11.Using a figure describing both the U.S. money market and the foreign exchange market, analyze the short-run effects of a decrease in domestic real GNP on the dollar/euro exchange rate. Clearly illustrate in the graph (correctly labeling axes and curves) and explain briefly what causes the curves to shift. What happens to the value of the dollar?

12. A British sweater costs 75 pounds in London. An American jean costs $80 in Los Angeles. At an exchange rate of 0.76/$, what is the price of a sweater in terms of a jean? All else equal, how does this relative price change if the dollar depreciates to 0.50/$? Compared with the initial situation, has a jean become more or less expensive relative to a sweater? If consumers in the U.S. and the UK view a sweater and a jean as perfect substitutes, what would happen to the demand for the jean after this relative price change? (Whenever necessary, round your numbers to two decimal places.)

13. In December 2015, the euro exchange rate with the RON (the Romanian currency) is 0.27 /RON. Over the year 2016, the Romanian inflation rate is 6% and the Euro area inflation rate is 4%. If the exchange rate at the end of the year 2016 is 0.25 /RON, does the euro appear to be overvalued, undervalued, or at the PPP level? Why? Explain each step of reasoning clearly.

14. Suppose the EURO/USD spot rate today is 0.90/$, the U.S. interest rate is 4.5% and the euro interest rate is 5%. You log onto your electronic brokerage account and find that the current quote for the 360-day forward rate of USD/EURO is $1.125/. Is there an arbitrage opportunity? If so, how much profit would you be able to receive if you invested $100? What do you expect to happen amongst your fellow traders? (Whenever necessary, round your numbers to three decimal places.)