Consider the foreign exchange market, where Ry and Rj respectively denote interest rates on US dollar deposit and Japanese yen deposit, and E and Eº respectively denote the exchange rate and the expected exchange rate (a rise in E means the depreciation of US dollar). (1) Find the interest parity condition. (2) Find the equilibrium exchange rate E*. (3) Show that the equilibrium exchange rate is decreasing in interest rate on US dollar deposit but is in- creasing in interest rate on Japanese yen and the expected exchange rate. (4) Consider a case where the exchange rate is fixed at some level Ê so that people believe that the ex- change rate never change in the future. Show that if Ry # Rj, then the foreign exchange market cannot be

Consider the foreign exchange market, where Ry and Rj respectively denote interest rates on US dollar deposit and Japanese yen deposit, and E and Eº respectively denote the exchange rate and the expected exchange rate (a rise in E means the depreciation of US dollar). (1) Find the interest parity condition. (2) Find the equilibrium exchange rate E*. (3) Show that the equilibrium exchange rate is decreasing in interest rate on US dollar deposit but is in- creasing in interest rate on Japanese yen and the expected exchange rate. (4) Consider a case where the exchange rate is fixed at some level Ê so that people believe that the ex- change rate never change in the future. Show that if Ry # Rj, then the foreign exchange market cannot be

ENGR.ECONOMIC ANALYSIS

14th Edition

ISBN:9780190931919

Author:NEWNAN

Publisher:NEWNAN

Chapter1: Making Economics Decisions

Section: Chapter Questions

Problem 1QTC

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There is a bar on Off‐Main Street called the Rock‐n‐Roll Bar. All the people that go to that bar like to listen to rock‐n‐roll music, and they love live bands. If the bar owner brings bands in to play music on a Saturday night, she will make a lot of money. However there are tenants in this building who get annoyed by the loud music. The benefits/costs to the owner/tenants of having zero, one, two or three bands on a Saturday night are listed below. Assume the bar owner has the right to hire as many bands as she likes. Iftransaction costs were $90, split between the bar owner and the tenants, how manybands would play? What would social welfare be? A. Three bands would play and social welfare would be ‐100.B. Two bands would play and social welfare would be 75.C. Two bands would play and social welfare would be ‐15.D. No bands would play and social welfare would be 0.E. Three bands would play and social welfare would be ‐190