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Question: 1.Unlike countries with currency problems, China has used a fixed exchange rate to keep the value of its currency below its market level. What is likely to happen to China's imports, exports, and purchases of U.S. securities if the exchange rate is allowed to float? Explain your answer. 2.If I were to trade $1 as a base currency and the yen starts devaluating due to inflation, do I make money? Explain. 3.Currently, the world experiences oil price shocks. In this regard, Tanzania sees global inflation going up. This means that the prices of goods that Tanzania imports from other countries are going up (i.e., goods are more expensive). Given that this is not just a one-time increase (i.e., inflation will stay higher in the world for a few years), the Bank of Tanzania (BoT) cannot control inflation in the rest of the world; therefore, there is little the BoT can do. The BoT has no role to play to control this imported inflation. a) Is this true? b) Would standard monetary policies to reduce inflation not work in this environment? c) Would it make a difference whether Tanzania has a fixed exchange rate or a flexible one?

Question: 1.Unlike countries with currency problems, China has used a fixed exchange rate to keep the value of its currency below its market level. What is likely to happen to China's imports, exports, and purchases of U.S. securities if the exchange rate is allowed to float? Explain your answer. 2.If I were to trade $1 as a base currency and the yen starts devaluating due to inflation, do I make money? Explain. 3.Currently, the world experiences oil price shocks. In this regard, Tanzania sees global inflation going up. This means that the prices of goods that Tanzania imports from other countries are going up (i.e., goods are more expensive). Given that this is not just a one-time increase (i.e., inflation will stay higher in the world for a few years), the Bank of Tanzania (BoT) cannot control inflation in the rest of the world; therefore, there is little the BoT can do. The BoT has no role to play to control this imported inflation. a) Is this true? b) Would standard monetary policies to reduce inflation not work in this environment? c) Would it make a difference whether Tanzania has a fixed exchange rate or a flexible one?

Managerial Economics: A Problem Solving Approach
Managerial Economics: A Problem Solving Approach
5th Edition
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Chapter11: Foreign Exchange, Trade, And Bubbles
Section: Chapter Questions
Problem 7MC
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Question: 1.Unlike countries with currency problems, China has used a fixed exchange rate to keep the value of its currency below its market level. What is likely to happen to China's imports, exports, and purchases of U.S. securities if the exchange rate is allowed to float? Explain your answer. 2.If I were to trade $1 as a base currency and the yen starts devaluating due to inflation, do I make money? Explain. 3.Currently, the world experiences oil price shocks. In this regard, Tanzania sees global inflation going up. This means that the prices of goods that Tanzania imports from other countries are going up (i.e., goods are more expensive). Given that this is not just a one-time increase (i.e., inflation will stay higher in the world for a few years), the Bank of Tanzania (BoT) cannot control inflation in the rest of the world; therefore, there is little the BoT can do. The BoT has no role to play to control this imported inflation. a) Is this true? b) Would standard monetary policies to reduce inflation not work in this environment? c) Would it make a difference whether Tanzania has a fixed exchange rate or a flexible one?
Transcribed Image Text:Question: 1.Unlike countries with currency problems, China has used a fixed exchange rate to keep the value of its currency below its market level. What is likely to happen to China's imports, exports, and purchases of U.S. securities if the exchange rate is allowed to float? Explain your answer. 2.If I were to trade $1 as a base currency and the yen starts devaluating due to inflation, do I make money? Explain. 3.Currently, the world experiences oil price shocks. In this regard, Tanzania sees global inflation going up. This means that the prices of goods that Tanzania imports from other countries are going up (i.e., goods are more expensive). Given that this is not just a one-time increase (i.e., inflation will stay higher in the world for a few years), the Bank of Tanzania (BoT) cannot control inflation in the rest of the world; therefore, there is little the BoT can do. The BoT has no role to play to control this imported inflation. a) Is this true? b) Would standard monetary policies to reduce inflation not work in this environment? c) Would it make a difference whether Tanzania has a fixed exchange rate or a flexible one?
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