Analysis: Suppose a new law stated that individuals could print their own currency. Consider this and answer the following:

- What kind of changes would come about in daily commercial transactions as a result of such a law?
- What forms could this private money assume?
- What would influence an individual to either accept or reject private money?
- What institutions might arise in the free market to help a person decide whether to accept or reject a particular private monetary note?

Assignment: What are the three motives for holding money?
Explain these motives by writing brief scenarios involving your own behavior illustrating each motive. Also depict these motives using a graph.

Answer two of the following questions:

1. What jobs are created through free trade and what jobs are lost when countries restrict free trade?
2. Explain how it is possible that protectionist policies create more unemployment than free trade.
3. Identify the areas in which the U.S. applies protectionist policies.
4. How does the protectionist policies impact relationships with foreign countries, and how have the affected countries retaliated?

Submit tour answers on a word document. Be sure to number the answers as numbered above.

Answer the following questions:

1. Do multinational corporations exploit the host countries that covet the technologies and entrepreneurial skills that the multinationals provide?
2. Does free trade encourage foreign producers to dump their products in domestic markets in a way that hurts the price system?
3. Do these multinational corporations take advantage of lax environmental regulations in host countries?

Lesson 14 International Finance

Let's estimate what happens to the exchange rate between the United States and the imaginary country of Oz.

The ruler of Oz is a totalitarian wizard. Since the economy of Oz is centrally planned, they lack three important ingredients that would make them more effective: free market efficiency, capital investment, and technological progress. An example is that cars in Oz are still being produced with plans that were stolen from a Ford factory in 1952.

In 2000, Oz decided to open its borders to the United States for the first time. It turns out that citizens in the United States are interested in four things that Oz produces: food, hotel accommodations, tourist attractions, and beautiful crystal vases. Citizens in Oz are interested in everything that the U.S. produces, but most of them cannot afford the U.S. dollar because it is too expensive. The evil wizard of Oz needs the U.S. dollar in order to buy weapons and weapon technology.

When citizens from the U.S. travel to Oz, they are forced to exchange money at the border of Oz with the evil wizard, who demands $1 for 10 ozzies. In fact, in order to enter the country, U.S. citizens must exchange $30.00 for every day they are in the country. Once they are in the country, U.S. tourists may obtain more ozzies by exchanging dollars at official exchange banks.

During the first year of open trade in 2000, 1 million U.S. tourists visited Oz for a total of 10 days per person. None of them exchanged money at official exchange banks, except for the amount that they were forced to trade at the border.

1. According to bank records, what was the official supply of U.S. dollars to Oz?

2. According to bank records, what was the official supply of Oz ozzies to the U.S?

In fact, the supply of U.S. dollars to Oz during the year of 2000 was $1 billion. The total U.S. demand for ozzies during the same year was 24 billion ozzies.

3. Explain why a black market for the U.S. dollar exists in Oz.

4. What is the black market exchange rate for the U.S. dollar? (Hint: make sure you subtract the transactions that took place at the official rate before you figure out the black market rate.)

5. A crystal vase costs $50.00 in the U.S. In Oz, it costs 300 ozzies. If a U.S. tourist visits Oz for 3 days and exchanges $90.00 at the official rate and another $90.00 at the black market rate, what is the average cost of the vase for this tourist? How much does the tourist actually spend in dollars for the vase? Did the tourist get a good deal?

6. What would happen to the official exchange rate in Oz if the rate were permitted to fluctuate with the free market?

It turns out that everything is less costly in Oz than the U.S. when you compare actual prices. Crystal vases appear cheap. A hotel room costs $5.00 a night, dinner at a four star restaurant costs $3.00, and drinks are 25 cents. This means that Oz has a comparative advantage over the U.S. in the production of these goods.

7. Assume that the wizard has had a change of heart and needs your advice on how to grow the economy of Oz. What will you advise?

You're reasoning doesn't equate, as you are on the same site

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