You see the following fictitious exchange rates 1 7 5 4 If all three of these currencies float, what is the exchange rate between the and the Suppose that the Hong Kong Dollar (HKD) is pegged to the U S dollar ($) at a rate of 7 75 HKD $ Over the past month, the U S dollar has fluctuated against the Euro from an exchange rate of $0 838 to $0 816 Over that same period, what do you think happened to the HKD $ rate The dollar pound exchange rate is currently $1 40 If the dollar appreciated vs the pound by 10 , what would the new exchange rate be People in the Cayman Islands use the Cayman Islands Dollar (CI$) as a currency Suppose their exchange rate with the U S dollar is CI$0 83 $ Which is more valuable A U S Dollar or the Cayman Island Dollar How many U S dollars would it take to buy 1 CI$ If the U S Dollar appreciated by 12 against the Cayman Island Dollar, what would be the new exchange rate Assume that the original exchange rate holds (CI$0 83 $) and that the dollar euro exchange rate is $1 20 If all currencies are floating without any capital controls, what is the CI$ exchange rate Suppose that U S inflation is expected to be 1 lower than inflation in the Euro Area What effect, if any, will this have on investors expectations about future spot exchange rates compared to todays Do you expect that the dollar is trading at a forward premium or at a forward discount relative to the euro The Hong Kong Dollar (HKD) is pegged to the U S Dollar at a rate of 7 8HKD USD Which is more valuable A U S Dollar or the Hong Kong Dollar What does it mean that the currency is pegged Suppose that the U S raised interest rates What do you suspect Hong Kong would do Suppose that the current spot dollar pound exchange rate is $1 40 but that the 1 year forward rate is $1 42 Do forward markets expect that the dollar will appreciate or depreciate vs the pound Which do you expect is higher the risk free interest rate on pounds or the risk free interest rate on dollars You observe the following exchange rates $1 20 $1 32 If there is no arbitrage, and all currencies are freely floating, what must the rate be If the current exchange rate is $1 20 , what will the new exchange rate be if the dollar appreciates by 5 against the Euro Why might someone demand a foreign currency Explain the difference between a floating and a fixed currency What will happen to the value of the U S dollar relative to other currencies if a U S company invents a new product that has a large global demand Draw a supply and demand graph between the U S ($) and the Euro Area () Assume that the equilibrium exchange rate is $1 20 Label every line as a demand or supply curve and whose demand supply it represents of what currency Suppose the U S intervenes through foreign reserves to change their exchange rate to $1 25 Does this represent a purchase or sale of reserves by the U S Draw one additional line on your graph above to denote a shift in one of the demand supply curves that will represent this change For each scenario, explain what you think would happen to the value of the U S dollar (compared to any relevant foreign currency) and why The U S government begins dumping Euros on foreign exchange markets Britain develops a highly efficient jet production technology (jets are a significant U S export) The U S Congress begins debates on a major overhaul of U S economic policy The world imports machinery from both the U K and the Euro Area Suppose that Germany (a member of the Euro Area) develops a new technology that allows for the production of better machinery at the same cost What will happen to the value of the pound relative to the euro Draw a graph showing the demand for pounds by citizens of the Euro Are The x axis should be quantity demanded, and the y axis should be the exchange rate Your y axis should go from 1 to 1 25 (Note that you dont have enough information to draw an accurate graph, it should simply reflect the correct direction, i e upward or downward sloping) On June 23, 2016, Britain voted to leave the European Union, an action that would likely impose greater barriers to trade between these regions Draw a new curve above representing the change likely to result from this action If no change occurred to the demand for euros by citizens of the U K, what would happen to the relative value of these currencies As a result of the referendum, the pound declined sharply in value Given your analysis above, what (if anything) can you say about what happened to the demand for euros by citizens of the U K Suppose that the Federal Reserve intervenes to raise U S interest rates unexpectedly At this announcement, what do you think will happen to the value of the dollar What does a trade deficit mean As an American citizen with dollars, how can I buy a Japanese television from a company that only accepts Yen List every step required and their effect on the Current Capital Accounts The U S has a large trade deficit with China Which is larger U S Exports to China or Chinese Exports to the U S This implies that one currency is flowing from one country to the other Which currency is it and which direction is it flowing A citizen in the U S buys a computer chip from South Korea List any credits debits that would exist on the U S Balance of payments, and specify whether they belong in the Current or Capital Account Roughly speaking, describe the difference between items in the Current and Capital Accounts Describe what is meant by a Current Account deficit Describe what is meant by a Capital Account Surplus Why must these go hand in hand Suppose that the U S exports $10 billion in vehicles to Canada, while Canada exports 10 billion CAD in oil to the U S The exchange rate is $0 80 CAD Assume this is the only trade between the countries Does the U S have a trade surplus or a trade deficit with Canada Does the U S have a capital account surplus or deficit Describe any net currency flows between these countries You may assume that neither country uses currencies for purposes other than buying imported goods Suppose the U S has the following statistics Total Exports 560 billion Total Imports 665 billion Cash Sent to Foreigners (gifts) 32 billion Cash Received from Foreigners (gifts) 63 billion Foreign Aid 23 billion Foreign Assets Purchased 38 billion Domestic Assets Sold to Foreigners 135 billion What are the U S Current and Capital Account balances Suppose that the U S is a net importer of steel If we were to impose a tariff on steel imports, describe the effect on Domestic Prices, Domestic Producer Surplus, and Domestic Consumer Surplus If I (a U S citizen) send money to a foreign family member, what will happen to the U S Capital and or Current Accounts I, a U S citizen, send money to my grandmother in Italy List any credits debits that would exist on the U S Balance of payments, and specify whether they belong in the Current or Capital Account The U S imposes a tariff on solar panel imports List what will happen to The price of domestic solar panels The quantity of solar panels imported The domestic consumer surplus The domestic producer surplus Imagine that you that you are your own country You have the following transactions over a month Description Amount Labor Income $1,000 Shopping $800 Cash sent to parents $200 For each item on the list, state all debits or credits to your Capital and Current Accounts What are your Current and Capital Account balances for the month In response to recent concerns about retaliatory tariffs, financial analyst and Bloomberg contributor Conor Sen tweeted the following If this trade war results in the EU putting tariffs on bourbon then maybe supply will increase for Americans so were better off Explain the basis for this joke

