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- Suppose you observe the following exchange rates and interest rates for the USD and JPY: Bid Ask USD/JPY 105.20 105.95 USD,JPY F,360 104.25 105.10 Trader lends at Trader borrows at I USD ? ? I JPY 1.40% 1.50% Which answer is closest to the maximum US lending rate that prevents covered interest rate arbitrage? 3.21% 3.16% 3.05% 2.32% 2.42%D3) . If the actual exchange rate for the euro value of the British pound is less than the exchange rate that would satisfy absolute PPP, which of the currencies is overvalued and which is undervalued? Why?Assume that an open economy with a floating exchange rate is described by the equations: C = 0.85(Y-T)T= 1000I= 1500 -200r G= 3000NX= 2000 – 250e (M/P)d = 0.4Y – 500r M= 4000S-I= 750 – 250rP= 2r* = 4 Derive the equation for the IS* curve. Derive the equation for the LM curve. Solve for Y. Solve for NX and e. Using the information from parts a. to d. above, graphically illustrate on a clearly labelled diagram, the short-run impact of contractionary fiscal policy on the exchange rate and level of output in this small open economy. Assuming that the economy adopted a fixed exchange rate system, illustrate on a clearly labelled diagram, the impact of contractionary fiscal policy. In one sentence, explain the type of intervention needed to maintain the fixed exchange rate proposed in part f. above.
- PQ 23 Assuming a flexible exchange rate, in the balance model, what effect, other factors constant, will a foreign government budget deficit financed by issuing bonds have on the home country's currency value?For an investment in a foreign-currency-denominated financial asset, which of the followings is/are true? * The overall return to such an investment comes only from the return on the asset itself. The overall return to such an investment comes only from changes in the exchange-rate value of the foreign currency The overall return to such an investment comes from both the return on the asset itself and changes in the exchange-rate value of the foreign currency The value of investment (in terms of home currency) increases If the foreign currency value increases relative to my own currency. Both c and d Explain with no plagiarismplease highlight the correct answer and explain why it is correct
- A country would always prefer to have a floating exchange rate regime in operation . Discuss .Answer:Consider that the home country increased government expenditures. Analyze its effects on net exports and real exchange rate using graphs. Describe briefly.Discuss the relationships between Purchasing Power Parity (PPP), Uncovered Interest Rate Parity (UIRP) and Fisher equation. Derive UIRP using PPP and Fisher equation.
- Discuss why the devaluation of domestic currency improves net exports in the extended version of the DD-AA model. Use a diagram in support of your answer.In quoting exchange rates: Answer a. One should always quote these as units of foreign currency over a unit of domestic currency b. One should always quote the rate as the units of domestic currency over a unit of foreign currency c. Usually one should quote the rate in such a way that the value is greater than one d. Each country's central bank determines how the rate is to be quotedShow how each of the following would affect the U.S. BOP. Include a description of the debit and credit items, and in each case say which specific account is affected (eg, CA, imports of goods and services, IM; FA, exports of financial assets, EXA; and so on). Suppose an American, David, is visiting Milan on business selling messenger bags to merchants. He spends a total of $800 (6500) for his hotel. David pays for his hotel using his Mastercard (held in the United States). The Milanese hotel now has a claim against Mastercard, so there is an increase in home assets owned by foreigners. In Milan, David meets with an Italian business associate, Francesco. Francesco plans to purchase a dozen of David's messenger bags (worth $120 each) for a bicycle messenger service he owns. He pays David the $1,440 using a checking account with Banca Intesa (an Italian bank). Please draw a table like the sample image (including arrows which indicate the increase or decrease) and explain a bit under…