Suppose that you are given the following model for the goods market: C=100 +0.4(Y-T), I=20+.1 Y-200r, G=400, X=200 +0.2Y*-10e, IM=300 +0.3Y+10e and you know that r = 2%, Y*=1,500, e=1 and T =50. Note: e= real exchange rate. The equation for the demand for domestic goods (Z) is and the multiplier for this economy is If the economy were closed, the equation for the demand for domestic goods (Z') would be and the multiplier for the closed economy would be

Suppose that you are given the following model for the goods market: C=100 +0.4(Y-T), I=20+.1 Y-200r, G=400, X=200 +0.2Y-10e, IM=300 +0.3Y+10e and you know that r = 2%, Y=1,500, e=1 and T =50. Note: e= real exchange rate. The equation for the demand for domestic goods (Z) is and the multiplier for this economy is If the economy were closed, the equation for the demand for domestic goods (Z') would be and the multiplier for the closed economy would be

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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Suppose the foreign exchange market is characterized by the following equations: Qd = 12.5 – 1.25R Qs = 3.5 + 1.25R where Qd is the demand function for foreign exchange, Qs is supply function of foreign exchange, and R is exchange rate in units of domestic currency per unit of foreign currency (quantity is in million units of foreign currency). ===================== The foreign exchange market described above is Select one: stable unstable unpredictable none of the above
Assume that the price of the same pair of shoes is 80 Canadian dollars (CAD) in Canada, 60 euros (EUR) in Germany, and 75 US dollars (USD). Assume that the nominal exchange rates are as follows: 0.85 USD/CAD, and 0.6 EUR/CAD. a) Calculate the real exchange rate between Germany and Canada, and that between the US and Canada. Show your work. b) How can you make the highest profit in this case. Show your work. (note that you might have more than one way to make profit in this scenario, so make sure to choose the one that yields highest profit) c) Assume that the prices of the shoes are still the same, however assume now that purchasing power parity holds. Compute the EUR/CAD and USD/CAD nominal exchange rates. Show your work. d) Given the assumptions in part c) above, is it possible to make profit in this case? Explain.
2) Exchange rates and interest rates are connected through the parity conditions. Let the New Zealand interest rate be 5% per annum, the US interest rate be 10% per annum, the spot exchange rate be 0.8USD/1 NZD, and the one year forward exchange rate to be 0.85USD/1 NZD. a) What is the return, in NZD, a New Zealand financial trader would get if they invested 1 NZD in New Zealand? b) What is the return, in NZD, an New Zealand financial trader would get if they invested 1 NZD in the US? [Hint: you'll have to exchange that NZD for USDI] c) As you should find, the values given mean the parity condition does not hold. Given the interest rates are fixed, what will happen to the value of the spot exchange rate now? Think about this in terms of demand and supply for the NZD in the FOREX market, and you may draw out a diagram if you wish. d) Now repeat c) for the change in value of the forward exchange rate.
A country's economy is described with the following parameters: Y=9000, G=1500, T=500, C=300+(1/2)(Y-T), I=2500-30r, NX=1200-150Excangerate, and r is 11 (world interest rates). Find equilebrium exchange rate approximately for this country. Select one: a. 5.80 b. 2.80 C. 7.13 d. 8.00 e. 9.80
At the start of 1996, the annual interest rate was 8 percent in the United States and 4.8 percent in Japan. The exchange rate was 110 yen per dollar at the time. Mr. Jorus, who is the manager of a Bermuda-based hedge fund, thought that the substantial interest advantage associated with investing in the United States relative to investing in Japan was not likely to be offset by the decline of the dollar against the yen. He thus concluded that it might be a good idea to borrow in Japan and invest in the United States. At the start of 1996, in fact, he borrowed ¥1,000 million for one year and invested in the United States. At the end of 1996, the exchange rate became 120 yen per dollar. How much profit did Mr. Jorus make in dollar terms?
