1. Indicate whether each of the following creates a demand for, or a supply of, European euros in foreign exchange markets:

1. A U.S. airline firm purchases several Airbus planes assembled in France.
2. A German automobile firm decides to build an assembly plant in South Carolina.
3. A U.S. college student decides to spend a year studying at the Sorbonne in Paris.
4. An Italian manufacturer ships machinery from one Italian port to another on a Liberian freighter.
5. The United States economy grows faster than the French economy.
6. A United States government bond held by a Spanish citizen matures, and the loan is paid back to that person.
7. It is widely believed that the euro will depreciate in the near future.

2. Alpha's balance of payments data for 2006 are shown below. All figures are in billions of dollars. What are (a) the balance on goods, (b) the balance on goods and services, (c) the balance on current account, and (d) the balance on capital and financial account? Suppose Alpha needed to deposit $10 billion of official reserves into the capital and financial account to balance it against the current account. Does Alpha have a balance of payments deficit or surplus? Explain.

3. Explain why the U.S. demand for Mexican pesos is downward-sloping and the supply of pesos to Americans is upward-sloping. Assuming a system of flexible exchange rates between Mexico and the United States, indicate whether each of the following would cause the Mexican peso to appreciate or depreciate:

1. The United States unilaterally reduces tariffs on Mexican products.
2. Mexico encounters severe inflation.
3. Deteriorating political relations reduce American tourism in Mexico.
4. The United States' economy moves into a severe recession.
5. The U.S. engages in a high interest rate monetary policy.
6. Mexican products become more fashionable to U.S. consumers.
7. The Mexican government encourages U.S. firms to invest in Mexican oil fields.
8. The rate of productivity growth in the United States diminishes sharply.

4. Diagram a market in which the equilibrium dollar price of one unit of fictitious currency zee (Z) is $5 (the exchange rate is $5 = Z1). Then show on your diagram a decline in the demand for Zee.

1. Referring to your diagram, discuss the adjustment options the United States would have in maintaining the exchange rate at $5 = Z1 under a fixed exchange-rate system.
2. How would the U.S. balance of payments surplus that is created (by the decline in demand) get resolved under a system of flexible exchange rates?