1. Analyze the dynamics of the U.S. current account data (U.S. exports and imports of goods, services and unilateral transfers) over the past five years. Use the Bureau of Economic Analysis website http://www.bea.gov/international/index.htm , as well as FRED. What have been the major factors contributing to the increase in U.S. exports over the past five years? What have been the main factors contributing to the increase in U.S. imports?

1. Review the paper by Orlowski, L.T, 2021. The 2020 Pandemic: Economic repercussions and policy responses. Review of Financial Economics39(1), 20-26. January 2021.https://doi.org/10.1002/rfe.1123

Based on your examination of this study, answer the following questions:

a. What are the major economic consequences of the present global outbreak of coronavirus?

b. Why did the Federal Reserve have to respond to the pandemic crisis with monetary easing?

c. What has been a fiscal policy response?

1. 
   
2. Briefly explain the Interest Rate Parity theory of exchange rate determination. Discuss whether this theory is confirmed by examining the relationship between the USD value of the euro (EUR) and the differential between US and German long-term interest rates. For this purpose, download to a single Excel file from the FRB of St. Louis FRED database:
3. 
   
4. The monthly series of the USD to one EUR for the sample period January 1999 - January 2023, data code: EXUSEU
5. 
   
6. 10-year US Treasury Note yield for the same sample period, code: GS10
7. 
   
8. 10-year German Government bond yield for the same sample period, code: IRLTLT01DEM156N.
9. 
   

Attached graphs showing the path of the exchange rate and the path of the US vs German government bond yields. Discuss the analytical result.

1. The spot rate of the British Pound (GBP) in USD terms was 1.216 on March 14, 2023 at 4:00pm (EST) and the 90-day forward rate was 1.219, based on quotes fromwww.fxempire.com . Calculate the annualized forward premium (or discount) of the GBP in USD terms. Briefly explain what economic factors decide about the obtained forward premium (or discount).

1. Suppose an investment fund manager considers investing $10,000,000 either in one-year (1Y) US Treasury note or in a corresponding UK Government one-year bond (UK 1Y Gilt). The UK investment is covered with a one-year forward contract. The current yield on a 1Y US Government bond is 4.44% (+0.0444), while the yield on a 1Y UK bond is 3.88% (0.0388) on March 14, 2023 (at 4:00pm EST, Bloomberg data). The GBP in USD spot rate is 1.216 and the 1Y forward rate is 1.221.

1. 
   
2. Compute the one-year USD return on investment in the US Government bond.
3. 
   
4. Compute the one-year USD return on investment in the UK Government bond, adjusted for the forward to spot rate ratio.
5. 
   

(c) Which of the two investment alternatives is more profitable? Explain why.EC316 International Economics Dr. Orlowski

Problem Set #2

Submit hard copies of your answers by Monday, April 3, 2023

1. Analyze the dynamics of the U.S. current account data (U.S. exports and imports of goods, services and unilateral transfers) over the past five years. Use the Bureau of Economic Analysis website http://www.bea.gov/international/index.htm , as well as FRED. What have been the major factors contributing to the increase in U.S. exports over the past five years? What have been the main factors contributing to the increase in U.S. imports?

1. Review the paper by Orlowski, L.T, 2021. The 2020 Pandemic: Economic repercussions and policy responses. Review of Financial Economics39(1), 20-26. January 2021.https://doi.org/10.1002/rfe.1123

Based on your examination of this study, answer the following questions:

a. What are the major economic consequences of the present global outbreak of coronavirus?

b. Why did the Federal Reserve have to respond to the pandemic crisis with monetary easing?

c. What has been a fiscal policy response?

1. 
   
2. Briefly explain the Interest Rate Parity theory of exchange rate determination. Discuss whether this theory is confirmed by examining the relationship between the USD value of the euro (EUR) and the differential between US and German long-term interest rates. For this purpose, download to a single Excel file from the FRB of St. Louis FRED database:
3. 
   
4. The monthly series of the USD to one EUR for the sample period January 1999 - January 2023, data code: EXUSEU
5. 
   
6. 10-year US Treasury Note yield for the same sample period, code: GS10
7. 
   
8. 10-year German Government bond yield for the same sample period, code: IRLTLT01DEM156N.
9. 
   

Attached graphs showing the path of the exchange rate and the path of the US vs German government bond yields. Discuss the analytical result.

1. The spot rate of the British Pound (GBP) in USD terms was 1.216 on March 14, 2023 at 4:00pm (EST) and the 90-day forward rate was 1.219, based on quotes fromwww.fxempire.com . Calculate the annualized forward premium (or discount) of the GBP in USD terms. Briefly explain what economic factors decide about the obtained forward premium (or discount).

1. Suppose an investment fund manager considers investing $10,000,000 either in one-year (1Y) US Treasury note or in a corresponding UK Government one-year bond (UK 1Y Gilt). The UK investment is covered with a one-year forward contract. The current yield on a 1Y US Government bond is 4.44% (+0.0444), while the yield on a 1Y UK bond is 3.88% (0.0388) on March 14, 2023 (at 4:00pm EST, Bloomberg data). The GBP in USD spot rate is 1.216 and the 1Y forward rate is 1.221.

1. 
   
2. Compute the one-year USD return on investment in the US Government bond.
3. 
   
4. Compute the one-year USD return on investment in the UK Government bond, adjusted for the forward to spot rate ratio.
5. 
   

(c) Which of the two investment alternatives is more profitable? Explain why.EC316 International Economics Dr. Orlowski