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You see the following fictitious exchange rates: 1.7/ 5.4/ If all three of these currencies float, what is the exchange rate between the and the

You see the following fictitious exchange rates:
1. 1.7/
2. 5.4/

If all three of these currencies float, what is the exchange rate between the and the ?

Suppose that the Hong Kong Dollar (HKD) is pegged to the U.S. dollar ($) at a rate of 7.75 HKD/$. Over the past month, the U.S. dollar has fluctuated against the Euro from an exchange rate of $0.838/ to $0.816/. Over that same period, what do you think happened to the HKD/$ rate?
The dollar-pound exchange rate is currently $1.40/. If the dollar appreciated vs the pound by 10%, what would the new exchange rate be?

People in the Cayman Islands use the Cayman Islands Dollar (CI$) as a currency. Suppose their exchange rate with the U.S. dollar is CI$0.83/$
1. Which is more valuable: A U.S. Dollar or the Cayman Island Dollar?
2. How many U.S. dollars would it take to buy 1 CI$?
3. If the U.S. Dollar appreciated by 12% against the Cayman Island Dollar, what would be the new exchange rate?
4. Assume that the original exchange rate holds (CI$0.83/$) and that the dollar-euro exchange rate is $1.20/. If all currencies are floating without any capital controls, what is the CI$/ exchange rate?
Suppose that U.S. inflation is expected to be 1% lower than inflation in the Euro Area:
1. What effect, if any, will this have on investors expectations about future spot exchange rates compared to todays?
2. Do you expect that the dollar is trading at a forward premium or at a forward discount relative to the euro?
The Hong Kong Dollar (HKD) is pegged to the U.S. Dollar at a rate of 7.8HKD/USD.

Which is more valuable: A U.S. Dollar or the Hong Kong Dollar?
What does it mean that the currency is pegged?

Suppose that the U.S. raised interest rates. What do you suspect Hong Kong would do?

Suppose that the current spot dollar-pound exchange rate is $1.40/ but that the 1-year forward rate is $1.42/.
1. Do forward markets expect that the dollar will appreciate or depreciate vs the pound?
2. Which do you expect is higher: the risk-free interest rate on pounds or the risk-free interest rate on dollars?
You observe the following exchange rates:
1. $1.20/
2. $1.32/

If there is no arbitrage, and all currencies are freely floating, what must the / rate be?

If the current exchange rate is $1.20/, what will the new exchange rate be if the dollar appreciates by 5% against the Euro?

Why might someone demand a foreign currency?

