1. What will happen to a country that fixes the price of the foreign exchange below equilibrium?

2. What factors will shift the supply and demand for currency?

3. What are the three categories of transactions in the balance of payments? Give an example of each.

4. What will happen to the supply of dollars, the demand for dollars, and the equilibrium exchange rate of the dollar in each of the following cases?

5. Economists sometimes say that the current exchange rate system is a dirty float system. What does this mean?

6. What are the main arguments presented against flexible exchange rates?

7. In a capitalist economy, is income inequality necessary for economic growth? ( no less than 350 word.)

8. After reading the article found in the following link, post comments on how cryptocurrencies are affecting the world’s economy.

https://www.aier.org/article/sound-money-project/c… (no less than 350 word)

here is some

Lecture Notes

This chapter examines the workings of the foreign exchange market, starting with a discussion of the balance of payments mechanism. After covering the various trade balance concepts on current and capital account flows as well as their implications for measurement of trade surpluses or deficits, the chapter moves to the determination of foreign exchange rates in a flexible rate system. The concept of purchasing power parity is discussed, and then the adjustment process under fixed exchange rates is examined. The chapter closes with a description of the development of the international monetary system, including the arguments for and against flexible exchange rates.

Many factors such as language, race, religion, and customs separate cultures. These factors also separate economies, which are further divided by the lack of a common medium of exchange? a common currency. For transactions to take place between two countries, one individual must be prepared to exchange domestic currency for foreign exchange. This chapter considers the theory and problems associated with international economic transactions. Central to this is a careful examination of the roles of exchange rates and the balance of payments. In this chapter, unlike the previous chapters, money must be explicitly introduced, along with its macroeconomic consequences.

Fundamental to any study of international finance is a thorough understanding of the supply and demand for foreign exchange by participants in international trade. For simplicity, consider the market for Japanese yen and U.S. dollars from the point of view of Americans. The amount of foreign exchange is measured in terms of yen; the price of one yen is the number of U.S. dollars required to purchase it. The number of yen demanded depends on how much that currency buys in Japanese goods and services. The lower the price of the yen, the more yen Americans are willing and able to purchase. By contrast, the lower the price of the yen, the fewer yen Japanese households and firms are willing and able to supply to the market, since their command over U.S. goods and services falls with a decline in the value of the yen.

Under a system of flexible exchange rates, the equilibrium exchange rate (the price of yen in terms of dollars) is determined by the interaction of supply and demand. An increase in the demand for yen, other things constant, leads to an increase in the exchange rate; that is, the usual laws of supply and demand carry over to the foreign exchange market. For this reason, we can predict movements in the freely floating exchange rate if we can predict movements in the supply and demand for foreign exchange.

A fixed exchange rate system requires that the government (or the central bank) actively intervene to buy or sell domestic currency. For example, if there is an excess supply of foreign exchange in the market, the government must buy up the surplus. Problems with fixed rates arise if the fundamental disequilibrium in the foreign exchange market becomes too large.

The aggregate record of international transactions between one country and the rest of the world is called the balance of payments accounts. The balance of payments accounts can be divided into three categories, (1) the current account, which measures merchandise trade, services, and unilateral transfers, (2) the capital account, showing changes in the ownership of assets between countries, and (3) the official reserves transactions account, which reflects the government?s purchases and sales of foreign exchange.

For much of the 20th century, exchange rates have been fixed either by means of the gold standard or by government intervention. In an attempt to reduce the postwar instability in exchange rates (and to bring about peaceful trade between nations), the Bretton Woods system was created. Fundamental disequilibria between currencies and disagreements over how best to manage rates, however, led to a breakdown of the system. A managed float, which allows rates to move within limits, has been popular since the early 1970s. Recently, increase in the volume of trade and international lending have made it increasingly difficult to maintain rates within a stable band.

(1500 words)