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Starting with the solid line (curve A) showing the fluctuation in the exchange rate over the business cycle in the absence of speculation in Figure 20.2, draw a figure showing the fluctuation in the exchange rate over the cycle (under a managed floating exchange rate system and no speculation) with a policy of leaning against the wind that eliminates about one-half of the fluctuation in the exchange rate.
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- Consider the exchange rate between the Moroccan dirham and the euro. Suppose the Moroccan government and the Eurozone governments agree to fix the exchange rate (ER) at 2.5 dirham per euro, as shown by the grey line on the following graph. Refer to the following graph when answering the questions that follow. EXCHANGE RATE (Dirham per euro) 4.0 3.5 1.0 0.5 0 0 2 4 12 QUANTITY OF EUROS (Billions) 6 8 10 Supply of Euros ER "Demand for Euros At the official dirham price of euros, there is a 14 At the official exchange rate of 2.5 dirham per euro, the euro is that Moroccans pay 16 ? and the Moroccan dirham is for European exports than they would with a free-floating exchange rate. of euros in the foreign exchange market. , which means Suppose the governments of the Eurozone and Morocco reevaluate their currencies so that their official exchange rate is now 1 dirham per 1 euro. This action results in of the euro.Chapter 6 addressed the effect of transfers between countries, such as the indemnity imposed on Germany after World War I. Suppose a transfer occurs involving Poland and the Czech Republic. The equation given below shows the determination of the long-run nominal zloty/koruna exchange rate, Ez/k, as a function of the real zloty/koruna exchange rate, qz/k• and the nations' long-run price levels. (Note: the zloty (z) is the currency of Poland (P) and the koruna (k) is the currency of the Czech Republic (C). Pp and Pc are, respectively, the price levels in Poland and the Czech Republic.) Ez/k = 9z/k* (Pp/Pc) If a permanent transfer from the Czech Republic to Poland occurs, the nominal zloty/koruna exchange rate, E,/k will O A. depreciate since the transfer will decrease Pp relative to Pc. O B. depreciate since the transfer will depreciate qz/k Oc. appreciate since the transfer will appreciate qz/k OD. depreciate since the transfer will depreciate q_/k and decrease Pp relative to Pc.The autonomous region of Catalonia has recently declared independence from Spain, and is looking for an exchange rate policy that would best fit their needs. The Catalans’ main goal is to stabilise the price level in the long-run, but constantly experience fluctuations in the price of foreign goods imported from Spain and other European countries. Would it be better for the Catalans to fix the exchange rate against the Euro, or to adopt a floating exchange rate? Justify your answer briefly.
- 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?The following paragraphs discuss the impact of various economic events on the exchange rate. Complete the paragraphs by filling in the blanks. Use any of the words from the following list (you can use each of these words as many times as you wish but choose carefully - your sentence must make grammatical sense):demand supply left right buy sell imports exports rise fall increases decreases What happens to the current account balance and the exchange rate when the following happens? Suppose that New Zealand firms become more profitable relative to foreign firms and so increase their payment of dividends (everything else held constant). The value for net foreign income therefore ________ and the value of the current account balance will _______. Payment of NZ dividends to foreign owners affects the _______ or/of $NZ while payments of foreign dividends to NZ owners of foreign companies affects the _______ for/of $NZ. Therefore the impact of the change in profit of NZ firms is…A country has a fixed exchange rate and capital is very mobile. Because it is experiencing high unemployment, the central bank increases the money supply. Using symbols and words, explain what will happen to (a) internal balance; (b) external balance; (c) the country’s exchange rate. How must the central bank respond if it wishes to maintain the fixed exchange rate? Why is monetary policy said to be ineffective with fixed exchange rates and capital mobility?
- Let S be the USD/GBP exchange rate, P∗ be the pound cost of a consumption basket in the U.K., and P be the dollar cost of a consumption basket in the U.S. Using the units of S, P∗, and P, find the units of the real exchange rate, Q = S (P∗/P).Suppose that the US interest rate is 5.4% per annum and the interest rate in Japan is 2.8% per annum. The value of the US dollar in the spot market is ¥74 what must the forward exchange rate be (yen per US dollar) for There to be no risk less profit? (Enter the numerical value only rounding to one decimal place) The forward rate you calculate above will be different and different from the spot rate explain why it cannot be the sameWhen you write an exchange rate in terms of how many units of a foreign currency it takes to buy one US dollar, we call that: a)a direct quote b) the real price c) an indirect quote d) a depreciation
- Suppose that if you purchase a big Mac in Coral Springs, FL in the US, it will cost you $3.95. On the other hand, if you purchase the same big Mac in Florianopolis in southern Brazil, it will cost you 18.85 Brazilian real. The current exchange rate is $1 US buys 5.60 real. In this case, according to the law of one price, the exchange rate should be that $1 US buys time we predict that the US dollar should real, and hence, over ---- O 5.95; appreciate O 5.95; depreciate O 4.77; appreciate 4.77; depreciateSuppose that the Federal Reserve cannot convince the public of its commitment to fight inflation in the United States in the near future. a) What would be the effect on the expected appreciation of the U.S. dollar? b) What would be the effect on the spot exchange rate for the U.S. dollar? Explain your answer using a graph.Naked Economics: Undressing the Dismal Science Book by Charles Wheelan In chapter 11, "International Economics," of Naked Economics, Charles Wheelan discusses international exchange rates and PPPs (Purchasing Power Parity). Based on the discussion of these two ideas in this chapter which of the below statements would you consider to be INCORRECT? A) The rate at which one currency can be exchanged for another is the exchange rate. B) Exchage rates include only the values of internationally tradable items, while the PPP includes both internationally tradable items as well as those which are not internationally tradable items but are used by people in different countries. C) If $25 can purchase a bundle of goods in the U.S. and if a comparable bundle of goods wil cost 750 rubles in Russia, then the PPP between the U.S. dollar and the Russian ruble would be $25=750 Russian rubles. D) The PPP only focuses on internationally tradable items, while the exchange rate has a…