US Balance of payment In the market for dollars

1. Below are several items related to the US Balance of payment In the market for dollars, identify whether they are related to the supply or demand for dollars.

Circle one
a. Imports of Cars into US Supply or Demand
b. US tourism abroad Supply or Demand
c. Chinese purchases of American bonds Supply or Demand
d. American Company dividends distributed overseas Supply or Demand
e. Interests payments by foreign borrowers to US banks Supply or Demand
f. Payments to US company employees serving abroad Supply or Demand
g. Exports of oil Supply or Demand
h. Migrants in the US send money (remittances) home Supply or Demand

2. Exchange rates define the value of one currency in terms of another. The currency in the denominator defines the market and is the one being valued. If the dollar is valued at .90 Euros that is equivalent to saying Euro/Dollar = .90/1.00.

a) If the dollar and the Euro exchange rate moves to one for one, is the dollar stronger (more valuable) or weaker (less valuable).?

b) If the Euro/Dollar exchange rate move to .70/1.00 is the dollar stronger (more valuable) or weaker (less valuable)?

c) Newspapers typically report the Dollar/Euro exchange rate. Does a higher exchange rate (say 1.10 as opposed to 1.05) mean the Euro is more or less valuable (strong)

d) At the Dollar/Euro exchange of 1.10, calculate the exchange rate for the Dollar (show your equation)

3. The supply of dollars in the US market, constitutes the dollar demand for Yuan in in the Chinese (Yuan) market. The demand for dollars by Yuan holders is the supply of Yuan in the Yuan market.

In two separate graphs show how the Yuan/Dollar market and the Dollar/Yuan markets might adjust if US citizens import fewer Chinese goods. Note also, that the currency in the denominator is the currency being supplied or demanded.

4. In the example above, discuss whether the Dollar becomes stronger or weaker, and what effect that is has on purchasing power of US dollar holders.

Explain whether the effects of that change in purchasing power is indicated by a shift in a) the supply or b) demand, or by a change in the quantity c) supplied or d) demanded. (note only one of those 4 possibilities is correct).

5. Draw separate graphs for the following events as they might effect the Mexican $/Peso market.

a. The US withdraws from Nafta and raises tariffs on Mexican imports.

b. The US provides new loans to Mexico

c. Large numbers of Mexican migrants return home from the US and no longer send remittances home.

d. US companies invest in the production plants in Mexico

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