Problem
1. Draw the foreign exchange market for euros in terms of pounds. Label the equilibrium exchange rate (e1), the equilibrium quantity (Q1), and the current exchange rate (ec). Assume that there is a shortage of the euro at the current rate.
2. Assume the current exchange rate for the Chinese yuan in terms of the U.S. dollar is $0.20 per yuan. Based on this information, draw the foreign exchange market for dollars. Assume the market is in equilibrium.
The United States and Mexico are trading partners.
3. Using side-by-side graphs of the exchange market for the U.S. dollar and the Mexican peso, show the impact of an increase in the demand for pesos.
4. Based on the change indicated in part (c), is the U.S. dollar appreciating or depreciating?
5. If the United States began with a current account balance of zero, will the change in part (3) result in a current account surplus, deficit, or no change? Explain.
6. Based on your answer to part (e), what must be the change to the capital and financial account of the United States?
7. Assume the final exchange rate for the Mexican peso is $0.05. Calculate the exchange rate for the dollar in terms of the peso.
8. Assuming efficient production and mutually beneficial trade, where would consumption for the United States and Mexico be relative to their respective production possibility curves-inside, on, or beyond the PPCs? Explain.