Author Question: The price of a computer in the United States is 1,000. The price of a car in Germany is 10,000 ... (Read 28 times)

bb · **on:** Jun 29, 2018

The price of a computer in the United States is 1,000. The price of a car in Germany is 10,000 euros. The current exchange rate is 0.9 euros per dollar.

a) If a computer is exported from the United States to Germany with no barriers to trade, what will be the price of the computer in Germany? b) If a car is imported to the United States from Germany with no barriers to trade, what will be the price of the car in the United States? c) Suppose the dollar appreciates by 10 percent against the euro. How will the price of a computer exported from the United States change in Germany? d) Suppose the dollar appreciates by 10 percent against the euro. How will the price of a car imported to the United States from Germany change in the United States?

Question 2

What factors affect the demand for money?

What will be an ideal response?

Jevvish · **Reply #1 on:** Jun 29, 2018

Answer to Question 1

a) The price of an American computer in Germany is 1,000 0.9 euros per dollar, which is 900 euros.
b) The price of a German car in the United States is 10,000 euros/0.9 euros per dollar = 11,111.
c) The new exchange rate is 0.9 euros per dollar 1.1 = 0.99 euros per dollar. So the new price of a U.S. computer in Germany is 1,000 0.99 euros per dollar = 990 euros. The price of a U.S. computer in Germany rises by 10 percent.
d) The new price of a German car in the United States is 10,000 euros/0.99 euros per dollar = 10,101. So the price of a German car in the United States falls by about 10 percent.

Answer to Question 2

Four factors influence the demand for money. First is the price level. An increase in the price level increases the nominal demand for money. Second is the interest rate. An increase in the interest rate raises the opportunity cost of holding money and decreases the quantity of money demanded. Third is real GDP. An increase in real GDP increases the demand for money. Fourth is financial innovation. Innovations that lower the cost of switching between money and other assets decrease the demand for money.