Pegged Dollar

The Hong Kong dollar's value is tied to the U.S. dollar. Explain how the following trade patterns would be affected by the appreciation of the Japanese yen against the dollar: (a) Hong Kong exports to Japan and (b) Hong Kong exports to the United States?

Economic Indexing

The Big Mac Price Index computed by the Economist has consistently found the U.S. dollar to be undervalued against some other major currencies, which seems to call for a rejection of the purchasing power parity theory. Explain why the index may not be a valid test of the theory.

High Interest Rates in Mexico

High interest rates are commonly expected to strengthen a country’s currency because they can encourage foreign investment in securities in that country, which results in the exchange of other currencies for that currency. Yet, the peso’s value has declined against the dollar over most years even though Mexican interest rates are typically much higher than U.S. interest rates. Thus, it appears that the high Mexican interest rates do not attract substantial U.S. investment in Mexico’s securities. Why do you think U.S. investors do not try to capitalize on the high interest rates in Mexico?

Managed Float

What is a managed float? What are the disadvantages of freely floating exchange rates that led countries to the managed float system?

Strong vs. Weak Currency

What do you think or can you list the advantages and disadvantages of a strong currency and a weak currency (from the U.S. point of view)?