--%>
Assignment Help - homework help

Illustrate a market of fictitious currency Zee

Illustrate a market wherein the equilibrium dollar price of one unit of fictitious currency Zee is $5 (the exchange rate is $5 = Z1). Then illustrates on your diagram a decline in the demand for Zee.

a. Referring to this diagram, describe the adjustment options Canada would contain in maintaining the exchange rate at $5 = Z1 within fixed exchange rate system.

b. How would the Canadian balance of payments surplus i.e. formed (by the decline in demand) get resolved under a system of flexible exchange rates?

E

Expert

Verified

Graph of Zees

367_market for Zees.png

(a) The reduction in demand for Zees from D1 to D2 will build a surplus (bc) of Zees at the $5 price. In order to maintain the $5 to Z1 exchange rate, Canada have to undertake policies to shift the demand-for-Zee curve rightward or shift the supply-of-Zee curve leftward. To enhance the demand for Zees, Canada could employ dollars or gold to purchase Zees in the foreign exchange market; employ trade policies to raise imports from Zeeonia; or enact expansionary fiscal & monetary policies to enhance Canadian domestic output and income, therefore increasing imports from Zeeonia. Expansionary monetary policy would also decrease the supply of Zees: Zeeons would respond towards the resulting lower Canadian interest rates by falling their financial investing in Canada. Hence, they would not supply as several Zees to the foreign exchange market.

(b) Under scheme of flexible exchange rates, the bc surplus of Zees (the Canadian balance of payments surplus) will cause the Zee to appreciate and the dollar to appreciate till the surplus is eliminated (at the $4 = Z1 exchange rate illustrated in the figure).

 

 

 

   Related Questions in Finance Basics

  • Q : Describe Treasury bill Describe

    Describe Treasury bill? How risky is it?Treasury bills are short term debt instruments issued through the U.S. Treasury which are sold at a discount and pay face value at maturity.  They are very close to risk-free as they are backed throug

    		•
  • Q : Measuring net output GDP in a specific

    Why do national income accountants comprise only final goods in measuring net output GDP in a specific year? Why don't they comprise the value of stocks and bonds bought & sold? Why don't they comprise the value of utilized furniture bought and so

    		•
  • Q : What are Summary Schedules Summary

    Summary Schedules: Different schedules in the Governor’s Budget Summary that summarize state revenues, expenditures and other fiscal and personnel data for the past, present, and budget years.

    		•
  • Q : Translate enterprise value in net

    Describe the adjustments essential to translate enterprise value to the net present value of common equity.To get the value of the company's common stock, add up the value of the firm's present assets to the enterprise value (this generates the

    		•
  • Q : Explain Governors Budget Summary or

    Governor's Budget Summary (or A-Pages): This is a companion publication to the Governor’s Budget which outlines the Governor’s goals, policies, and objectives for the budget year. This gives a perspective on important fiscal and/or structu

    		•
  • Q : What is Cash Flow Statement What is

    What is Cash Flow Statement: It is a statement of cash receipts and disbursements for a particular time period.

    		•
  • Q : Describe equilibrium price and quantity

    Assume the market for widgets can be described by the given equations:                     Demand: P = 10 - Q             &

    		•
  • Q : Define the term Unencumbered Balance

    Define the term Unencumbered Balance: It is the balance of an appropriation not so far committed for particular purposes.

    		•
  • Q : Describes why reserves are an asset to

    Normal 0 false false

    		•
  • Q : Describe why measure projects risk as

    Describe why we measure a project's risk as the change in the CV.We measure a project's risk since the change in the coefficient of variation since this focuses on the change in the riskiness of the firm's existing portfolio.

    		•