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Contents

xiii

CHAPTER 14

Exchange-Rate Adjustments and the Balance of Payments ................. 441

Effects of Exchange-Rate Changes on Costs and Prices ....................................... 441

Japanese Firms Outsource Production to Limit Effects of Strong Yen ................. 444

Partial Exchange Rate Pass-Through .......... 453 Invoice Practices ................................... 454 Market Share Considerations ................... 454 Distribution Costs ................................. 455

Cost-Cutting Strategies of Manufacturers in Response to Currency Appreciation .............. 445

Why a Dollar Depreciation May Not Close the U.S. Trade Deficit ..................... 456

Appreciation of the Yen: Japanese Manufacturers ...................................... 445

Appreciation of the Dollar: U.S. Manufacturers ...................................... 447

Will Currency Depreciation Reduce a Trade Deficit? The Elasticity Approach .......... 447

J-Curve Effect: Time Path of Depreciation ...... 451 Exchange Rate Pass-Through ....................... 453

The Absorption Approach to Currency Depreciation ............................................ 456

The Monetary Approach to Currency Depreciation ............................................ 458

Summary ................................................ 458 Key Concepts & Terms .............................. 459 Study Questions ....................................... 459

CHAPTER 15

Exchange-Rate Systems and Currency Crises ..................................... 461

Exchange-Rate Practices ............................. 461

Choosing an Exchange Rate System: Constraints Imposed by Free Capital Flows .................... 462

Fixed Exchange-Rate System ....................... 464 Use of Fixed Exchange Rates .................... 464 Par Value and Official Exchange Rate ........ 465 Exchange-Rate Stabilization ..................... 466 Devaluation and Revaluation ................... 467

Exchange-Rate Stabilization and Monetary Policy .................................... 476

Is Exchange-Rate Stabilization Effective? ..... 478 The Crawling Peg ..................................... 479 Currency Crises ........................................ 480

Sources of Currency Crises ....................... 482 Speculators Attack East Asian Currencies .... 484 Capital Controls ....................................... 484

Bretton Woods System of Fixed Exchange Rates ..................................... 469

Should Foreign-Exchange Transactions Be Taxed? ........................................... 485

Is China a Currency Manipulator? ........................................ 470

Increasing the Credibility of Fixed Exchange Rates ........................................ 486

Floating Exchange Rates ............................. 471 Achieving Market Equilibrium .................. 471

Trade Restrictions, Jobs, and Floating Exchange Rates ..................................... 473

Currency Board .................................... 487

For Argentina, No Panacea in a Currency Board .................................... 489

Dollarization ........................................ 489

Arguments for and Against Floating Rates ...................................... 473

The Global Economic Crisis of 20072009 ........................................... 492

Managed Floating Rates ............................. 474

Managed Floating Rates in the Short and Long Terms ................................... 475

Summary ................................................ 493 Key Concepts & Terms .............................. 494 Study Questions ....................................... 494

Copyright 2010 Cengage Learning. All Rights Reserved. May not be copied, scanned, or duplicated, in whole or in part. Due to electronic rights, some third party content may be suppressed from the eBook and/or eChapter(s). Editorial review has deemed that any suppressed content does not materially affect the overall learning experience. Cengage Learning reserves the right to remove additional content at any time if subsequent rights restrictions require it.

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