国际经济学国际贸易分册,8e英文教师手册习题答案ichap

1、Price Adjustments and Balance-of-Payments DisequilibriumChapter 23:Copyright 2014 by the McGraw-Hill Companies, Inc. All rights reserved.McGraw-Hill/Irwin Learning ObjectivesExplain how changes in exchange rates affect the movement of goods and services and the trade balances of countries.Discuss ho

2、w price elasticity of demand relates to the stability of foreign exchange markets.Summarize how the price adjustment mechanism functions under a system of fixed or pegged exchange rates. The Price Adjustment Process and the Current Account Under A Flexible Rate SystemA depreciation of the home curre

3、ncy causes foreign goods to e more expensive, reducing consumption of imports relative to domestic alternatives.A depreciation makes the home countrys exports seem cheaper, so the trading partner switches expenditure towards home products.This process is expenditure switching. Demand for Foreign Goo

4、ds and Services and the Foreign Exchange MarketDemand for foreign exchange is derived from demand for goods and services.Demand for imports depends on price of foreign goods or services, tariffs or subsidies, prices of domestic substitutes and complements, domestic e, and tastes.Demand for foreign c

5、urrency by home country is also supply of foreign currency to the foreign country.Demand and Supply of Foreign Exchangee$/e/$1.20.83S$D$DSWith normally shaped supply and demand curves, the market for foreign exchange is stable.If U.S. e rises, demand for imports rises and so does demand for foreign

6、exchange.The rightward shift of the demand for foreign exchange creates a current account deficit and an increase in the price of pounds (a depreciation of the dollar).Demand and Supply of Foreign Exchangee$/e/$eeqS$D$DSDeeqeeqDemand and Supply of Foreign ExchangeThe depreciation raises the price of

7、 American products.British demand for dollars falls.Supply of dollars decreases (since demand for pounds rose).e$/e/$eeqS$D$DSDeeqeeqS$D$eeqDemand and Supply of Foreign Exchange Market Stability and the Price Adjustment MechanismThis price adjustment depends on the slope of the supply and demand cur

8、ves for foreign exchange.Supply curves can be backward-sloping.If supply curve is steeper than demand curve, the market is still stable.If supply curve is flatter than demand curve, the market is unstable.e$/e/$S$D$DSIn this case, if e is too high, there is an excess supply and e will fall. In this

9、case, if e is too high, there is an excess demand and e will rise. Demand and Supply of Foreign Exchange Explaining the Backward-Sloping Supply CurveAs the dollar es more expensive, two effects happen:more pounds are required to buy each unit of imports from the U.S.the number of units imported fall

10、s due to the increase in price in terms of pounds.Its easy to see these effects by considering the price elasticity of demand Explaining the Backward-Sloping Supply CurveExample:Suppose the depreciation of the dollar causes the U.K. price of the imported good to increase from 16 to 22, and this caus

11、es quantity demanded to fall from 120 units to 100 units.If foreign demand for home goods is inelastic, supply of foreign exchange is downward-sloping. Exchange Market Stability: The Marshall-Lerner ConditionIf home-country demand is elastic, a depreciation will improve the current account balance.T

12、he increased price of imports reduces total expenditures on imports and the reduced price of exports to foreigners causes an increase in their expenditures.If home-country demand is inelastic, a depreciation will have an ambiguous effect on the current account balance.The increased price of imports

13、will increase total expenditures on imports, possibly offsetting the foreign countrys increased expenditures on exports.The Marshall-Lerner Condition: The foreign exchange market will be stable as long aswhereX = expenditures on exportsM = expenditures on importsDX = price elasticity for home export

14、sDM = price elasticity for imports. Exchange Market Stability: The Marshall-Lerner ConditionIf home-country demand is elastic, a depreciation will improve the current account balance.The increased price of imports reduces total expenditures on imports and the reduced price of exports to foreigners c

15、auses an increase in their expenditures.If home-country demand is inelastic, a depreciation will have an ambiguous effect on the current account balance.The increased price of imports will increase total expenditures on imports, possibly offsetting the foreign countrys increased expenditures on expo

