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(8 marks) Assume that the capital market is perfectly mobile in and between New Zealand (NZ) and the United Kingdom (UK). Both countries pursue a
(8 marks) Assume that the capital market is perfectly mobile in and between New Zealand (NZ) and the United Kingdom (UK). Both countries pursue a flexible exchange rate regime. Consider bonds with one-year maturity issued by each government. The New Zealand bond pays 100 New Zealand dollars (NZD) in one year and currently sells for 96.15 NZD. The UK bond pays 100 British pounds (GBP) in one year and currently sells for 98.04 GBP. The NZ nominal exchange 2. rate is 1 NZD 0.55 GBP. (2 marks) (b) Using the above information, derive and calculate the expected exchange rate implied by (2 marks) (c) Suppose that the central bank in the UK announced a contractionary open market operation, following which the current price of the UK bond drops by 3%. Right at this news, will (2 marks) (d) Continue from part (c), assume that no other events occur. Soon the interest parity condition will hold again in a new equilibrium. Does the NZ nominal exchange rate depreciate, appreciate, or remain unchanged? Briefly explain, also provide calculations if (2 marks) (a) Calculate the nominal interest rate on each of the two bonds. the uncovered interest parity condition. the demand for NZ bond go up? Briefly explain. you have them
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