Assume that you are studying exchange rates between India and the US. Assume that the equilibrium exchange rate in India is 76 Indian rupees per US dollar. Now suppose that the inflation rate falls in India. Which of the following choices shows a change we would expect to see in the Indian forex market? The demand for the US dollar would rise, leading to a depreciation of the Indian rupee. The demand for the Indian rupee would increase leading to an appreciation of the US dollar. The supply of the Indian rupee would rise leading to an appreciation of the Indian rupee. The supply of the US dollar would rise leading to an appreciation of the Indian rupee
2. Consider the following version of Mundell- Fleming model under flexible exchange rates: S(Y) = I(i) + G + X(Y*,e)–V(Y,e).... (1) L(Y,i) = M ..... .(2) %D X(Y*,e) = V (Y,e)+ F(i) = 0. . .(3) All functions have their usual meanings. Equation (1) is the IS-function; equation (2) is the LM- function and equation (3) is the balance of payments function. Y* is foreign output. The following parameter restrictions apply: 0 0; X. > 0;Vy > 0; V. 0; L, 0. Y a) Determine and provide economic intuition for the signs and magnitudes of the following multipliers (Assume the BP curve is upward sloping): i) dY/dG ii) dY/dY* iii) de/dY*. (b) Compare the value of dY/dG when capital mobility is perfect to its value when the BP curve is vertical. (c) Determine and provide economic intuition for the sign of dY/dM. What is the limiting value dY/dM when the BP curve is becomes vertical? Redo for the case when the BP is horizontal. Use economic intuition to explain your answers.
It is possible to assert that the exchange rate is endogenous in the equation system nx = c1 + c2 y + c2 ex + u, where nx is net exports, y is gross domestic product, and ex is real exchange rate. Defend this assertion.
Assume you are a trader with Deutsche Bank. From the quote screen on your computer terminal, you notice that Dresdner Bank is quoting EUR/USD at 1.2459 and Credit Suisse is offering USD/CHF at 0.8850. You learn that UBS is making a direct market between the Swiss franc and the euro, with a current EUR/CHF of 1.1048. (Ignore bid-ask spreads for this problem.) Assume you have $5,000,000 with which to conduct the arbitrage. What is the EUR/CHF rate that eliminate triangular arbitrage? (X.XXXX)
Suppose that the US interest rate is 5.4% per annum and the interest rate in Japan is 2.8% per annum. The value of the US dollar in the spot market is ¥74 what must the forward exchange rate be (yen per US dollar) for There to be no risk less profit? (Enter the numerical value only rounding to one decimal place) The forward rate you calculate above will be different and different from the spot rate explain why it cannot be the same
Chapter 6 addressed the effect of transfers between countries, such as the indemnity imposed on Germany after World War I. Suppose a transfer occurs involving Poland and the Czech Republic. The equation given below shows the determination of the long-run nominal zloty/koruna exchange rate, Ez/k, as a function of the real zloty/koruna exchange rate, qz/k• and the nations' long-run price levels. (Note: the zloty (z) is the currency of Poland (P) and the koruna (k) is the currency of the Czech Republic (C). Pp and Pc are, respectively, the price levels in Poland and the Czech Republic.) Ez/k = 9z/k* (Pp/Pc) If a permanent transfer from the Czech Republic to Poland occurs, the nominal zloty/koruna exchange rate, E,/k will O A. depreciate since the transfer will decrease Pp relative to Pc. O B. depreciate since the transfer will depreciate qz/k Oc. appreciate since the transfer will appreciate qz/k OD. depreciate since the transfer will depreciate q_/k and decrease Pp relative to Pc.
Consider the simultaneous equilibrium in the US money market and the foreign exchange market. In this problem we will analyze the effect of a decline in the future expected exchange rate (expected (E$/€), i.e. expected dollar appreciation. The figure on the right shows the return on dollar deposits as a function of the dollar/euro exchange rate E$/€. 1) Using the 3-point drawing tool, draw the line representing the dollar return on euro deposits. Label this line 'RET-€1'. 2) Using the 3-point drawing tool, draw a new line on the same graph representing the dollar return on euro deposits as the future expected exchange rate falls, and label it 'RET-€2'. Carefully follow the instructions above and only draw the required objects.