Using the fundamental equation of the asset approach to exchange rates for two countries, Home and Foreign, show graphically and explain the effect on expected rate of return on Home and Foreign deposits and on the spot exchange rate if the interest rate on Foreign deposits remains unchanged, Home interest rate decreases, and the expected exchange rate is unchanged.
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- Economic logic may tell us that a country with a higher interest rate, thus a higher rate of return, should be able to attract foreign capital and that a country with a lower interest rate, thus a lower rate of return, should experience an outflow of capital. If a country is experiencing a large net capital inflow its currency is likely to appreciate, while a country experiencing a large net capital outflow would likely see its currency depreciate (assuming a floating exchange rate). However, according to interest rate parity conditions a country with a higher interest rate would see its currency depreciate, while the currency of the lower interest rate country would appreciate. What is the main reason the outcome under interest rate parity conditions? Question 4 options: The assumption that countries have an identical real interest rate The relative interest rate level is not a factor for investment decisions Investors do not seek…Suppose that the annual rate of returns on dollar deposits equals 3% and the rate of returnon euro deposits is 1%. Furthermore, assume that the current exchange rate is $0.9=1 euro.Find the expected exchange rate where interest parity holds?Let's suppose the current exchange for Forint (Hungary currency) vs. Kuna (Croatia currency) is: 55.75 Forint/Kuna. Suppose the interest rate on Hungary's government securities with one-year maturity is 3%, and that of Croatia is 2%. According to the International Fisher Effect model, Forint will _____ against the other currency.
- The Purchasing Power Parity (PPP) theory of the exchange rate implies that the currency of a country A would depreciate against that of country B if: (a) the inflation rate in A exceeds that in B (b) the normal interest rate in A exceeds that in B (c) the growth rate of GDP in B exceeds that in A (d) foreign direct investment moves from B to ASuppose the nominal exchange rate (given as foreign currency per unit of U.S. currency as in class) rises. If purchasing power parity holds, this could mean that domestic prices __________________ or foreign prices ________________ with all else unchanged. Group of answer choices A) increased, decreased B) decreased, decreased C) increased, increased D) decreased, increasedPrices in Country A sharply rose due to a supply shortage and led to high levels of inflation in the economy. What effect is this price increase likely to have on domestic currency in the foreign exchange market? Country A's domestic currency will see an appreciation, in relation to currencies of other trading partners. Country A's domestic currency will see both appreciation and depreciation, in relation to currencies of other trading partners. Country A's domestic currency will see no change, in relation to currencies of other trading partners. Country A's domestic currency will see a depreciation, in relation to currencies of other trading partners. There is insufficient information to draw a conclusion.
- Explain the function and structure of the foreign exchange marketOutline the arguments for and against a system of fixed foreign exchange rates.Illustrate graphically the effects in the foreign exchange market of an expansionary monetary policy carried out by the foreign country in our two-country framework. Consider the cases of both a fixed and a flexible exchange rate.
- Contrast the effects of having a fixed versus a floating exchange rate for a country’s economyWhenever the purchasing power of a Home country's currency is the same in both Home and Foreign, the real exchange rate between Home and Foreign is equal to 1. True False If inflation in the United States is 4% per year and in China it is 8% per year, and interest rate in the China is 10%, then the Fisher effect predicts that the interest rate in the United States is 6%. True False If relative PPP and uncovered interest parity hold,____________________ Absolute PPP must hold. covered interest rate parity must hold. real interest rate parity must hold. anything could happen.If a Japanese car costs 500,000 yen, a similar American car costs $10,000, and a dollar can buy 100 yen, what are the normal and real exchange rate?