Question
I am very confused, would someone help me? Fill in blank or choose one from the underlined part. Show your work for partial credit. 1.
I am very confused, would someone help me?
Fill in blank or choose one from the underlined part. Show your work for partial credit. 1. (4 points) The Swiss franc has a floating exchange rate with the U.S. dollar. Today, the interest rate on one-year Swiss bonds denominated in Swiss francs is 6 percent, and the interest rate on one-year U.S. bonds denominated in U.S. dollars is 6 percent. a. If uncovered interest parity holds between Swiss francs and U.S. dollars, what is the spot exchange rate that investors are expecting in one year? Now, the U.S. money supply unexpectedly increases by 10 percent, which is considered a permanent. b. What is likely to be the effect on the spot exchange rate? c. Also, in your answer address short-run changes in the exchange rate as well as long- run changes. 2. (4 points) Suppose the Chinese government pegs the yuan to the U.S. dollar. What could the Chinese central bank do to prevent depreciation of the yuan against the dollar in the foreign exchange market? i a. It would raise / lower interest rates to discourage exports to the United States. b. It would increase /reduce its official reserve holdings by buying / selling dollars in the foreign exchange market. c. It would buy / sell yen and buy / sell dollars in the foreign exchange market. 3. (4 points) International capital flows are associated with benefits and costs. Among costs, they may cause macroeconomic instability. Discuss it briefly. 4. (10 points) Choose whether each of the following statements is true or false. Then briefly explain your answer. a. If member countries are subject to asymmetric shocks, common monetary policy will be appropriate. b. For the fixed rate to be sustained, a country may have an inflation rate that is much above (or below) the inflation rate(s) of its partner(s). c. A domestic monetary shock is less disruptive with floating exchange rates. d. If foreign capital is highly responsive to changes in interest rates, then domestic spending shocks are less disruptive with fixed exchange rates. e. With floating exchange rates, the transmission of business cycles through foreign trade and repercussion is less than with fixed exchange rates. f. International capital-flow shocks have domestic effects under fixed exchange rates but not under floating exchange rates.
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