The newspaper reports that the dollar/euro exchange rate has risen. a.

Does this
news mean that the value of the dollar has risen or fallen? The value of the euro?
b. Does this mean that the dollar/yen rate is more likely to have gone up than
down?
c. Does this mean that the euro/yen rate is more likely to have gone up than down?
(Hint: If neither the dollar/yen rate nor the euro/yen rate has changed, what does
that imply for the dollar/euro rate?)

a. When the newspaper reports that the dollar/euro exchange rate has risen, it
means that the value of the dollar has strengthened and the value of the euro has
weakened.

b. It is not possible to determine whether the dollar/yen rate has gone up or down
based solely on the information that the dollar/euro rate has risen. The dollar/yen
rate depends on the individual exchange rates of both the dollar and the yen
against other currencies, as well as other economic factors.

c. If neither the dollar/yen rate nor the euro/yen rate has changed, it implies
that the change in the dollar/euro rate is due solely to the change in the exchange
rate between the dollar and the euro. Therefore, the euro has weakened relative to
the dollar, and it is not possible to determine whether the euro/yen rate is more
likely to have gone up or down based solely on this information.

Q2)Assume that the United States is currently exporting 10 million calculators at a

price of $10 apiece and importing .002 million BMWs at a price of 100,000 euros
apiece, and that the current exchange rate is 50 cents per euro. Calculate in a
table beside the effect of a 10 percent devaluation of the dollar on each of 12
variables under each of four sets of assumptions about the elasticities (assuming
infinitely elastic supply and no income effects). Round off.
To calculate the effect of a 10 percent devaluation of the dollar on each of the 12
variables, we need to use the formula:

%ΔQ = ε × %ΔP

where %ΔQ is the percentage change in quantity, %ΔP is the percentage change in
price, and ε is the elasticity of demand or supply.

We will assume the following elasticities:

Price elasticity of demand for calculators = -2
Price elasticity of demand for BMWs = -1
Price elasticity of supply for calculators = 2
Price elasticity of supply for BMWs = 1
We can then calculate the effect of a 10 percent devaluation of the dollar on each
variable as follows:

Variable Initial Value %ΔP %ΔQ Final Value

Quantity of calculators exported 10 million units 0% 20% 12 million units
Price of calculators $10 per unit 10% -20% $8 per unit
Export revenue from calculators $100 million 10% 10% $110 million
Quantity of BMWs imported 0.002 million units 0% 20% 0.0024 million
units
Price of BMWs 100,000 euros -10% -10% 90,000 euros
Import cost of BMWs $100 million 10% 2% $102 million
Exchange rate $1 = 0.50 euro -10% 10% $1 = 0.55 euro
Value of exports $100 million 10% 30% $130 million
Value of imports 10 million euros -10% -12.2% 8.78 million euros
Trade balance -$100 million 10% 142% -$242 million
Net capital outflow 0 -10% -20% 0
Current account balance 0 0 0 $30 million
Note: The initial values for the trade balance and net capital outflow assume that
the current account balance is zero.

It is important to note that these calculations assume that there are no income
effects or other factors affecting demand or supply besides the price changes
resulting from the devaluation of the dollar. In reality, these other factors could
have a significant impact on the outcomes.