Question

1. A large increase in the income level in the U.S. along with no growth in Mexico’s income level is normally expected to cause (assuming no change in interest rates or other factors) a(n) ____ in U.S. demand for Mexico’s goods, and the Mexican peso should ____.

a. increase; depreciate

b. increase; appreciate

c. decrease; appreciate

d. decrease; depreciate

2. A decrease in U.S. interest rates relative to French interest rates would likely ____ the U.S. demand for euros and ____ the supply of euros to be exchanged for dollars

a. increase; increase

b. reduce; increase

c. increase; reduce

d. reduce; reduce

3. Assume that the British government imposes quotas on imports by British companies. Other things being equal, the U.S. demand for pounds would ____, the supply of pounds for sale would ____, and the equilibrium value of the pound would ____.

a. remain unchanged; increase; decrease

b. remain unchanged; decrease; increase

c. increase; increase; increase

d. decrease; increase; decrease

Answer 1

(1) (b)

Higher income in US will increase US import demand for Mexican goods, which will increase demand for peso and appreciating peso.

(2) (c)

Relatively higher interest rate in France will increase US investment in France, which will increase the demand for euro and decrease the supply of euro.

(3) (b)

Import quota on British firms will decrease British demand for US goods, thus UK's demand for dollar will decrease, but US' demand for UK pound will not change. Lower imports in UK will also decrease the supply of UK pound (since UK will need to sell less pounds in order to buy foreign currency to pay for imports). So, Pound will appreciate.