1. How are percentage changes in a currency’s value measured? Illustrate your answer numerically by assuming a change in the Thai baht’s value from a value of $0.022 to $0.026. Answer:
Percent △ in foreign currency value = st-st-1 st-1 = $0.026-$0.022$0.022 ≈ 18.18%
2. What are the basic factors that determine the value of a currency? In equilibrium, what is the relationship between these factors? Answer:
The basic factors that determine the value of a currency are the Currency demand and the Currency Supply.
In equilibrium, the Currency Demand equals to the Currency Supply.
3. How might the relatively high levels of inflation and interest rates in Thailand have affected the baht’s value? (Assume a constant level of U.S. inflation and interest rates.) Answer:
| Inflation ratesHigh levels of inflation rates * The high level of inflation rates means U.S. people need less baht than before. So, the demand decreases. * The high level of inflation rates means Thailand people need more Baht than before. So, the supply increases.|
| Interest ratesHigh levels of interest rates * The high level of interest rates means U.S. people will need more baht to save in Thailand bank. So, the demand increases. * The high level of interest rates means Thailand people put more money into the bank. So the supply decreases.|
4. How do you think the loss of confidence in the Thai baht, evidenced by the withdrawal of funds from Thailand, affected the baht’s value? Would Blades be affected by the change in value, given the primary Thai customer’s commitment? Answer:
| 1. The value of baht will become cheaper than before.The withdrawal of funds from Thailand * The demand for the baht will decrease.(D→Do) * The equilibrium point will changeFrom the diagram we can see * The value of baht decrease. * The value of baht will become cheaper than before.| 2. Blades will be...