Suppose i = 4%, i* = 2%, and that the domestic currency is expected to depreciate by 3% during the coming year. Given this information, would you expect individuals to hold only domestic bonds or only foreign bonds? Explain. Hint: You will have to read the notes provided in Lesson 6 to do this question
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- 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?The ECU as a basket of currencies. What is the percentage/weight of the ECU's total value accounted by the Spanish peseta? Refer to Exhibit 3.4 in the text. Would you get a different result if you valued the ECU in Japanese yen instead of the U.S. dollar? Would you expect this weight to change if the ECU depreciates by 10 percent against the U.S. dollar? For reference (image included)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 plagiarism
- 5) Because capital flows were an important element in the currency crises, it has been advocated that emerging markets countries avoid the financial instability by restricting capital mobility. Assess the extent to which you agree with this statement 6) If a country's par exchange rate is overvalued, what kind of intervention would that country's central bank be forced to undertake, and what kind of effect would it have on its international reserves? What must happen if this country's central bank decides not to intervene anymore?Consider a hypothetical open economy. The following table presents data on the relationship between various real interest rates and national saving, domestic investment, and net capital outflow in this economy, where the currency is the U.S. dollar. Assume that the economy is currently experiencing a balanced government budget. Real Interest Rate National Saving Domestic Investment Net Capital Outflow (Percent) (Billions of dollars) (Billions of dollars) (Billions of dollars) 7 50 20 -10 6 45 30 -5 5 40 40 4 35 50 30 60 10 2 25 70 15 Given the information in the preceding table, use the blue points (circle symbol) to plot the demand for loanable funds. Next, use the orange points (square symbol) to plot the supply of loanable funds. Finally, use the black point (cross symbol) to indicate the equilibrium in this market. Market for Loanable Funds 10 Demand 8 Supply Equilibrium 2 20 40 60 80 100 QUANTITY OF LOANABLE FUNDS REAL INTEREST RATEHow will the following event affect variables 1 through 3 in the foreign exchange market under a flexible exchange rate system; other things unchanged. Event: The U.S. Central Bank (the Fed) starts buying Chinese currency using dollar reserves: Variable 1: Supply of dollar in the foreign exchange market ___(increase, decrease, unaffected: briefly explain why). Variable 2: Value of dollar in the foreign exchange market unaffected: briefly explain why). Variable 3: American goods exported to China unaffected: briefly explain why). (appreciate, depreciate, (increae, decrease,
- In answering the question, you should emphasize the line of reasoning that generated your results; it is not enough to list the results of your analysis. Include correctly labeled diagrams, if useful or required, in explaining your answers. A correctly labeled diagram must have all axes and curves clearly labeled and must show directional changes. Assume that yesterday the exchange rate between the euro and the Singaporean dollar was 1 euro = 0.58 Singaporean dollars. Assume that today the euro is trading at 1 euro = 0.60 Singaporean dollars. %3D a. How will the change in the exchange rate affect each of the following in Singapore in the short run? i. Aggregate demand. Explain. ii. The level of employment. Explain. b. Suppose that Singapore wants to return the exchange rate to 1 euro = 0.58 Singaporean dollars. i. Should the Singaporean central bank buy or sell euros in the foreign exchange market? ii. Instead of buying or selling euros, what domestic open-market operation can the…Suppose that you are given the following model for the goods market: C=100 +0.4(Y-T), I=20+.1 Y-200r, G=400, X=200 +0.2Y*-10e, IM=300 +0.3Y+10e and you know that r = 2%, Y*=1,500, e=1 and T =50. Note: e= real exchange rate. The equation for the demand for domestic goods (Z) is and the multiplier for this economy is If the economy were closed, the equation for the demand for domestic goods (Z') would be and the multiplier for the closed economy would be Z = 576 + 0.2Y; multiplier open eco is 2; Z' = 526 + 0.5Y ; multiplier closed eco is 4 O Z = 1000+ 0.4Y; multiplier open eco is 1.67; Z' = 500+ 0.5Y ; multiplier closed eco is 5 Z = 676 + 0.2Y; multiplier open eco is 5; Z' = 496 + 0.5Y; multiplier closed eco is 2 OZ = 576 +0.2Y; multiplier open eco is 5 ; Z' = 500+ 0.4Y; multiplier closed eco is 1.67Relative inflation rates affect interest rates, exchange rates, the overall economic health of a country, and the operations and profitability of multinational companies. Consider the following statement: Countries with lower inflation rates will have lower interest rates. If companies borrow from countries with low interest rates, the potential gains from the interest savings will likely be (multiplied or offset) by the losses from currency appreciation.
- Economics Consider a hypothetical open economy. The following table presents data on the relationship between various real interest rates and national saving, domestic investment, and net capital outflow in this economy, where the currency is the U.S. dollar. Assume that the economy is currently experiencing a balanced government budget. Real Interest Rate National Saving Domestic Investment Net Capital Outflow (Percent) (Billions of dollars) (Billions of dollars) (Billions of dollars) 7 60 30 -10 6 55 40 -5 5 50 50 0 4 45 60 5 3 40 70 10 2 35 80 15 Given the information in the preceding table, use the blue points (circle symbol) to plot the demand for loanable funds. Next, use the orange points (square symbol) to plot the supply of loanable funds. Finally, use the black point (cross symbol) to indicate the equilibrium in this market.Consider a hypothetical open economy. The following table presents data on the relationship between various real interest rates and national saving, domestic investment, and net capital outflow in this economy, where the currency is the dollar. Assume that the economy is currently experiencing a balanced government budget. NOTE: follow RED ARROWS for the order of the questions (IT IS PART OF THE SAME QUESTION!!!!!) NOTE: HERE ARE THE OPTIONS FOR THE BLANKS: Because of the relationship between net capital outflow and net exports, the level of net capital outflow at the equilibrium real interest rate implies that the economy is experiencing _____ (a trade deficit OR balanced trade OR a trade surplus) Now, suppose the government is experiencing a budget deficit. This means that ______ (national saving will increase OR national saving will decrease OR domestic investment will increase OR domestic investment will decrease), which leads to ______ (an increase in the supply of OR…4. Short Answer Questions: If the price level in Japan is 1.0, the price level in the U.S. is 2.0, and it costs 100 yen to buy one dollar, then the nominal exchange rate is exchange rate between the U.S. and Japan is goods. _dollar / yen, the real Japanese goods per US 5. In order for an individual to be indifferent between holding foreign or domestic bonds, A. the Marshall-Lerner condition must hold. B. the foreign and domestic interest rates must be equal. C. the expected rate of depreciation of the domestic currency is zero. D. the interest parity condition must hold. 6. Assume that the interest parity condition holds. Also assume that the U.S. interest rate is 8% while the U.K. interest rate is 6%. Given this information, financial markets expect the pound to _(appreciate / depreciate) by %.