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Assume the United States exports 1000 computers at a price of $3000 each and imports 15 UK autos at a price of 10000 pounds each. Assume that the dollar/pound exchange rate is $2 per pound.
a. Calculate in dollar terms, the US export receipts, import payments and trade balance prior to a depreciation in the dollar's exchange rate.
b. Suppose the dollar's exchange value depreciates by 10%. Assuming that the price elasticity of demand for US exports equals 3.0 and the price elasticity of demand for US imports equals 2.0, does the dollar depreciation improve or worsen the US trade balance? Why?
c. Now assuming that the price elasticity of demand for US exports equals 0.3 and the price elasticity of demand for US imports equals 0.2. Does this change the outcome? Why?
Q. Explain how the money markets of two countries are linked through the foreign exchange market. Answer: The financial policy actions by the Fed affect the U.S. interest rate
A good analysis in increasing cost theory with graphical analysis
heberler''s theory of opportunity cost notes
Annotated Bibliography
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