Answers to End of Chapter 4 Questions spot rate of the British British pound is $1.73. $1.73. The expected 1. Perc Percen enta tage ge Depr Deprec ecia iati tion on.. Assume the spot spot rate one year year from now is assumed to be $1.66. What percentage depreciation depreciation does this refect! A"#W%& '$1.66 ( $1.73)*$1.73 + (,.-/ xpected depreciation of ,.-/ percent 2. Infl Inflat atio ion n Effe Effects cts on Excha Exchang ngee Rate Rates. s. Assume that the 0.#. infation rate becomes high reatie to 2anadian infation. infation. ther things being e4ua5 how shoud this affect affect the 'a) 0.#. demand for 2anadian doars5 'b) suppy of 2anadian doars for sae5 and 'c) e4uiibrium aue of the 2anadian doar!
A"#W%& A"#W%& emand emand for 2anadian 2anadian doars doars shoud increase5 increase5 suppy of 2anadian 2anadian doars for sae shoud decrease5 and the 2anadian doars aue shoud increase. 3. Inter Interest est Rate Rate Effe Effects cts on on Exchan Exchange ge Rates Rates.. Assume 0.#. interest rates fa reatie to British interest interest rates. rates. ther ther things being e4ua5 e4ua5 how shou shoud d this affect the 'a) 0.#. demand demand for British pounds5 'b) suppy of pounds for sae5 and 'c) e4uiibrium aue of the pound!
A"#W%& emand for pounds shoud shoud increase5 suppy suppy of pounds for sae sae shoud decrease5 and the pounds aue shoud increase. 4. Inco Income me Eff Effec ects ts on on Exch Exchan ange ge Rat Rates es.. Assume that the 0.#. income ee rises at a much higher rate than does the 2anadian 2anadian income ee. ther things being being e4ua5 how shoud this this affect the 'a) 0.#. demand for 2anadian doars5 'b) suppy of 2anadian doars for sae5 and 'c) e4uiibrium aue of the 2anadian doar!
A"#W%& Assuming Assuming no effect on 0.#. interest rates5 demand demand for doars shoud increase5 increase5 suppy of doars for sae may not be affected5 and the doars aue shoud increase. Assume that the 8apanese 8apanese goernme goernment nt 5. Trade ade Restri Restricti ction on Effec Effects ts on Exchan Exchange ge Rates Rates.. Assume reaxes its contros on imports imports by 8apanese companies. ther things being e4ua5 e4ua5 how shoud this this affect affect the 'a) 0.#. demand demand for 8apane 8apanese se yen5 yen5 'b) suppy suppy of yen yen for sae5 sae5 and 'c) e4uiibrium aue of the yen! A"#W%& emand for yen shoud not not be affected5 suppy of yen yen for sae shoud increase5 and the aue of yen shoud decrease. 6. Effe Effect ctss of Rea Reall Inte Intere rest st Rat Rates es.. What is the expected reationship between the reatie rea interest rates of two countries and the exchange rate of their currencies!
A"#W%& A"#W%& The higher higher the rea interest interest rate of a country reatie reatie to another another country5 country5 the stronger wi be its home currency5 other things e4ua. . !pec !pec"l "lat ati# i#ee Effe Effect ctss on Exchan Exchange ge Rate Rates. s. xpain why a pubic forecast by a respected economist about future interest interest rates coud affect the aue of the doar today. today. Why do some forecasts by we9respected economists hae no impact on todays aue of the doar!
A"#W%& :nterest rate moements moements affect exchange rates. #pecuators can use anticipated interest rate moements to forecast exchange exchange rate moements. They may decide to purchase securities in particuar countries because of their expectations about currency moements5 since their yied wi be affected by changes in a currencys currencys aue. aue. These purchases of secur9 secur9 ities re4uire an exchange of currencies5 which can immediatey affect the e4uiibrium aue of exchange rates. :f a forecast of interest rates by a respected economist was aready anticipated by mar;et participants or is not different from inestors origina expectations5 an announced forecast does not proide new information. Thus5 there woud be no reaction by inestors inestors to such an announcement5 and exchange rates woud not be affected. $. %actor %actorss &ffe &ffecti cting ng Excha Exchange nge Rate Rates. s. What factors affect the future moements in the aue of the euro against the doar!
