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?
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?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
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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
For reference (image included)
Transcribed Image Text:EXHIBIT 3.4 What Is an ECU, and How Much Is It Worth in Dollars as of January
10, 1991?
Exchange
Rate of the Currency i's ECU Each Currency
Currency in
Dollars (2) $ (3) = (1) × (2)
Amount
Value of the
Weight of
of Each
in the ECU
Currency in
One ECU (1)
Component in
Currency
(4)
German mark (DM)
0.6242
0.6607
0.4127
30.8
French franc (FF)
British pound (£)
Italian lira (IL)
1.332
0.1942
0.2587
19.3
0.08784
1.90250
0.1671
12.5
151.8
0.000877
0.1331
9.9
Dutch guilder (DG)
Belgian franc (BF)
Luxembourg franc (LF)
Spanish peseta (Pta)
Danish krone (DK)
0.2198
0.5848
0.1285
9.6
3.301
0.032
0.1056
7.9
0.130
0.0167
0.0021
0.2
6.885
0.0104
0.0716
5.4
0.1976
0.1711
0.0338
2.5
Irish pound (I£)
Greek drachma (GD)
Portuguese escudo (Esc)
0.008552
1.7415
0.0148
1.1
1.440
0.00328
0.0047
0.4
1.393
0.00384
0.0053
0.4
1.3380
100.0
The currency composition of the ECU was valid from September 21, 1989, until the launch
of the euro on January 1, 1999.
This system of divergence indicators acts as an early warning signal. Once a cur-
rency ECU rate diverges by three-quarters of its allowable band, there is a pre-
sumption that its government will take remedial action, such as raising interest
rates and/or tightening fiscal policy if the currency is weak. Thus, divergence indi-
cators establish which country is at fault when an exchange rate reaches its
floor/ceiling against another currency, simply because the country at fault will
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