18: Q. 2 (page 495)

鈥淎 country is always worse off when its currency is weak (falls in value).鈥� Is this statement true, false, or uncertain? Explain your answer.

Short Answer

Expert verified

The statement is uncertain.

Step by step solution

01

Concept Introduction

Currency depreciation is a decrease in the value of money in terms of its interchangeability with other monetary forms. Money depreciation can be caused by a variety of factors, including monetary constraints, loan fee differentials, political shakiness, and risk avoidance among financial backers.

02

Explanation

When one nation's currency loses its purchasing power, it loses value in relation to other currencies. This can result in two problems. Because of the depreciation of other currencies, imported goods will be more affordable in the international market. As a result, it will be easier for domestic manufacturers to sell their goods in global markets. The local buyer, on the other hand, will discover that the foreign good is more expensive in the local market. So whether the country is in worse shape or not, remarking on the above-mentioned situation will certainly be difficult. As a result, the response to the inquiry is unclear.

03

Final Answer 

Hence, the statement 鈥淎 country is always worse off when its currency is weak (falls in value)鈥� is uncertain.

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Most popular questions from this chapter

Go to the St. Louis Federal Reserve FRED database, and find data on the exchange rate of U.S. dollars per British pound (DEXUSUK). A Mini Cooper can be purchased in London, England, for拢17,865orinBoston,UnitedStates,for$23,495.

a. Use the most recent exchange rate available to calculate the real exchange rate of the London Mini per Boston Mini.

b. Based on your answer to part (a), are Mini Coopers relatively more expensive in Boston or in London?

c. What price in British pounds would make the Mini Cooper equally expensive in both locations, all else being equal?

If the European Central Bank decides to pursue a contractionary monetary policy to fight inflation, what will happen to the value of the U.S. dollar?

If the Japanese price level rises by 5% relative to the price level in the United States, what does the theory of purchasing power parity predict will happen to the value of the Japanese yen in terms of dollars?

If Mexicans go on a spending spree and buy twice as much French perfume and twice as many Japanese TVs, English sweaters, Swiss watches, and bottles of Italian wine, what will happen to the value of the Mexican peso?

If the demand for a country鈥檚 exports falls at the same time that tariffs on imports are raised, will the country鈥檚 currency tend to appreciate or depreciate in the long run?
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