[Joseph_E._Stiglitz,_Carl_E._Walsh]_Economics(Bookos.org) (1)

3. Suppose that at the start of 2001, a U.S. investor
put $10,000 into a one-year euro investment. If
the exchange rate was 1.5 euros per dollar, how
much would $10,000 be in euros? Over the course
of the year, the euro investment paid 10 percent
interest. But when the investor switched back
to dollars at the end of the year, the exchange rate
was 2 euros per dollar. Did the change in the
exchange rate earn the investor more money or
less money? How much? How does your analysis
change if the exchange rate had fallen to 1 euro
per dollar?
4. If the government wanted to reduce the trade deficit
by altering the exchange rate, what sort of monetary
policy should it employ? Explain.
5. If the government succeeds in raising the exchange rate,
who benefits and who is injured?
6. Suppose Americans go on a “buy American” campaign
that reduces imports. Use a supply and demand model
of the foreign exchange market to show how this campaign
would affect the value of the dollar. Does the
change in the exchange rate act to increase the reduction
in imports or does it partially offset the initial
reduction in imports? Explain.
776 ∂ CHAPTER 34 THE INTERNATIONAL FINANCIAL SYSTEM