3. Suppose the Canadian interest rate is 5% and the U.S. interest rate is 2%. a. If uncovered interest rate parity holds, what must be the expected growth in the Canadian exchange rate (Es/CND)? b. Suppose the expected exchange rate a year from now is .8. What is the spot exchange rate?
3. Suppose the Canadian interest rate is 5% and the U.S. interest rate is 2%. a. If uncovered interest rate parity holds, what must be the expected growth in the Canadian exchange rate (Es/CND)? b. Suppose the expected exchange rate a year from now is .8. What is the spot exchange rate?
Managerial Economics: A Problem Solving Approach
5th Edition
ISBN:9781337106665
Author:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Chapter11: Foreign Exchange, Trade, And Bubbles
Section: Chapter Questions
Problem 9MC
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Transcribed Image Text:3. Suppose the Canadian interest rate is 5% and the U.S. interest rate is 2%.
a. If uncovered interest rate parity holds, what must be the expected growth in the
Canadian exchange rate (E$/CND)?
b. Suppose the expected exchange rate a year from now is .8. What is the spot exchange
rate?
4. There have been increasing political tensions between the U.S. and China as the two
countries negotiate a new trade agreement. Suppose China decides to sell its holding of
U.S. treasury securities as a means of punishing the U.S.
a. Draw a graph showing the supply and demand for RMB (the Chinese currency). The
vertical axis is ES/RMB. Show the effect of China's sale of U.S. treasury securities on the
dollar-RMB exchange rate.
b. Explain what effect the asset sale will have on the U.S. current account.
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