Explain the difference between a floating and a fixed currency.
What will happen to the value of the U.S. dollar relative to other currencies if a U.S. company invents a new product that has a large global demand?

Draw a supply and demand graph between the U.S. ($) and the Euro Area (). Assume that the equilibrium exchange rate is $1.20/. Label every line as a demand or supply curve and whose demand/supply it represents of what currency.

Suppose the U.S. intervenes through foreign reserves to change their exchange rate to $1.25/. Does this represent a purchase or sale of reserves by the U.S.? Draw one additional line on your graph above to denote a shift in one of the demand/supply curves that will represent this change.

For each scenario, explain what you think would happen to the value of the U.S. dollar (compared to any relevant foreign currency) and why.

The U.S. government begins dumping Euros on foreign exchange markets.

Britain develops a highly efficient jet production technology (jets are a significant U.S. export).

The U.S. Congress begins debates on a major overhaul of U.S. economic policy.

The world imports machinery from both the U.K. and the Euro Area. Suppose that Germany (a member of the Euro Area) develops a new technology that allows for the production of better machinery at the same cost. What will happen to the value of the pound relative to the euro?

Draw a graph showing the demand for pounds by citizens of the Euro Are The x-axis should be quantity demanded, and the y-axis should be the exchange rate. Your y-axis should go from 1/ to 1.25/. (Note that you dont have enough information to draw an accurate graph, it should simply reflect the correct direction, i.e. upward or downward sloping)

On June 23, 2016, Britain voted to leave the European Union, an action that would likely impose greater barriers to trade between these regions. Draw a new curve above representing the change likely to result from this action. If no change occurred to the demand for euros by citizens of the U.K, what would happen to the relative value of these currencies?
As a result of the referendum, the pound declined sharply in value. Given your analysis above, what (if anything) can you say about what happened to the demand for euros by citizens of the U.K?

Suppose that the Federal Reserve intervenes to raise U.S. interest rates unexpectedly. At this announcement, what do you think will happen to the value of the dollar?

What does a trade deficit mean?

As an American citizen with dollars, how can I buy a Japanese television from a company that only accepts Yen? List every step required and their effect on the Current/Capital Accounts.

The U.S. has a large trade deficit with China.
1. Which is larger: U.S. Exports to China or Chinese Exports to the U.S.?
2. This implies that one currency is flowing from one country to the other. Which currency is it and which direction is it flowing?

A citizen in the U.S. buys a computer chip from South Korea. List any credits/debits that would exist on the U.S. Balance of payments, and specify whether they belong in the Current or Capital Account.

Roughly speaking, describe the difference between items in the Current and Capital Accounts

Describe what is meant by a Current Account deficit. Describe what is meant by a Capital Account Surplus. Why must these go hand in hand?

Suppose that the U.S. exports $10 billion in vehicles to Canada, while Canada exports 10 billion CAD in oil to the U.S. The exchange rate is $0.80/CAD. Assume this is the only trade between the countries.

Does the U.S. have a trade surplus or a trade deficit with Canada?

Does the U.S. have a capital account surplus or deficit?

Describe any net currency flows between these countries. You may assume that neither country uses currencies for purposes other than buying imported goods.

Suppose the U.S. has the following statistics:

Total Exports	560 billion
Total Imports	665 billion
Cash Sent to Foreigners (gifts)	32 billion
Cash Received from Foreigners (gifts)	63 billion
Foreign Aid	23 billion
Foreign Assets Purchased	38 billion
Domestic Assets Sold to Foreigners	135 billion

What are the U.S. Current and Capital Account balances?

Suppose that the U.S. is a net importer of steel. If we were to impose a tariff on steel imports, describe the effect on Domestic Prices, Domestic Producer Surplus, and Domestic Consumer Surplus

If I (a U.S. citizen) send money to a foreign family member, what will happen to the U.S. Capital and/or Current Accounts?

I, a U.S. citizen, send money to my grandmother in Italy. List any credits/debits that would exist on the U.S. Balance of payments, and specify whether they belong in the Current or Capital Account.

The U.S. imposes a tariff on solar panel imports. List what will happen to:

The price of domestic solar panels
The quantity of solar panels imported
The domestic consumer surplus
The domestic producer surplus

Imagine that you that you are your own country. You have the following transactions over a month:

Description	Amount
Labor Income	$1,000
Shopping	$800
Cash sent to parents	$200

For each item on the list, state all debits or credits to your Capital and Current Accounts. What are your Current and Capital Account balances for the month?