var imagesSmall = ","; var imagesLarge = "krugmanwellsecon4-numbered_fig-ch34_fig_1,krugmanwellsecon4-numbered_fig-ch34_fig_2,krugmanwellsecon4-numbered_fig-ch34_fig_5,krugmanwellsecon4-numbered_fig-ch34_fig_6,krugmanwellsecon4-numbered_fig-ch34_fig_7,krugmanwellsecon4-numbered_fig-ch34_fig_8,krugmanwellsecon4-numbered_fig-ch34_fig_12,,"; var imagesXlarge = "krugmanwellsecon4-unnumbered_fig-ch34_un_01,krugmanwellsecon4-numbered_fig-ch34_fig_3,krugmanwellsecon4-numbered_fig-ch34_fig_4,krugmanwellsecon4-numbered_fig-ch34_fig_10,,,,,"; var imagesXXlarge = ",,,,,"; var pitfalls_onmargin = "krugmanwellsmacro4-ch19-pitfalls-box-WHICHWAYISUP?,krugmanwellsecon4-ch19-pitfalls-box-WHICHWAYISUP?,,,"; /*** CYU answers ***/ xBookUtils.showAnswers['krugmanwellsecon4-cyu-34-1-1a'] = "
The sale of the new airplane to China represents an export of a good to China and so enters the current account.
"; xBookUtils.showAnswers['krugmanwellsecon4-cyu-34-1-1b'] = "The sale of Boeing stock to Chinese investors is a sale of a U.S. asset and so enters the financial account.
"; xBookUtils.showAnswers['krugmanwellsecon4-cyu-34-1-1c'] = "Even though the plane already exists, when it is shipped to China it is an export of a good from the United States. So the sale of the plane enters the current account.
"; xBookUtils.showAnswers['krugmanwellsecon4-cyu-34-1-1d'] = "Because the plane stays in the United States, the Chinese investor is buying a U.S. asset. So this is identical to the answer to part b: the sale of the jet enters the financial account.
"; xBookUtils.showAnswers['krugmanwellsecon4-cyu-34-1-2a'] = "The collapse of the U.S. housing bubble and the ensuing recession led to a dramatic fall in interest rates in the United States because of the deeply depressed economy. Consequently, capital inflows into the United States dried up.
"; xBookUtils.showAnswers['krugmanwellsecon4-cyu-34-2-1a'] = "The increased purchase of Mexican oil will cause U.S. individuals (and firms) to increase their demand for the peso. To purchase pesos, individuals will increase their supply of U.S. dollars to the foreign exchange market, causing a rightward shift in the supply curve of U.S. dollars. This will cause the peso price of the dollar to fall (the amount of pesos per dollar will fall). The peso has appreciated and the U.S. dollar has depreciated as a result.
"; xBookUtils.showAnswers['krugmanwellsecon4-cyu-34-2-1b'] = "This appreciation of the peso means it will take more U.S. dollars to obtain the same quantity of Mexican pesos. If we assume that the price level (measured in Mexican pesos) of other Mexican goods and services does not change, other Mexican goods and services become more expensive to U.S. households and firms. The dollar cost of other Mexican goods and services will rise as the peso appreciates. So Mexican exports of goods and services other than oil will fall.
"; xBookUtils.showAnswers['krugmanwellsecon4-cyu-34-2-1c'] = "U.S. goods and services become cheaper in terms of pesos, so Mexican imports of goods and services will rise.
"; xBookUtils.showAnswers['krugmanwellsecon4-cyu-34-2-2a'] = "The real exchange rate equals
Today, the aggregate price levels in both countries are both equal to 100. The real exchange rate today is 10 × (100/100) = 10. The aggregate price level in five years in the U.S. will be 100 × (120/100) = 120, and in Mexico it will be 100 × (1,200/800) = 150. The real exchange rate in five years, assuming the nominal exchange rate does not change, will be 10 × (120/150) = 8.
"; xBookUtils.showAnswers['krugmanwellsecon4-cyu-34-2-2b'] = "Today, a basket of goods and services that costs $100 costs 800 pesos, so the purchasing power parity is 8 pesos per U.S. dollar. In five years, a basket that costs $120 will cost 1,200 pesos, so the purchasing power parity will be 10 pesos per U.S. dollar.
"; xBookUtils.showAnswers['krugmanwellsecon4-cyu-34-3-1d'] = "The accompanying diagram shows the supply of and demand for the yuan, with the U.S. dollar price of the yuan on the vertical axis. In 2005, prior to the revaluation, the exchange rate was pegged at 8.28 yuan per U.S. dollar or, equivalently, 0.121 U.S. dollars per yuan ($0.121). At the target exchange rate of $0.121, the quantity of yuan demanded exceeded the quantity of yuan supplied, creating the shortage depicted in the diagram. Without any intervention by the Chinese government, the U.S. dollar price of the yuan would be bid up, causing an appreciation of the yuan. The Chinese government, however, intervened to prevent this appreciation.
If the exchange rate were allowed to move freely, the U.S. dollar price of the exchange rate would move toward the equilibrium exchange rate (labeled XR* in the accompanying diagram). This would occur as a result of the shortage, when buyers of the yuan would bid up its U.S. dollar price. As the exchange rate increases, the quantity of yuan demanded would fall and the quantity of yuan supplied would increase. If the exchange rate were to increase to XR*, the disequilibrium would be entirely eliminated.
Placing restrictions on foreigners who want to invest in China would reduce the demand for the yuan, causing the demand curve to shift in the accompanying diagram from D1 to something like D2. This would cause a reduction in the shortage of the yuan. If demand fell to D3, the disequilibrium would be completely eliminated.
Removing restrictions on Chinese who wish to invest abroad would cause an increase in the supply of the yuan and a rightward shift in the supply curve. This increase in supply would also cause a reduction in the size of the shortage. If, for example, supply increased from S1 to S2, the disequilibrium would be eliminated completely in the accompanying diagram.
Imposing a tax on exports (Chinese goods sold to foreigners) would raise the price of these goods and decrease the amount of Chinese goods purchased. This would also decrease the demand for the yuan. The graphical analysis here is virtually identical to that found in the figure accompanying part b.
The devaluations and revaluations most likely occurred in those periods when there was a sudden change in the franc–mark exchange rate: 1974, 1976, the early 1980s, 1986, and 1993–1994.
"; xBookUtils.showAnswers['krugmanwellsecon4-cyu-34-4-2a'] = "The high Canadian interest rates would likely have caused an increase in capital inflows to Canada. To obtain these assets (which yielded a relatively higher interest rate) in Canada, investors would first have had to obtain Canadian dollars. The increase in the demand for the Canadian dollar would have caused the Canadian dollar to appreciate. This appreciation of the Canadian currency would have raised the price of Canadian goods to foreigners (measured in terms of the foreign currency). This would have made it more difficult for Canadian firms to compete in other markets.
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