Questions and Answers of Exchange Rates International

Derive equation (3.12) formally, making clear any assumptions you need along the way.
The bubble component, Bt, has to satisfy condition (12.23) to be consistent with rationality. Write down a time series which satisfies this condition and, by considering its parameters, say what you
Generalise the model in this chapter to incorporate a gold forward market in which households can try to increase their period 1 consumption by signing contracts at time 0 to buy G units
A variable risk premium has often been cited by economists as a possible explanation for the apparent failure of the unbiasedness hypothesis to fit the facts. Looking at the risk premium model, as it
Is the analysis in Chapter 11 consistent with a situation in which exchange rates follow a chaotic process? If an exchange rate process is chaotic, can the forward rate still be unbiased?
Given the following data:Current US 1-year interest rate: 6%Current exchange rate $1.00 = €0.90Expected exchange rate one year from now: $1.00 = €0.85a) What is the equilibrium Eurozone interest
If the evidence suggested the exchange rate process is chaotic, are there any implications for the rest of the economy?
If currency markets generate exchange rates that follow a chaotic process, does that mean they fail to function adequately? Would it mean some kind of regulation is needed?
What are the advantages and disadvantages of setting broad rather than narrow fluctuation bounds for a fixed exchange rate?
Economists distinguish between broad money and narrow money. This is why, if you look at monetary statistics, you will find time series for M1, M2, M3….. each corresponding to a different
Generalise the model in this chapter to allow for a bond market, in which households can hold either or both of two bonds with fixed nominal ﴾face﴿ value: a domestic bond, with fixed price B,
What problems might crop up in trying to exploit the following apparent arbitrage opportunities:a) An international brand of suntan lotion on sale at €3.95 in shops in Spanish holiday resorts and
Would you expect the Law of One Price to apply in the case of the following products and, if not, why not?a. A barrel of crude oilb. A litre of petrolc. A Real Madrid football club shirtd. A share of
The bubble mechanism is sometimes called “the bigger fool” view of market behaviour. Can you explain why?
On 04/08/05, the UK monetary policy authorities cut short term interest rates by 0.25%, but the exchange rate of the Pound barely moved during the day. Can one therefore deduce that interest rates
a) If the discovery of a new natural gas field in the Norwegian sector of the North Sea is announced on a Saturday night when the currency markets are more or less closed, would you expect the value
a. Could the forward market be efficient even if agents do not have rational expectations?b. If agents have rational expectations, does it follow that the forward rate must be an unbiased forecast of
Can the market’s expectation at t+2 of the exchange rate at t+N be less accurate than its expectation at t+1 of the exchange rate at t+N?
Can rational agents ever be made worse off by having more information?
On 8th December 2014, you foresee the following possible exchange rates for Renminbi and Thai Baht:Expected Future StateProb(State)RMB per $USTHB per $USState 10.256.10032.000State
If Mr A and Mrs B are both rational, must they share the same expectations?
a) In what sense is the model in Chapter 10 a general equilibrium model? Are any of the models in the earlier chapters general equilibrium models?b) What are the advantages and disadvantages of
Prove that in the Dornbusch model the exchange rate overshoots in response to a change in the money stock.
The exchange rate of the British Pound against the dollar since the global financial crisis has followed this path:Average for month:GBP per $USMar-080.4995Mar-090.70607Dec-140.63779Is this evidence
Given that the demand for money is reduced by a smaller k at time T, sketch the time series projections of p, r, m-p and s. Is there any difference compared with the case of an increase in money
Do you think the Mundell-Fleming model has any relevance to the current situation of:a. The UK?b. Germany?c. Greece?
a. The assumption is sometimes made that capital flows are infinitely elastic. What do you think this means? Do you think it is a realistic assumption for a small country? Do you think it is a
Recall that the money supply equation in equation (5.9) relates only to the monetary base or stock of high-powered money. Suppose a country has no domestic credit (i.e. DC = 0), so that its monetary
Generalize the two-country model of a floating exchange rate to take account of the distinction between traded and nontraded goods. Assume that the price index in each country is:where PT, PN are
For some years now, China, Japan and some of the states in the Persian Gulf have had extremely high reserves of US dollars. How far can you explain this state of affairs using the simple Monetary
If a small country fixes the exchange rate of its currency against the dollar, how is its money stock determined? What about its inflation rate?
In the context of the Monetary Model, does currency depreciation cause inflation? Or does inflation cause currency depreciation? Or does neither statement make sense?
“Currency depreciation is always and everywhere a monetary phenomenon”. Is this a fair summary of the Monetary Model?
Suppose a country’s monetary authority decided it wanted to keep a fixed relationship between its domestic money stock and its foreign exchange reserves. This would be a version of what is known as
Trace the impact on commercial and central bank balance sheets of the following:a. A German tourist paying her hotel bill in Italyb. A Chinese tourist paying her hotel bill in ItalyIs your answer
a. Generalise the model in Sections 3.7.1 and 3.7.2 to allow for i) an inflation risk premium, l, l* in each country’s money market and ii) a risk premium, r, in the UIRP relationship. Then show
Today’s FT is quoting the following rates for the $HK against the €.
Given the following data for 13th March 2007:The interest rate on 12-month German T-bills : 4.00 %The interest rate on 12-month Japanese T-bills : 0.61%Spot exchange rate : €1.00 =
Given the following information: Spot rate of Swiss Franc ………………………………………………………………….$ 0.80The forward rate of Swiss Franc
If a major international bank is offering Yen deposits yielding 1% p.a. when at the same time dollar deposits are yielding 7% p.a., and the spot exchange rate is $1.00 = Yen 110(a) what can you
If the current exchange rate is £1.00 = $1.75, the one-year forward rate is £1.00 = $1.85, and the interest rate on UK £ deposits is 8% p.a., what is the riskless dollar-denominated return which
Given the following data:UKJAPANYEAR ﴾AVGE﴿CPIPPICPIPPI20001001001001002007112.5112.698.1101.6where CPI and PPI denote consumer and producer price indices respectively, and that the average
Suppose a car in the Mercedes Benz range costs €28,000 to produce and is currently selling for €40,000 in Germany, when the exchange rate is €1.00 = $1.25. If the car is on sale for
Given the following data about two countries, A and B:Weight in index for country :Current Index level for countryABABFood.22.3584174Other Goods.32.4177233Services.46.242861221.001.00The base year is
A trader finds that a particular generic (i.e unbranded) antibiotic is available in Germany at a price of €0.50 per unit, compared to a minimum price of $0.80 per unit in the USA. The current
A UK power station relies on imported coal as an input. A Chinese coal mine can supply coal for RMB266 per ton from the docks at Tianjin, while a Polish supplier is offering the same grade of coal
(a) Is there a limit to how long a country can sustain a surplus or deficit on its long term capital account?(b) Is there a limit to how long a country can sustain a surplus or deficit on its current
Given the following quotations at two banks:$USBank ABank BBid rate for $HK0.12850.1279Ask rate for $HK0.12920.1284Is there an arbitrage opportunity? If so, how much profit could you make starting
Are the problems involved in fixing an exchange rate the same as those involved in fixing the price of a commodity e.g. petrol?
Does the Bank of England hold Pounds Sterling in its reserves? If not, why not? What about the US Federal Reserve?
a)- Why is nobody interested in the balance of payments of California?b)- Should Americans worry about the size of the deficit in the current account of the US balance of
Many countries have black markets for foreign exchange. What conditions do you think explain why some countries have a black market in foreign currency, while others have none?
Where is the flaw in this logic?“A country’s balance of payments tracks the supply and demand for its currency. Since the balance of payments on capital plus current account is always zero,