A"#W%& A"#W%& The euros euros aue coud change change because of the baance baance of trade5 trade5 which refects more 0.#. demand for uropean goods than the uropean demand for 0.#. goods. The capita fows between the 0.#. and urope wi aso affect the 0.#. demand for euros and the suppy of euros for sae 'to be exchanged for doars). Assume that there are subs substanti tantia a capita capita fows fows among among '. Inte Intera ract ctio ion n of Exch Exchan ange ge Rate Rates. s. Assume 2anada5 the 0.#.5 and 8apan. :f interest rates in 2anada decine to a ee beow the 0.#. interest rate5 and infationary expectations remain unchanged5 how coud this affect the aue of the 2anadian doar against against the 0.#. doar! or exampe5 exampe5 if the trade deficit deficit was arger arger than than antic anticipa ipated ted55 and is expected to continue5 this impies that the 0.#. demand for foreign currencies may be arger than initiay initiay anticipated. anticipated. Thus5 the doar woud be expected to wea;en. #ome specuators specuators may ta;e a position in foreign currencies immediatey and coud cause an immediate decine in the doar.
b. :n some periods5 foreign exchange traders do not respond to a trade deficit announcement5 een when when the announced deficit deficit is ery arge. ffer an expanation expanation for such a ac; of response. A"#W A"#W%& %& :f the mar;et mar;et correc correcty ty anticip anticipate ated d the trade trade defici deficitt figure figure55 then then any news contained contained in the announcement announcement has aready been accounte accounted d for in the mar;et. The mar;et mar;et shoud ony respond to an announcement about the trade deficit if the announcement contains new information. 11. )omo#ements of Exchange Rates. xpain why the aue of the British pound against the doar wi not aways moe in tandem with the aue of the euro against the doar.
A"#W%& The euros aue changes in response response to the fow of funds between between the 0.#. and the countries using the euro or their currency. The pounds aue changes in response to the fow of funds between the 0.#. and the 0.?. @Answer is based on intuition5 is not directy from the text. 12. %actor %actorss &ffect &ffecting ing Exchange Exchange Rates. Rates. :n the 1-s5 %ussia was attempting to import more goods but had itte to offer other countries countries in terms of potentia exports. :n addition5 %ussias infation rate was high. high. xpain the type type of pressure that these factors paced on the the %ussian currency.
A"#W A"#W%& %& The The arge arge amount amount of %ussian %ussian imports imports and ac; ac; of %ussian %ussian exports exports paced paced downward pressure on the the %ussian currency. currency. The high infation infation rate in %ussia aso paced downward pressure on the %ussian currency. currency. 13. *ation *ational al Incom Incomee Effects. Effects. Anaysts commony attribute the appreciation of a currency to expectations that economic economic conditions wi strengthen. Cet5 this chapter suggests suggests that when other factors are hed constant5 increased nationa income coud increase imports and cause the oca currency currency to wea;en. :n reaity5 reaity5 other factors factors are not constant. constant. What other factor factor is i;ey to be affected by increased economic growth and coud pace upward pressure on the aue of the oca currency!
A"#W%& :nterest rates tend to rise in in response to a stronger economy economy55 and higher interest rates can pace upward pressure on the oca currency 'as ong as there is not offsetting pressure by higher expected expected infation). 14. %actors &ffecting Exchange Rates. :f the Asian countries experience a decine in economic growth 'and experience a decine in infation and interest rates as a resut)5 how wi their currency aues 'reatie to the 0.#. doar) be affected!
A"#W%& A reatie decine in Asian economic growth wi reduce Asian demand for 0.#. products5 which paces upward pressure on Asian currencies.
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