ECON0302 International Finance Midterm Exam Fall 2004

Transcription

1 ECON0302 International Finance Midterm Exam Fall 2004 Short Questions (60 points each) 1. If in ation in the US is projected at 2:5% annually for the next 3 years and at 0:9% annually in Switzerland for the same time period, and the spot exchange rate is currently at CHF 1:20 per USD. What is the P P P estimate of the future spot rate 3 years from now? (Show your steps.) [10 points] 2. Suppose the spot rates for the euro, pound, and yen are US$1:2744, US$1:832, and U S$0: respectively. The associated 90-day interest rates (annualized) are 2:15%, 4:84%, and 0:03% respectively, while the US 90-day interest rate (annualized) is 2:06%. What is the 90-day forward rate on an EPY (EP Y 1 = e1 + $1 + =Y1) if the covered interest parity holds? (Show your steps.) [15 points] 3. Under the current linked exchange rate system, (the relative version of) the purchasing power parity (PPP) implies that HK should have the same in ation rate as the US whereas the interest rate parity (IRP) implies that the nominal interest rates in the two places should also be the same. However, data in the 1990s show that the in ation rate was signi cantly higher in HK than in the US. Evidence during the Asian nancial crisis also shows that the nominal interest rate was much higher in HK than in the US. Can these be taken as solid evidence to reject both the PPP and the IRP? If not, what alternative arguments or evidence can you provide to support the two parity conditions in the context of Hong Kong? [20 points] 4. According to the intertemporal approach to balance of payments, an open economy hit by an adverse supply shock will su er a deterioration in its current account. Explain whether tyhe above statement is true or false. [15 points] Analytical question (40 points) Using the short-run IS-LM-BP model, analyze the macroeconomic e ects of protectionist policies (such as tari s and quotas) adopted by a country under xed and exible exchange rates. How does your answer depend on the degree of capital mobility? 1

2 ECON0302 International Finance Midterm Exam Fall 2003 State whether each of the following statements is true, false, or uncertain; then provide a brief explanation to justify your answer. You have 60 minutes. Books and notes may be consulted. 1. Although monetary policy loses much of its power in in uencing real output and employment under xed exchange rates, scal policy can always be used as an e ective stabilization tool to maintain internal and external balances. 2. Under the monetary approach to exchange rates, an increase in money supply arising from central bank purchase of foreign-currency-denominated bonds (FXO) will lead to a larger depreciation of the home currency than an increase in money supply arising from central bank purchase of domestic-currency-denominated bonds (OMO). 3. Theoretically and empirically, the forward exchange rate is the best predictor of the future spot exchange rate. 4. The Economist magazine s nding that, when expressed in terms of the same currency, Big Mac hamburgers are cheaper in poor countries than in rich countries is a clear rejection of the purchasing power parity. 5. Under xed exchange rates, domestic and foreign interest rates must be equal in nominal terms, but not necessarily in real terms. 1

3 ECON0302 International Finance Fall 1999 Name: Student ID: Midterm Examination You have 100 minutes. Please answer ALL questions in the space provided. Books and notes may be consulted. Good luck! (1) PPP-based Exchange Rate (10 points) If inflation in the US is projected at 3% annually for the next 5 years and at 10% annually in Mexico for the same time period, and the spot exchange rate is currently at MXP per USD. What is the PPP estimate of the future spot rate 5 years from now? (Show your steps.) (2) Interest Rate Parity for EPY (15 points) Suppose the spot rates for the euro, pound, and yen are US$1.0395, US$1.6232, and US$ respectively. The associated 90-day interest rates (annualized) are 3.5%, 7%, and 0.2% respectively, while the US 90-day interest rate (annualized) is 6%. What is the 90-day forward rate on an EPY (EPY = =C =Y1) if the covered interest parity holds? (Show your steps.) (3) PPP and IRP under the Linked Exchange Rate System (25 points) Under the current linked exchange rate system, (the relative version of) the purchasing power parity (PPP) implies that HK should have the same inflation rate as the US whereas the interest rate parity (IRP) implies that the nominal interest rates in the two places should also be the same. However, data in the past decade show that the inflation rate was significantly higher in HK than in the US. Recent evidence (especially during the Asian financial crisis) also shows that the nominal interest rate was much higher in HK than in the US. Can these be taken as solid evidence to reject both the PPP and the IRP? If not, what alternative arguments or evidence can you provide to support the two parity conditions in the context of Hong Kong? (4) G-Shock under the Intertemporal Approach to BOP (20 points) According to the intertemporal approach to balance of payments, a small open economy that experiences a temporary increase in government spending will suffer a deterioration in its current account. Is the above statement correct? Explain. (5) Effects of Monetary Policy: Monetary Approach vs. Mundell-Fleming (30 points) Compare and contrast the predictions of the monetary and Mundell-Fleming approaches to BOP about the macroeconomic effects of a monetary contraction (induced by, say, an open market sale of government bonds) under a floating exchange rate regime. Based on your answer, explain why we can view the effects predicted by the former approach as long-run effects and those predicted by the latter approach as short-run effects.

