HW10/Quiz10

Suppose a bond issued by the European Central Bank and denominated in euros pays 6% per year. Today the exchange rate is 1.35 dollars per euro. It is expected that the exchange rate in one year will be 1.49 dollars per euro. What is the annual dollar return on this​ bond?

(calculate the dollar return which is: ((Real return in euros)+(Exchange rate in future/ exchange rate today)-1)) 16 percent

Suppose that you​ buy, and one year later​ sell, a foreign​ (British) bond under the following​ circumstances: When you buy the bond the exchange rate is ​$2.00 = pound£1. You pay pound£45​ ($90) for the British bond. You sell the bond for pound£50. No interest payment was expected or received. When you sell the​ bond, the exchange rate is ​$1.50 = pound£1. What is your gain or loss in​ dollars?

-$15

A single​ currency, such as the Euro in the​ E.U., is appropriate when countries are seeking to

integrate with each​ other, with the intention of going further than simply implementing free trade in goods.

In​ 2001, the Euro cost just about 90 cents. In​ 2008, the cost of the Euro was almost​ $1.50. This general development means that between 2001 and 2008

the Euro appreciated against the U.S. dollar.

In which market will a company arrange to receive currency for a transaction at a future​ date?

the forward market

The current account will increase if

the real exchange rate depreciates or disposable income goes down

When the dollar is worth less in relation to currencies of other countries ​(for example relative to the Japanese Yen in the diagram to the right​), are you more likely to buy​ American-made or​ foreign-made electronics? Are U.S. companies that manufacture​ semi-conductors happier when the dollar is strong or when it is​ weak? What about an American company that is in the business of importing electronic consumer goods into the United​ States?

American (domestic) products. When the dollar is weaker. When the dollar is stronger.

If the U.S. dollar depreciates in terms of the​ Euro:

American goods would be cheaper for Europeans.

A managed floating exchange rate refers​ to:

An exchange rate that is not​ pegged, but does not float freely.

In a fixed exchange rate​ system, how do countries address the problem of currency market pressures that threaten to lower or raise the value of their​ currency?

If demand​ rises, countries must fill the excess demand for foreign currency by selling their reserves. If demand​ falls, then countries must increase demand by buying up the excess supply with domestic currency.

Under the Bretton Woods​ system, the increase in the U.S. inflation rate would lead​ to:

Inflation in the countries that pegged their currencies to the U.S. dollar.

Due to this change, the U.S. dollar will ____, the Canadian dollar will ______, and the length of the effect will be ______.

The Canadian supply of currency to the U.S. market increases in response to the rise in​ Canada's demand for American exports. This is represented as a shift in the supply curve to the​ right, and there will be a new intersection with the D1 curve. Appreciate, Depreciate, medium run

Under a Gold​ Standard:

The exchange rate is fixed.

A contract that contains a promise that a specified amount of foreign currency will be delivered on the specified date in the future is traded in which of the​ following?

The forward market.

In the debate on fixed versus floating exchange​ rates, the strongest argument for a floating rate is that it frees macroeconomic policy from taking care of the exchange rate. Why is this also the weakest​ argument?

The freeing of monetary policy from the task of maintaining an exchange rate creates a lack of external discipline on monetary policy and leads to an over reliance on inflationary policies to satisfy domestic economic needs.

After the breakdown of the Bretton Woods​ system, the dominant exchange rate regime in the U.S.​ was:

a managed float.

The immediate effect of this shock on the value of the dollar is

depreciation

Suppose the​ dollar-yen exchange rate is 0.014 dollars per yen. Since the base​ year, inflation has been 1 percent in Japan and 6 percent in the United States. What is the real exchange​ rate? In real​ terms, the dollar has appreciated against the yen.

.014(101/106)=0.0133 True

Suppose the U.S.​ dollar-euro exchange rate is 1.1 dollars per​ euro, and the U.S.​ dollar-Mexican peso rate is 0.18 dollars per peso. What is the​ euro-peso rate?

.164 euros per Mexican peso. (0.18/1.1)

The Economist magazine is famous for its publication of the Big Mac index​ -- a table of Big MacTM prices in different countries around the world. The use of the Big Mac allows for a highly standardized product sold throughout the world. Given the following abbreviated​ table: Country PriceBig Mac China Rmb 10 U.K. pound£1.25 U.S. ​$2.50 Suppose that the exchange rate between China and the U.K​ is: Rmb​ (Renminbi) 15​ = pound£1.00 and that the Big MacTM could be used as a standardized commodity​ -- easily transported and not perishable. Complete the​ following: Purchasing Power Parity would imply that the British pound should _______ against the Chinese Renminbi​ (Yuan).

15,000 1,500 1,875 depreciate

Based on the information given in the diagram on the​ right, in which years would you have chosen to visit the Tower of London rather than the Grand Canyon in​ Arizona?

1985 or 2001 (lowest points of graph)

A European washing machine costs 1000 Euros. A U.S. washing machine costs 1000 dollars. If the nominal exchange rate is​ $0.50 per Euro the real exchange rate is

2 European washing machines per U.S. washing machine.

Which of the following would be interested in holding foreign currency to engage in​ transactions? Which of the following would be interested in holding foreign currency to take advantage of investment​ opportunities?

A and D only (A tourist and a manufacturing firm) A portfolio manager

_____ must choose an exchange rate system to determine how prices in the home country currency are converted into prices in another​ country's currency.

Every country

______ must choose an exchange rate system to determine how prices in the home country currency are converted into prices in another​ country's currency.

Every country

Which of the following is NOT a valid argument against a floating exchange rate​ regime?

Floating rates put some countries in a privileged position.

How does a fall in the value of the pound sterling as shown in the diagram to the right affect British​ consumers? How does this fall in the value of the pound affect American​ exporters?

Foreign goods are now relatively more expensive. British consumers are hurt. A weaker currency makes foreign goods​ (U.S.) more expensive to domestic​ (British) consumers. With the price of domestic goods unchanged these imports are now relatively more expensive and British exports are relatively cheaper to foreign consumers. Makes them worse off.

A managed floating exchange rate refers​ to:

n exchange rate that is not​ pegged, but does not float freely.

In​ general, a country whose economy is dependent on an imported resource and whose goal is to minimize the shock that the resource can cause to their economy should adopt an exchange rate system

that allows their currency to float in the market.

If the interest rate on a deposit in Euros is​ 6% per​ year, and the Euro is expected to depreciate against the U.S. dollar by​ 1%, what does the interest parity condition imply about the interest rate on the deposit in U.S.​ dollars?

​5%