Week Five Discussion Questions 1. Explain how foreign exchange rates are determined.

How do changes in interest rates, inflation, productivity, and income affect exchange rates? What are the advantages and disadvantages of a weak versus a strong dollar for imports, exports, international and domestic markets? Exchange rates are the rates that a currency from one country trades for the currency of another ( olander, !"1"#. $hese rates can %e ad&usted %y a country purchasing and selling foreign currencies or other international reserves. hanges in interest rates, inflation, productivity, and income all affect the exchange rate. 'f a country has a higher inflation rate the demand for foreign goods %ecome cheaper, which increases foreign currency there%y creating a higher demand for foreign currency ( olander, !"1"#. ( country)s increase in interest rates also increases the demand for said country)s currency, which increases the value of this currency ( olander, !"1"#. When a country)s income reduces the demand for imports falls with it ( olander, !"1"#. $his in turn causes the country)s exchange rate to reduce from lack of demand. ( strong dollar increases the demand for exports and international markets. Higher valued exchange rates increase the amount of investors from foreign nations, which then increases the domestic markets ( olander, !"1"#. *eference olander, +. . (!"1"#. ,acroeconomics (-th ed.#. .oston, ,(/ ,c0raw1 Hill2'rwin. !. Who %enefits from a tariff or 3uota? Who loses? +o domestic markets %enefit from protectionist trade policies? How do protectionist trade policies affect a government)s wealth and fiscal policy? When a tariff is placed on a good it increases the price of the imported good there%y reducing the demand for the import ( olander, !"1"#. $his increases demand on domestic goods %y increasing the prices of foreign. 4uotas are similar to a tariff in that they limit the demand for imports ( olander, !"1"#. $he difference is the imports are limited %y 3uantity rather than a tax. $he affects of tariffs and 3uotas on the exporter of the goods is larger than that of the importer. $he exporter is essentially stifled in the amount of goods they can export there%y restricting the exporting country)s economy. $he intent %ehind tariffs and 3uotas is to increase the demand for domestic goods while decreasing that of foreign. $his can %uild the domestic economy %ut if it is not done carefully it can adversely affect exports which will create a lull in the domestic economy as well.

$ariffs create a much larger amount of revenue for the government than that of a 3uota. 5ince a 3uota is a limit on goods it does not generate revenue, however a tariff is a tax, which generates revenue. $his revenue makes a tariff a much more via%le option to the government than that of a 3uota.

*eference olander, +. . (!"1"#. ,acroeconomics (-th ed.#. .oston, ,(/ ,c0raw1 Hill2'rwin.