4 11302 International Finance Name: Student No.: Fall 1998 Mid-term Examination I True/False/Uncertain Questions (45 points) State whether each of the following statements is true, false, or uncertain, and provide a brief explanation to support your answer. Please answer ALL questions in the space provided. You have 50 minutes. (1) The empirical regularity that, when expressed in terms of the same currency, price levels are lower in poorer countries and higher in richer ones is a clear rejection of the purchasing power parity. (2) The two (uncovered and covered) versions of interest rate parity conditions imply that the expected future spot exchange rate must be equal to the forward exchange rate. (3) An increase in the foreign demand for exports from the domestic country will lead to a rise in the demand for domestic currency and consequently a depreciation of the foreign currency in the foreign exchange market. (4) Under a floating exchange rate regime, any balance of payments deficits (surpluses) can automatically be corrected through a depreciation (an appreciation) of the domestic currency. (5) According to the monetary approach, an emigration of domestic workers will result in a deterioration in the balance of payments and a depreciation of the local currency.

5 11302 International Finance Name: Student No.: Fall 1998 Mid-term Examination II Please answer ALL questions in the space provided. You have 80 minutes. Books and notes may be consulted. (1) What is meant by the Dutch Disease? In what sense do you think it is a disease? What policy remedies, if any, would you recommend to cure the disease? (2) How will a transitory increase in government spending affect saving, investment, and the current account balance in a small open economy? Does your answer depend on how the government finances its spending? (3) Critically evaluate the following statement: As the EMU is just another (though extreme) form of fixed exchange rate system, there is no reason to expect it to perform any better than the EMS or the Bretton Woods System. In fact, it is doomed to fail given the experience of these two earlier systems. (4) The predictions of the monetary model and the Mundell-Fleming model about the effects of fiscal and monetary policies on the internal balance and external balance under different exchange rate regimes are in general different. There is nonetheless one robust policy prediction coming out of both models. What is it? Explain.

6 11302 International Finance Fall 1997 Name: Student no.: Midterm Examination I (A) Short Questions (45 points) 1. Depreciating an Overvalued Currency to Restore its PPP Value (15 points) a) Suppose that at the existing exchange rate of HK$7.8 per US$, the HK$ is overvalued by 15% relative to its PPP-value. What is the PPP value of the HK$? b) Suppose further that the annual inflation rates in HK and the US are 6% and 2.5% respectively and they are expected to remain at these levels for the foreseeable future. In order to restore the HK$/US$ exchange rate to its PPP-value, the monetary authority decides to devalue the HK$ by 0.6% per month. How long will it take for the HK$ to resume its PPP-value? 2. Monetary Expansion and the Exchange Rate (15 points) State whether the following statement is true, false, or uncertain and provide a brief explanation to support your answer: "When the domestic money supply is increased, the exchange rate (defined as the domestic currency value of foreign currency) will appreciate, irrespective of whether it is done through open market operations or foreign exchange operations." 3. Triangular Options (15 points) Can an option on the DM-yen exchange rate be created from two options, one on the dollar-dm exchange rate and the other on the dollar-yen exchange rate? Explain. (B) Multiple Choice Questions (55 points)

7 11302 International Finance Fall 1997 Name: Student no.: Midterm Examination II (1) True/False/Uncertain Question: Bretton Woods vs. The EMS (20 points) State whether the following statement is true, false, or uncertain and provide a brief explanation to support your answer. Since both the Bretton Woods System and the European Monetary System are essentially fixed exchange rate systems, the latter is doomed to failure given the experience of the former. (2) Analytical Question: A Dutch Disease? (25 points) Consider a large oil producing and exporting country "Opec" operating under a floating exchange rate regime and facing perfect capital mobility. Suppose that, due to the discovery of oil reserves under the "Greasy Ocean", the oil production in "Opec" is doubled and there is a significant increase in her oil exports. (2.1) Using the Mundell-Fleming model, explain how the oil discovery in "Opec" will affect its price level and trade balance position as well as its levels of interest rate, exchange rate, and national income. (2.2) How will the effects you find in (a) be altered if "Opec" adopts a fixed exchange rate regime. Explain. (2.3) How would your answers to (a) and (b) above be affected if you replace the Mundell- Fleming model with the monetary approach as your framework of analysis. Explain the economic intuition behind your results.

8 11302 International Finance Mid-term 1 November 8, 1996 (Friday), 3:05-3:55 pm (A) Multiple Choice Questions (35 points: 2.5 points each) Please circle your answer on the question paper. (B) True/False/Uncertain Questions (25 points) State whether each of the following statements is true, false, or uncertain; and provide a brief explanation in plain English. 1. Purchasing Power Parity (9 points) Since non-traded goods do carry some weights in the determination of national price levels, the purchasing power parity (PPP) condition does not hold both theoretically and empirically. 2. Interest Rate Parity (8 points) The covered interest parity (CIP) does not hold when domestic and foreign assets are risky. But the same is not true for the uncovered interest parity (UIP). 3. The Gold Standard vs. the Bretton Woods System (8 points) Given the full convertibility of the US dollar into gold (at the rate of USD 35 per ounce of gold) under the Bretton Woods System, the amount of gold reserves required to settle international payments arising from current account imbalances under that system should be less than that under the Gold Standard.

9 11302 International Finance Mid-term 2 January 11, 1997 (Saturday), 10:30 am - 12:30 pm (A) Multiple Choice Questions (45 points: 3 points each) (B) Analytical Question: Short-run and long-run effects of import tariffs (55 points) In order to reduce its trade deficits, the government of a small open economy decides to impose tariffs on its imported goods. Explain the effects of such protectionist policy in the short-run Keynesian (i.e., Mundell-Fleming) and the long-run classical (i.e., monetary) models under fixed and flexible exchange rates.