16、rts. Exchange Market Stability: The Marshall-Lerner ConditionSome empirical studies suggest these demand elasticities may be low.However, the general consensus is that these elasticities are large enough that the foreign exchange market is stable. Exchange Market Stability: The Marshall-Lerner Condi

17、tion Price Adjustment Process: Short Run vs. Long RunWhen the Marshall-Lerner condition holds, changes in the exchange rate bring about appropriate switches in expenditures between domestic and foreign goods.A home currency depreciation leads to a substitution of domestic goods for imports.A home cu

18、rrency depreciation causes foreigners to switch to home country exports. Price Adjustment Process: Short Run vs. Long RunShort-run elasticities of supply and demand tend to be smaller in absolute value than long-run elasticities.Consumers dont adjust immediately to relative price changes; its not un

19、usual for the quantity demanded of imports and the amount of foreign exchange needed to not respond to changes in the exchange rate.The supply of exports may not adjust immediately in response to changes in exchange rates due to lags in recognition, decision-making, production, and delivery. Price A

20、djustment Process: The J-CurveIf the short-run elasticities are low, the market for foreign exchange may be unstable.a depreciation may initially lead to a further depreciation, since demand for the foreign currency outstrips supply.Therefore the current account deficit worsens.Eventually, the curre

21、nt account deficit shrinks and a new equilibrium is attained.The J-CurveX-Mtimepoint of depreciation(X-M) = f(e,time) Price Adjustment Mechanism in a Fixed Exchange Rate SystemRather than allowing the foreign exchange market to determine the value of foreign exchange, countries sometimes fix or “peg

22、” the value of their currencies. Price Adjustment Mechanism with the Gold StandardFrom 1880 to 1914, countries pegged their currencies to gold.This fixes countries exchange rates with each other.For example, if the dollar is fixed at $100 per ounce and the pound is fixed at 50 per ounce, the “mint p

23、ar” exchange rate is $2/.Governments must be prepared to maintain the gold price by buying and selling gold at the set price. Price Adjustment Mechanism with the Gold StandardSince the exchange rate is fixed, some other mechanism must be in force to balance demand for and supply of foreign exchange.

24、These “rules of the game” are assumed to hold:no restraints on buying/selling gold within countries; gold can move freely between countries,money supply is allowed to change if a countrys gold holdings change, andPrices/wages are flexible. Price Adjustment Mechanism with the Gold StandardSuppose an

25、increase in U.S. e causes an increased demand for pounds.There will be upward pressure on the exchange rate to eliminate the excess demand for pounds.Buyers/sellers know that governments stand ready to buy/sell pounds at mint par, using gold as medium of exchange.Since it is costly to ship gold, the

26、 exchange rate can vary slightly from mint par.Foreign Exchange Market Under a Gold Standarde$/e/$2.00DSD$1.96$2.00DS$2.04Mint parAssuming transactions costs represent 2% of par value, the exchange rate can vary between $1.96 and $2.04. Price Adjustment Mechanism with the Gold StandardAmericans neve

27、r need to pay more than $2.04/, since an unlimited supply of pounds can be obtained at this price.This price is called the gold export point.The British never need to receive fewer than $1.96/, since at that point gold will begin to move to the U.S. to be exchanged for dollars.This price is called t

28、he gold import point. Price Adjustment Mechanism with the Gold StandardThe exchange rate can vary in between these narrow bands.Prices cannot adjust through exchange rate changes.Instead, prices adjust through changes in the money supply.Price Adjustment Mechanism with the Gold StandardAssuming the

29、quantity theory holds,Ms = kPY.If gold leaves the country, Ms falls and prices must fall in response.Assuming demand for tradeable goods is elastic, this should reduce spending on imports and increase receipts from exports. Price Adjustment Mechanism with the Gold StandardThe price adjustment mechan

30、ism under the gold standard is triggered by changes in the money supply related to flows of gold.This adjustment depends on flexible wages and prices any rigidities will hinder adjustment.Other adjustment may occur due the effects of changes in the money supply on interest rates and e.The gold stand

31、ard works to keep inflation in check.Price Adjustment Mechanism with a Pegged Rate SystemA country can also fix its exchange rate without reference to the value of gold.The central bank must be ready to buy foreign currency when the domestic currency is strong, and sell foreign currency when the domestic currency is weak.Central banks must hold a sufficient