Managerial Economics Study Set 8

Business

Quiz 6 :

Managing in the Global Economy

Quiz 6 :

Managing in the Global Economy

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After an unanticipated dollar appreciation has occurred, what would you recommend a company like Cummins Engine do with its strong domestic currency
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As a result of unanticipated appreciation of dollar, the U.S exports would become relatively expensive, while imports become relatively cheaper.
Since imports are cheap, it is recommended to out-sourcing inputs and other raw materials from other countries.
They can also move their production units overseas.
Manufacturers should cut export prices to remain competitive in the market.
Further, manufacturers can plan investment in product lines the demand for which is more inelastic with respect to price and less sensitive to exchange rate fluctuations.

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If Boeing's dollar aircraft prices increase 20 percent and the yen/dollar exchange rate declines 15 percent, what effective price increase is facing Japan Air Lines for the purchase of a Boeing 747 Would Boeing's margin likely rise or fall if the yen then depreciated and competitor prices were unchanged Why
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Since the yen/dollar exchange rate has declined, it implies that the expected inflation in the U.S is greater than the expected inflation in Japan.
As U.S. prices are expected to rise by 20 percent over a period, and the yen/dollar exchange rate falls by 15 percent, the prices in Japan are expected to rise by 5 percent over the same period.
With unchanged competitor's prices, depreciation of yen implies more yen per dollar. Thus, Japan's export will become cheaper. However, its imports will become expensive and Japan may search for relatively cheaper substitutes, either produced domestically or from other countries.
In order to maintain competitiveness in the aircrafts industry, the U.S would cut prices (reduce margins) for selling Boeing 747.

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If the U.S dollar depreciates 20 percent, how does this affect the export and domestic sales of a U.S. manufacturer Explain.
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U.S dollar is said to be depreciated when its value decreases relative to other currencies in the world.
Effect of dollar depreciation on exports
As the U.S dollar depreciates, the domestic goods are relatively cheaper in the countries in which it exports. That is, U.S goods would become cheaper in the importing countries. As a consequence, demand for exports from U.S would increase leading to a positive effect on domestic business.
Effect of dollar depreciation on domestic sales
The depreciation of dollar makes imports relatively expensive for the domestic country. If the manufacturer requires inputs to be imported from other countries, depreciation of dollar would increase input costs.
Increased input cost may induce the manufacturer to reduce the supply in domestic market resulting in increased prices for domestically produced goods.

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Would cappuccino by the cup or Prada handbags have wider price variation in a free trade area like the European Union Why
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What is the difference between transaction demand, speculative demand, and autonomous transactions by central banks, the World Bank, and the IMF in the foreign exchange markets Which of these factors determines the long-term quarterly trends in exchange rates
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If the U.S. dollar were to appreciate substantially, what steps could a domestic manufacturer like Cummins Engine Co. of Columbus, Indiana, take in advance to reduce the effect of the exchange rate fluctuation on company profitability
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If the domestic prices for traded goods rose 40 percent over 10 years in China and 25 percent over those same 10 years in the United States, what would happen to a freely floating Chinese yuan/U.S. dollar exchange rate Why
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Unit labor costs in Germany approach $30 per hour, whereas in Britain unit labor costs are only $20 per hour. Why would such a large difference persist between two members of the EU free trade area
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If core price inflation has grown at a compound growth rate of 2 percent per annum in the United States and 0.06 percent in Japan for the past eight years, what exchange rate represents PPP today if the two currencies eight years ago in 2005 were in parity and exchanged at the rate of ¥109/$
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Would increased cost inflation in the United States relative to its major trading partners likely increase or decrease the value of the U.S. dollar Why
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What three factors determine whether two economies with separate fiscal and monetary authorities should form a currency union Give an illustration of each factor using NAFTA economies.
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If unit labor costs in Spain and Portugal rise, but unit labor costs in Germany decline and other producer prices remain unchanged, what effect should these factors, by themselves, have on export trade, and why
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