A)
At the time of the news article, the U.S. dollar had depreciated. The short- run effect of this depreciation was to make U.S. goods and services and U.S. properties less expensive for foreigners. Mr. Reddy, among others, was trying to take advantage of the lower price by purchasing investment properties and development opportunities in the United States.
B)
Mr. Reddy’s actions increase the demand for U.S. dollars. If others take similar actions, the demand for U.S. dollars increases. If U.S. residents also begin to believe that buying U.S. investment properties offers a profitable opportunity, the supply of U.S. dollars decreases as the U.S. residents purchase U.S. properties rather than foreign properties. In addition, Mr. Reddy is expecting that the dollar will appreciate back to its previous level. If others have the same expectation, once again the demand for dollars increases and the supply of dollars decreases. On both counts, the dollar appreciates. This change in the exchange rate resembles a self-fulfilling prophecy because market participants expect the dollar to appreciate and, as a result, it does so. Of course, the fundamental reason for the change is the shift in people’s beliefs.
3)
A) TheChinesegovernmentmodifieditscurrencypolicyonJuly21,2005.It announced that the yuan’s exchange rate would become “adjustable, based on market supply and demand with reference to exchange rate movements of currencies in a basket” (it was later announced that the composition of the basket includes the dollar, the yen, the euro, and a few other currencies). It does not appear that the Chinese intended to allow these exchange rate movements to accumulate, however, because the yuan has appreciated only about 1% against the dollar since the July 2005 reforms were initiated (through April 3, 2006), according to the Bank of China. It also does not appear that the other