Discussion 1: “The Factors That Determine Foreign Exchange Rates.” Please respon
ID: 436731 • Letter: D
Question
Discussion 1: “The Factors That Determine Foreign Exchange Rates.” Please respond to the following:Suppose that US $1 equals ?0.7778 in New York and US $1 equals ?0.7775 in Paris. Explain how foreign exchange traders in New York and Paris can profit from these exchange rates.
Should China revalue the yuan against the dollar? Why or why not? If so, describe what impact this might have on (1) U.S. balance of payments, (2) Chinese balance of payments, (3) relative competitiveness of Mexico and Thailand, (4) firms such as Wal-Mart, and (5) U.S. and Chinese retail consumers.
You are an IMF official who will be soon visiting a country whose export earnings are not able to pay for imports. The government has requested a loan from the IMF. In which areas would you recommend the government make cuts: (1) education, (2) salaries for officials, (3) food subsidies, and /or (4) tax rebates for exporters? Explain the reasons for your recommendations.
Explanation / Answer
Foreign traders can buy goods in Paris and sell them in New York; in Paris, the goods would be cheaper, so by selling them in New York, each dollar made off the goods would turn a 0.0003 profit, because of the difference of value in the two cities of the US dollar.