Foreign exchange market based on chapter 14 (Exchange Rates and the Foreign Exchange Market: An Asset Approach) of the textbook

Transcription

1 HOMEWORK 6 (ASSET MARKETS) ECO41 FALL 2011 UDAYAN ROY Each correct answer is worth 1 point. The maximum score is 20 points. This homework assignment is due on Wednesday, December 7. Please show your answers on the answer sheet (on the last page). Foreign exchange market based on chapter 14 (Exchange Rates and the Foreign Exchange Market: An Asset Approach) of the textbook 1. How many dollars would it cost to buy an Edinburgh Woolen Mill sweater costing 50 if the exchange rate is $1.50 per one British pound ( )? $ 2. How many dollars would it cost to buy an Edinburgh Woolen Mill sweater costing 50 British pounds if the exchange rate is 1.80 dollars per one British pound? $ 3. If the price of a British pound increases from $1.50 per pound to $1.80 per pound, we say that: a. The dollar has appreciated and the pound has depreciated b. the dollar has depreciated and the pound has appreciated c. the dollar has appreciated and the pound has appreciated d. the dollar has depreciated and the pound has depreciated 4. When the price of a British pound increases from $1.50 per pound to $1.80 per pound, a. Americans find that Britain s exports are more expensive, and British residents find that imports from America are more expensive. b. Americans find that Britain s exports are more expensive, and British residents find that imports from America are less expensive. c. Americans find that Britain s exports are cheaper; however, British residents are not affected. d. Americans are not affected, but British residents find that imports from America are more expensive. 5. An appreciation of a country s currency a. Decreases the relative price of its exports and lowers the relative price of its imports. b. Raises the relative price of its exports and raises the relative price of its imports. c. Lowers the relative price of its exports and raises the relative price of its imports. d. Raises the relative price of its exports and lowers the relative price of its imports. 6. The exchange rate between currencies depends on a. The interest rates that can be earned on deposits in those currencies. b. The expected future exchange rate. c. The interest rates that can be earned on deposits in those currencies and the expected future exchange rate. d. National output.

2 7. If the interest rate on dollar deposits is 10 percent and the interest rate on euro deposits is 6 percent, then a. An investor should invest only in dollar deposits. b. An investor should invest only in euro deposits. c. An investor should be indifferent between dollar deposits and euro deposits. d. It is impossible to use the given information to compare the returns on dollar deposits and euro deposits. 8. Which of the following statements is the most accurate? a. A rise in the interest rate on dollar bank deposits (R $ ) causes the dollar to appreciate. b. A rise in the interest rate on dollar bank deposits (R $ ) causes the dollar to depreciate. c. A rise in the interest rate on dollar bank deposits (R $ ) does not affect the U.S. dollar. d. For a given euro interest rate (R ) and constant expected exchange rate (E e $/ ), a rise in the interest rate on dollar deposits (R $ ) causes the dollar to appreciate. 9. If the interest rate paid by US banks (R $ ) is 6 percent and the interest rate paid by European banks (R ) is 4 percent, the theory of interest parity says that people probably expect a. The dollar to appreciate by 2 percent b. The euro to appreciate by 2 percent c. The dollar to appreciate by 10 percent d. The euro to appreciate by 10 percent 10. What is equation that represents the interest parity condition? a. R $ = R + (E e $/ E $/ ) / E $/. b. R = R $ + (E e $/ E $/ ) / E $/. c. R $ = R + (E e /$ E /$ ) / E /$. d. R $ = R - (E e $/ E $/ ) / E $/. 11. If all interest rates stay unchanged, the theory of interest parity says that an increase in the expected future value of the euro (E e $/ ) a. Will cause the value of the euro (E $/ ) to increase immediately b. Will cause the value of the euro (E $/ ) to decrease immediately c. Will have no immediate effect on the value of the euro (E $/ ) d. Will cause the value of the euro (E $/ ) to increase, but only in the long run 12. When the interest parity equation is satisfied, a. The goods market is in equilibrium b. The money market is in equilibrium c. The foreign exchange market is in equilibrium 2

