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Consider situation in the foreign exchange market on a particular day. The triangular arbitrage condition holds. USD/EUR is 1,09 i.e. by one euro you get
- Consider situation in the foreign exchange market on a particular day. The triangular arbitrage condition holds. USD/EUR is 1,09 i.e. by one euro you get 1,09 US dollars. NOK/EUR is 9,90 i.e. by one euro you get 9,90 NOK. What is the value of USD/NOK i.e. how many US dollars will you get by one Norwegian krona?
- Assume the uncovered interest rate parity holds. In the euro area the one year interest rate is 0% and in Norway 1,5% = 0,015. NOK/EUR rate is 9,90 and thus EUR/NOK rate is 0,1010. What is the expected EUR/NOK rate? Is the euro expected to appreciate or depreciate?
- Assume the purchasing power parity holds. Inflation in the euro area is 2% and global inflation outside the euro area is 0%. What is the expected appreciation or depreciation of the euro in the foreign exchange market?
- Consider the real exchange rate of Finland. Inflation in Finland is 2% and global inflation (countries relevant from the point of view of Finland's foreign trade) is 0%. The external value of the euro is exogenous from the point of view of Finland and it appreciates in the foreign exchange market by 5%. How much does the real exchange rate of Finland change? Does it appreciate or depreciate? Is this good or bad for Finnish exports?
- Let us consider the monetary model of exchange rate determination as explained during the lectures. Assume that the elasticity of money demand with respect to income is 1 and the semi-elasticity with respect to interest rate (bond yield) is 0,5. Consider developments in the euro area and Norway during the forthcoming 5 years. We expect that the ECB boosts monetary expansion by 20% during the 5 year period, cumulative increase in output is expected to be 8% and we expect no change in 5 the year bond yield. Respectively, in Norway monetary expansion is expected to be 10%, cumulative increase in output also 10% and we expect no change in the Norwegian 5 year bond yield. What is the expected inflation in the euro area and in Norway?What is the expected appreciation / depreciation of the euro?
Thanks in advance!
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