--%>
Assignment Help - homework help

Illustrate a market of fictitious currency Zee

Illustrate a market wherein the equilibrium dollar price of one unit of fictitious currency Zee is $5 (the exchange rate is $5 = Z1). Then illustrates on your diagram a decline in the demand for Zee.

a. Referring to this diagram, describe the adjustment options Canada would contain in maintaining the exchange rate at $5 = Z1 within fixed exchange rate system.

b. How would the Canadian balance of payments surplus i.e. formed (by the decline in demand) get resolved under a system of flexible exchange rates?

E

Expert

Verified

Graph of Zees

367_market for Zees.png

(a) The reduction in demand for Zees from D1 to D2 will build a surplus (bc) of Zees at the $5 price. In order to maintain the $5 to Z1 exchange rate, Canada have to undertake policies to shift the demand-for-Zee curve rightward or shift the supply-of-Zee curve leftward. To enhance the demand for Zees, Canada could employ dollars or gold to purchase Zees in the foreign exchange market; employ trade policies to raise imports from Zeeonia; or enact expansionary fiscal & monetary policies to enhance Canadian domestic output and income, therefore increasing imports from Zeeonia. Expansionary monetary policy would also decrease the supply of Zees: Zeeons would respond towards the resulting lower Canadian interest rates by falling their financial investing in Canada. Hence, they would not supply as several Zees to the foreign exchange market.

(b) Under scheme of flexible exchange rates, the bc surplus of Zees (the Canadian balance of payments surplus) will cause the Zee to appreciate and the dollar to appreciate till the surplus is eliminated (at the $4 = Z1 exchange rate illustrated in the figure).

 

 

 

   Related Questions in Finance Basics

  • Q : Pros and cons of commercial paper

    Describe pros and cons of commercial paper associated to bank loans for a company seeking short-term financing? Usually commercial paper is a cheaper source of short-term financing for a firm, compared to bank loans. Also, a larger amount of fu

    		•
  • Q : Examples of high debt levels companies

    Give two instances of types of companies which would be best able to handle high debt levels.Companies which handle local telephone service and those which handle natural gas delivery to consumers would be assumed to comfortably be able to handl

    		•
  • Q : Explain Modified Accrual Basis Modified

    Modified Accrual Basis: The base of accounting in which revenues are acknowledged when the underlying transaction has occurred as of the last day of the fiscal year and the quantity is measurable and accessible to finance expenditures

    		•
  • Q : Why do focusing on cash flows rather

    Why do we focus on cash flows rather than profits while evaluating proposed capital budgeting projects? We targeted on cash flows instead of profits while evaluating proposed capital budgeting projects since it is cash flow that changes the valu

    		•
  • Q : Define Organization Code Organization

    Organization Code: The four-digit code allotted to each state governmental entity (and at times to exclusive budgetary programs) for fiscal system aims. The organization code is the initial segment of the budget item or appropriation

    		•
  • Q : Define the term Technical Technical :

    Technical: In the budget systems, refers to an amendment which clarifies, accurate, or else does not materially influence the purpose of a bill.

    		•
  • Q : Midterm Exam for FIN 6000 Please

    Please complete the midterm exam independently.  Don't discuss it with other students in the class.  Please email me if you have any clarifying questions.  <

    		•
  • Q : Describe EU Normal 0 false false false

    Normal 0 false false

  • Q : Fin 335 International finance 1. The

    1. The exchange rate is 1.22 Swiss francs per U.S. dollar. How many U.S. dollars are needed to purchase 1,500 Swiss francs? [$1,229.51] 2. You are planning an extended trip to Hong Kong. You have located some housing

    		•
  • Q : Define Trigger Trigger : An event which

    Trigger: An event which causes an action or actions. The triggers can be active (like pressing the update key to validate input to a database) or passive (like a tickler file to repeat of an activity). For illustration, budget "trigger" mechanisms hav

    		•