Problem 4. Exchange Rates. 8.5 National Currency to US Dollar Exchange Rate 350 - Lira 300 Lima 8 Euro 7.5 7 250 01-Jan-2021: 7.43 M TRY/USD Index 2015 = 100 200 6 5.5 03-Jan-2020: 150 5.97 5 4.5 100 Jan 2018 Jan 2019 Jan 2020 Jan 2021 50 2010 2012 2014 2016 2018 2020 Figure 2: Exchange Rates. Source: retrieved from FRED (a) Given the information in Figure 2. did the Turkish Lira depreciate or appreciate from the Turkish perspective between January 2020 and January 2021? Calculate the percentage change of the spot rate for 2020. Comparing to the EUR/USD exchange rate, can you say something about the volatility of the Lira? (c) A pistachio baklava in Turkey costs 1.5 Lira (and assume it does not change). How many baklava would a U.S. tourist visiting Turkey be able to buy with $50 on the 3rd of January 2020 compared to the 1st of January 2021? Is the baklava becoming more or less expensive in dollar terms? (d) Plot the demand curve for Lira (think of the amount of Lira the US tourist is demanding in the baklava example at the two exchange rates). What happens to the demand curve if U.S. income has risen and 4 the tourist now has $60 to spend on baklava in Turkey? (No calculations needed, provide a graphical argument for full credit.) (e) Turkish inflation is expected to reach 18% this year. At the same time, the U.S. inflation rate could be at 5%. Using the concept of Relative Purchasing Power Parity, how do you expect the exchange rate to react? Does this mean that the lira is likely to appreciate relative to the dollar? Problem 4. Exchange Rates. 8.5 National Currency to US Dollar Exchange Rate 350 - Lira 300 Lima 8 Euro 7.5 7 250 01-Jan-2021: 7.43 M TRY/USD Index 2015 = 100 200 6 5.5 03-Jan-2020: 150 5.97 5 4.5 100 Jan 2018 Jan 2019 Jan 2020 Jan 2021 50 2010 2012 2014 2016 2018 2020 Figure 2: Exchange Rates. Source: retrieved from FRED (a) Given the information in Figure 2. did the Turkish Lira depreciate or appreciate from the Turkish perspective between January 2020 and January 2021? Calculate the percentage change of the spot rate for 2020. Comparing to the EUR/USD exchange rate, can you say something about the volatility of the Lira? (c) A pistachio baklava in Turkey costs 1.5 Lira (and assume it does not change). How many baklava would a U.S. tourist visiting Turkey be able to buy with $50 on the 3rd of January 2020 compared to the 1st of January 2021? Is the baklava becoming more or less expensive in dollar terms? (d) Plot the demand curve for Lira (think of the amount of Lira the US tourist is demanding in the baklava example at the two exchange rates). What happens to the demand curve if U.S. income has risen and 4 the tourist now has $60 to spend on baklava in Turkey? (No calculations needed, provide a graphical argument for full credit.) (e) Turkish inflation is expected to reach 18% this year. At the same time, the U.S. inflation rate could be at 5%. Using the concept of Relative Purchasing Power Parity, how do you expect the exchange rate to react? Does this mean that the lira is likely to appreciate relative to the dollar