3 d. All of the above e. None of the above Money market based on chapter 15 (Money, Interest Rates, and Exchange Rates) of the textbook 13. The aggregate money demand (M d ) depends on a. The interest rate (R) b. The price level (P) c. Real national income (Y) d. All of the above. e. Only (a) and (c) 14. The requirement that the real supply of money (M s /P) must equal the real demand for money (L) implies that the domestic interest rate (R) will rise if: a. M s or P or Y or some combination of these changes occurs. b. M s or P or Y or some combination of these changes occurs. c. M s or P or Y or some combination of these changes occurs. 15. A rise in a. real GNP (Y) decreases aggregate real money demand (L) for any given interest rate (R), thereby moving the L(R,Y) curve to the right. b. real GNP raises aggregate real money demand for any given interest rate, moving the L(R,Y) curve to the left. c. real GNP raises aggregate real money demand for any given interest rate, moving the L(R,Y) curve to the right. d. nominal GNP raises aggregate real money demand for a given interest rate, moving the L(R,Y) curve to the right. e. real GNP raises aggregate nominal money demand for a given interest rate, moving the L(R,Y) curve to the right. 16. The real money supply (M s /P) curve is a. horizontal because M S is set by the central bank while P is taken as given. b. vertical because M S is set by the central bank. c. vertical because M S is set by the households and firms while P is taken as given. d. horizontal because M S and P are set by the central bank. e. vertical because M S is set by the central bank while P is taken as given. 3

4 Interest Rate, R Interest Rate, R Real Money Holdings Real Money Holdings 17. Which of the following is accurate? a. As the left panel of the figure above shows, an increase in the supply of money reduces the interest rate, provided the price level and the real GNP are unchanged. b. As the right panel of the figure above shows, an increase in the supply of money raises the interest rate, provided the price level and the real GNP are unchanged. c. As the left panel of the figure above shows, an increase in the supply of money raises the interest rate, provided the price level and the real GNP are unchanged. d. As the right panel of the figure above shows, an increase in the supply of money reduces the interest rate, provided real GNP is unchanged. 18. Which of the following is accurate? a. As the left panel of the figure above shows, an increase in real GNP reduces the interest rate, provided the price level and the supply of money are unchanged. b. As the right panel of the figure above shows, an increase in real GNP raises the interest rate, provided the price level and the supply of money are unchanged. c. As the left panel of the figure above shows, an increase in real GNP raises the interest rate, provided the price level and the supply of money are unchanged. d. As the right panel of the figure above shows, an increase in real GNP reduces the interest rate, provided the supply of money is unchanged. 19. The requirement that the real supply of money (M s /P) must equal the real demand for money (L) implies that the domestic interest rate (R) will rise if: a. M s or P or Y or some combination of these changes occurs. b. M s or P or Y or some combination of these changes occurs. c. M s or P or Y or some combination of these changes occurs. 20. We saw in the discussion of interest parity in Chapter 14 that R = R* + (E e E)/E, where R is the domestic interest rate, R* is the foreign interest rate, and E e is the expected future value of the foreign currency. This implies that the value of the foreign currency (E) will rise if: 4

5 a. R or R * or E e or some combination of these changes occurs. b. R or R * or E e or some combination of these changes occurs. c. R or R * or E e or some combination of these changes occurs. 21. Combining the themes of Chapter 14 and of this chapter that were discussed in the last 2 questions, we can say that the value of the foreign currency (E) will rise if: a. M s or P or Y in the US, or E e or some combination of these changes occurs. b. M s or P or Y in the US, or E e or some combination of these changes occurs. c. M s or P or Y in either the US or in Europe, or E e or some combination of these changes occurs. 5

6 ANSWER SHEET HOMEWORK 6 (ASSET MARKETS) ECO41 FALL 2011 UDAYAN ROY NAME: DATE: