HOMEWORK Essay Example | Topics and Well Written Essays - 750 words - 1

HOMEWORK - Essay Example Q1 (II): considering that the ratio of trade is 1:1 and that north is more efficient in producing both left and right shoes as compared to the south, the north will consume 70 pairs of shoes. That is, the north would rather not trade. On the other hand, with no increase in the number of workers in the south, they can only consume one pair of shoes if they give up one-left shoes for one right shoe (Miles & Scott 15-72). Q1 (III): assuming that there still are 10 workers in the North, the new exchange rate will be (300:3000), (100:1000) = 1:10. Therefore, the North could decide to exchange 30 left shoes for 300 right shoes. In this case, the number of pairs of shoes consumed will be 300 (Miles & Scott 15-72). Q2: the Federal reserve governor meant that in the year 2005, the payment made by the U.S for importing services and other visible and invisible goods were more than those received; leading to a current account deficit. In the process, the value of US currency decreased making U.S products cheaper in the international market. A decreased U.S currency means an increase in the value of foreign currencies leading to low foreign prices, thus low interest rate in the long-run (Arize 35-67). Q3: when the Government’s purchases increase during a war, consumption is concentrated on ammunitions. The country will heavily import the war machines than exports. This will lead to a deficit in trade account (a negative balance). To pay for the imported machines, more local currency will be supplied in the foreign exchange market than is demanded. Due to more supply than demand, the local currency will lose its value. The decreased value will be reflected in the exchange rate. Therefore, the real exchange rate will be lower. That is, the real price of the local currency against foreign currencies will be lower. The aforementioned effects would take place, whether a local or a