Kenneth R. Szulczyk
reserves. If the country refuses to use reserves or devalue its currency, then black markets
would form for its currency.- If a country devalues it currency, subsequently, the impact does not immediately reduce a
trade deficit. A country’s imports continue rising while its exports fall after a devaluation
and then improves after a time lag. - Country has too much money flowing into the country. Consequently, the central bank
increases the money supply and reduces the interest rate. International investors slow down
their investments in the country that reduces the financial account. - Capital flight is similar to a bank run on a foreign country. International investors cause a
massive outflow of capital as they cash in their investments. A capital flight could lead to the
collapse of a country’s currency. Investors use four methods to transfer money out of the
country: bank transfers, money laundering, false invoicing for imports and exports, or
converting money into precious metals. - This will be a very bad day indeed. If the U.S. dollar collapses in value, then the paper
wealth of anyone holding dollars will disappear. Furthermore, the foreigners would stop
investing in the U.S. economy and the U.S. government debt. Then trade could halt as
nations and people stop accepting dollars for payment unless investors find a replacement
international currency.
Answers to Chapter 1 6 Questions
- The Pepsi costs 2.25 dirhams.
- We calculated:
$ 1 1.^428 $^1
€0.714
€ 1
2 km km
=
- We calculated the cross exchange rate below. Did you notice the trick when I calculated the
cross rate? Consequently, arbitrage is possible.
50
1
100
€ 1
€ 1
2 km
kuna
= km
kuna
Step 1: Trader converts the convertible markets into euros, calculated below:250 , 000 €
2
1 €
500 , 000 =
kmkm