Question 3

a) Assume that Wakanda's government-debt crisis heightened in 2015 when ordinary citizens rushed to move their money abroad. Two years later, it is reported that the government is not likely to default on its bonds and public confidence is restored. Analyse and explain the effects on the country's interest rate and exchange rate in 2017. Use the three-panel diagram to aid your discussion. (6 marks)

b) Using the information provided in Table 1, assume that a cup of vanilla latte costs $6 in the United States, 24 kuna in Croatia, 40 renminbi in China, 250 rupees in India, and 5 francs in Switzerland. According to these numbers, calculate the real exchange rate between United States and foreign goods for all four countries. Workings has to be shown. (4 marks)

Table 1 Country Currency Currency per U.S. Dollar Croatia Kuna 4.00 China Renminbi 8.00 India Rupee 45.00 Switzerland Franc 0.60