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Respond to Critical Thinking and Discussion Question 6 in Ch

Respond to Critical Thinking and Discussion Question 6 in Ch

Respond to Critical Thinking and Discussion Question 6 in Chapter 11.To successfully complete this discussion board, the student is to make two postings. The postings are to be made early enough to allow for comments from other students. (10 points maximum)First posing: Your initial response to the discussion board questions Second posting: Response to another student’s initial response to the discussion board questions .posst 1(question):a) What will happen to the value of the U.S. dollar if oil producers decide to invest most of their earnings from oil sales in domestic infrastructure projects?b) What factors determine the relative attractiveness of the dollar, euro, and yen denominated assets to oil producers flush with petrodollars? What might lead them to direct more funds towards non-dollar denominated assets?c) What will happen to the value of the dollar if OPEC members decide to invest more of their petrodollars towards non-dollar assets, such as euro denominated stocks and bonds?d) In addition to oil producers, China is also accumulating a large stock of dollars, currently estimated to total $1,000 billion by the end of 2006. What would happen to the value of the dollar if China and oil producing nations all shifted out of dollar denominated assets at the same time? What would be the consequences for the United States economy?post 2 reply:a) What will happen to the value of the U.S. dollar if oil producers decide to invest most of their earnings from oil sales in domestic infrastructure projects?If oil-producing countries decide to invest their earnings in domestic infrastructure, they are expected to see economic growth and increased imports. Downward pressure is inevitable as petrodollars are invested in local communities or sold, but the expected increase in import demand from economic growth will increase demand for dollars.b) What factors determine the relative attractiveness of the dollar, euro, and yen denominated assets to oil producers flush with petrodollars? What might lead them to direct more funds towards non-dollar denominated assets?The relative attractiveness of investments denominated in dollars, euros or yen depends on expected returns and risk indices. Therefore, when considering different currencies, the most important factor is the expected change index of exchange rate. For example, when the euro is expected to depreciate against other currencies, other things being equal, assets denominated in other currencies may be more attractive.c) What will happen to the value of the dollar if OPEC members decide to invest more of their petrodollars towards non-dollar assets, such as euro denominated stocks and bonds?If oil producers switch investments from other currencies to euro-denominated assets, they will convert other currencies, such as dollars, into euros. This will lead to an increase in the supply of dollars in overseas markets, which will lead to a decrease in the price of dollars. Conversely, if oil producers increase their dollar reserves, oil prices will rise, and I expect the pressure on the dollar to decrease as OPEC members decide to sell dollars and invest in non-dollar denominated assets. Just like bonds denominated in euros.d) In addition to oil producers, China is also accumulating a large stock of dollars, currently estimated to total $1,000 billion by the end of 2006. What would happen to the value of the dollar if China and oil producing nations all shifted out of dollar denominated assets at the same time? What would be the consequences for the United States economy?If oil producers and China decide to pull out of dollar-denominated assets at the same time, the dollar could depreciate at a breakneck pace. This would have a huge impact on the us economy. Then, as demand for dollar-denominated bonds slumps, some positive benefits, such as increased export competitiveness, will be drowned out by a surge in interest rates. And investors may choose not to invest because of the high risk of new industries, which will make it difficult for enterprises to raise funds and slow down economic growth. As the depreciation of the us dollar reduces the purchasing power of the us dollar, imported products will become very expensive relative to the American society, and the rise in the price level of goods will lead to inflation. It could eventually lead to a financial meltdown.

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