Economics Study Set 17

Answer:

Exchange rate
Exchange rate refers to the amount of domestic currency required to purchase one unit of foreign currency. For example, 0.02 dollar is required to buy one Indian rupee; in this case, the exchange rate is $0.02: Rs1.
Consumption from abroad
The dress materials produced in India are consumed consistently. When American demand for dress material decreases, then American demand for Indian rupee, in the foreign exchange market, also decreases. This reduces the supply of American dollar in the foreign exchange market; and thereby increases the value of American dollar.
On the other hand, since Americans buy less amount of dress material the demand for Indian rupee falls; this reduces the value of Indian rupee. Hence, from an American's point of view, the exchange rate increases. Now, the same unit of American currency can buy more Indian rupee than earlier.

Answer:

Balance of Payment
Balance of Payment refers to the total transaction of monetary services of the country with the rest of the world.
Floating Exchange Rate
Floating exchange rates are determined in the market by the free flow of demand and supply of currencies.
a. Favorable Balance of Payment
A summer trip to Europe increases the demand for euro. In a foreign exchange market, increase in the demand for euro against dollar increases the value of euro. This reduces the exchange rate of dollar against euro. The fall in dollar value increases U.S. exports and decreases U.S. imports. The increase in exports over imports improves the Balance of Payment.
b. Unfavorable Balance of Payment
A gift worth $20 from Canada increases the supply of Canadian dollar. The value of Canadian dollar in terms of American dollar increases. This increases the exchange rate of U.S. dollar against Canadian dollar. The fall in value of dollar increases U.S. exports and decreases U.S. imports. The increase in imports over exports reduces the Balance of Payment.
c. Favorable Balance of Payment
Purchase of new Honda from Japan increases the demand for Japanese yen against U.S. dollars. In foreign exchange market, increase in the demand for Yen against dollar increases the value of yen. This reduces the exchange rate of U.S. dollar against yen. The fall in value of dollar increases U.S. exports and decreases U.S. imports. The increase in exports over imports improves the Balance of Payment.
d. Favorable Balance of Payment
Purchase of new Honda from Ohio increases the demand for Ohio currency against U.S. dollars. In foreign exchange market, increase in the demand for Ohio currency against dollar increases the value of Ohio currency. This reduces the exchange rate of U.S. dollar against the currency of Ohio. The fall in dollar value increases U.S. exports and decreases U.S. imports. The increase in exports over imports improves the Balance of Payment.
e. Unfavorable Balance of Payment
The sale of stocks in the Tokyo Stock Exchange means the supply of Japanese shares and demand for U.S. dollar. This increases the value of dollar against yen, and thereby increases the exchange rate of U.S. dollar against Japanese yen. The fall in dollar value increases U.S. exports and decreases U.S. imports. The increase in imports over exports reduces the Balance of Payment.

Answer:

Bretton wood system
Under the gold standard fixed exchange rate system, supply of money depends on the gold reserve. Since the countries are unable to control the gold reserve, they can also not control the money supply. In the 1930s, the Second World War and the Great Depression caused failure of the gold standard fixed exchange rate system which collapsed the world trade.
To enable profitable world trade, Bretton wood fixed exchange rate system was established in 1944.
Causes for the failure of Bretton wood system in 1971
In the Bretton wood system, countries cannot change the exchange rate easily. A country can devalue its currency when it is in serious deficit in balance of payment. This will be implemented after a long period of time, which leads to reduction of the country's resources.