Note that, in the previous question, the price level eventually increases by 20% (in the long run) due to money neutrality and the domestic interest rate temporarily falls below the foreign interest rate (over the short run) to offset the temporary increase in the domestic real money supply. Since the long run decrease + in the exchange rate must be equal to 20% due to interest parity + , the immediate increase + in the exchange rate must be equal to + 20% due to purchasing power parity +
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- A big Mac costs $3.35 in the U.S. and 31 Pesos in Mexico. The current exchange rate is $1 buys 11 Pesos. Then according to purchasing power parity, we can predict that the U.S. dollar should over time, and in order for ppp to hold we need Et = %3D O appreciate; 10.11 O appreciate; 9.25 O depreciate; 10.11 O depreciate; 9.25Suppose the exchange rate between the Mexican peso and the U.S. dollar is 12 MXN = $1 and the exchange rate between the Hungarian forint and the U.S. dollar is 215 FNT = $1.a. Express both of these exchange rates in terms of dollars per unit of the foreign currency.b. What should the exchange rate be between the Mexican peso and the Hungarian forint? Express the exchange rate in terms of 1 peso and in terms of 1 forint.c. Suppose the exchange rate between the peso and the dollar changes to 9 MXN = $1 and the exchange rate between the forint and the dollar changes to 240 FNT = $1. For each of the three currencies, explain whether the currency has appreciated or depreciated against the other two currencies.Assume Switzerland has a one-year interest rate of 3% and that of Ghana is 16%. If the International Fisher Effect (IFE)holds, what would you forecast for the Swiss franc exchange rate with respect with the cedi be for a one-year period? Assume that the initial exchange rate is 5000cedis to a Swiss franc.
- Describe in words how the following events affect the nominal exchange rate E$/€ in the long run accordingto the general model of long-run exchange rates in Chapter 16:A) increase in U.S. money supplyB) Increase in growth rate of foreign money supplyC) Increase in world relative demand for U.S. productsSuppose that Russia decided to increase interest rates by %2. Considering the inflation and interest differential between the US and Germany, what is likely to happen to real exchange rate in Russia? Explain with this formula iRuble− idollar = π − π * Almanya isim: AlmanyaAccording to Big Mac Index 2012 provided by the Economists, A Big Mac costs $4.33 in the U.S. and 15.65 RMB in China. a. What should be the exchange rate S($/RMB) based on PPP? b. If the inflation rate in China will be 3% while the inflation rate in the U.S. will be 2% over the next year, what should be the future exchange rate S360($/RMB) based on PPP? c. If S($7RMB) indeed increases by 2%, what does it imply to the competitiveness of the U.S. exporters? d. The market exchange rate of S(RMB/$) is 6.29RMB/$ on October 3rd. Compared to the PPP-implied exchange rate, is RMB over-value or under value and by how much?
- Assume that the LM curve for a small open economy with a floating exchange rate is givenby Y = 200r – 200 + 2(M/P), while the IS curve is Y = 400 + 3G – 2T + 3NX – 200r. The function for NX is NX = 200 – 100e, where e is the exchange rate. The price level (P) is fixedat 1.0. The international interest rate is r*= 2.5 percent.a. Using the LM curve, find the equilibrium level of Y in the small open economy, if M =100.b. Given this value of Y, if G = 100 and T = 100, what must be the equilibrium value of NX?c. If this value of NX is to be achieved, what must be the equilibrium exchange rate, e?It costs 100 GBP to buy a certain basket of goods in the UK. It costs 200 USD to buy the same basket in the US. 1 year deposit rates are 10% in both countries. Everyone expects these numbers to remain the same indefinitely. What is the current exchange rate between USD and GBP implied by purchasing power parity? What is the current exchange rate between USD and GBP implied by the overshooting model? Today, the Bank of England announces that it is going to lower the short-term interest rate to 5% in May 2024 and to return it to 10% in May 2025. It also says that the price level will go up and, eventually, it will cost 150 GBP to buy the same basket of goods in the UK. The price adjustment will be completed by May 2026. What is the current exchange rate between USD and GBP implied by the overshooting model? Under the circumstance described in (3), what will be the exchange rate between USD and GBP in May 2024?Relative purchasing power parity Multiple Choice explains exchange rates as being part of the equilibrium for the markets for financial assets denominated in different currencies says that a single currency will have the same price everywhere, once the prices at difference places are expressed in that currency. theorizes that the difference between changes over time in product-price levels in two countries will be offset by the change in their exchange rate over this time. suggests that the exchange rate should be equal to the ratio of the domestic price level to the foreign price level.
- Consider the exchange rate between U.S. Dollar and Mexican Peso: USD/MXN. Initially, the supply curve for USD is 100+e, bln dollars per week and the demand curve is 140 - e„bln dollars per week. There is a financial crisis in Mexico and the government fears that it may lead to capital outflows that would make the crisis even worse. They decide that if Mexican Peso depreciates by more than 20%, the central bank will step in and fix the exchange rate. As the crisis unfolds the demand for the U.S. dollars increases to 142-e and the supply of dollars falls to 99+ e N' How should the central bank of Mexico react to this change? O A. start selling U.S. dollars to support the exchange rate O B. start buying U.S. dollars to support the exchange rate O C. reduce money supply in the economy O D. do nothing QUESTION 4 bln dollars per week and the demand curve is 155 -e bln dollar Using information from problem 3, suppose that the financial crisis worsens and now the supply curve for USD is 91+e.…If Boblandia had a flexible (floating) exchange rate, it would cost 5 Bobos to purchase a Canadian dollar. The Central Bank of Boblandia (aka, the Bank of Boblandia, or BoB) has fixed the exchange rate, saying it will buy or sell Bobos at C$0.17 for each Bobo. Which of the following is true (assuming no capital controls in Boblandia)? O At the fixed exchage rate, supply of Bobos exceeds demand. The BoB's holdings of Canadian dollars will increase. O At the fixed exchage rate, supply of Bobos exceeds demand. The BoB's holdings of Canadian dollars will decrease. At the fixed exchage rate, supply of Bobos is less than demand. The BoB's holdings of Canadian dollars will increase. O At the fixed exchage rate, supply of Bobos is less than demand. The BoB's holdings of Canadian dollars will decrease.If Boblandia had a flexible (floating) exchange rate, it would cost 5 Bobos to purchase a Canadian dollar. The Central Bank of Boblandia (aka, the Bank of Boblandia, or BoB) has fixed the exchange rate, saying it will buy or sell Bobos at C$0.22 for each Bobo. Which of the following is true (assuming no capital controls in Boblandia)? O At the fixed exchage rate, supply of Bobos exceeds demand. Expansionary monetary policy can restore the balance between supply and demand of Bobos. O At the fixed exchage rate, supply of Bobos exceeds demand. Contractionary monetary policy can restore the balance between supply and demand of Bobos. O At the fixed exchage rate, supply of Bobos is less than demand. Expansionary monetary policy can restore the balance between supply and demand of Bobos. O At the fixed exchage rate, supply of Bobos is less than demand. Contractionary monetary policy can restore the balance between supply and demand of Bobos.