What does interest rate parity refer to? O a. Inflation rates in all countries are identical Ob. O b. Real exchange rates in all countries are identical None of the answers is correct O d. Nominal interest rates in all countries are identical
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- Does a higher rate of return in a nations economy, all other things being equal, affect the exchange rate of its currency? If so, how?If a countrys currency is expected to appreciate in value, what would you think will be the impact of expected exchange rates on yields (e.g., the Interest rate paid on government bonds) in that country? Hint: Think about how expected exchange rate changes and interest rates affect a currencys demand and supply.Imagine that the economy of Germany finds itself in the following situation: the government budget has a surplus of 1 of Germanys GDP; private savings is 20 of GDP; and physical investment is 18 of GDP. Based on the national saving and investment identity, what is the current account balance? If the government budget surplus falls to zero, how will this affect the current account balance?
- The theory of purchasing power parity cannot fully explain exchange rate movements because Select one: O a. fiscal policy differs across countries O b. some goods are not traded between countries O c. monetary policy differs across countries O d. all goods are identical even if produced in different countries O e. both b andcE1 The higher the value of e, the ______________(More or less) units of foreign currency a dollar buys. When a nominal exchange rate goes up, we say the domestic currency is _________(appreciating or depreciating) against the foreign currency. When a nominal exchange rate goes down, we say that the domestic currency is _________(depreciating or appreciating) against the foreign currency.Purchasing-power parity holds between the nationsof Ectenia and Wiknam, where the only commodityis Spam.a. In 2020, a can of Spam costs 4 dollars in Ecteniaand 24 pesos in Wiknam. What is the exchange ratebetween Ectenian dollars and Wiknamian pesos?b. Over the next 20 years, inflation is expected to be3.5 percent per year in Ectenia and 7 percent peryear in Wiknam. If this inflation comes to pass,what will the price of Spam and the exchangerate be in 2040? (Hint: Recall the rule of 70 fromChapter 27.)c. Which of these two nations will likely have ahigher nominal interest rate? Why?d. A friend of yours suggests a get-rich-quickscheme: Borrow from the nation with the lowernominal interest rate, invest in the nation with thehigher nominal interest rate, and profit from theinterest-rate differential. Do you see any potentialproblems with this idea? Explain.
- A case study in the chapter analyzed purchasingpower parity for several countries using the pricc ofBig Macs. Here arc data for a few more countries: a. For each country, compute the predicted exchangerate of the local currency per U.S. dollar. (Recallthat the U.S. price o( a Big Mac was $4.93.)b. According to purchasing-power parity, what is thepredicted exchange rate between the Hungarianforint and the Canadian dollar? What is the actualexchange rate?c. How well docs the theory of purchasing-powerparity explain exchange rates?The purchasing power parity may not fully explain exchange rate movements because Select one: the foreign price level changes by more than the domestic price level O a. O b. of changes in the price of goods and services not traded internationally O c. different countries have different inflation rates O d. monetary policy differs across countries O e. the domestic price level changes by more than the foreign price level Next pa Epage e to searchWhat is happening to the U.S. real exchange rate ineach of the following situations? Explain.a. The U.S. nominal exchange rate is unchanged,but prices rise faster in the United States thanabroad.b. The U.S. nominal exchange rate is unchanged, butprices rise faster abroad than in the United States.c. The U.S. nominal exchange rate declines, andprices are unchanged in the United States andabroad.d. The U.S. nominal exchange rate declines, andprices rise faster abroad than in the United States.
- Evaluate the following statement: "if lower exchange rates increase a nation's exports, the govermment should do everything in its power to anure that the exchange rate for its cumency is an low as it can possbly be This statement does nat acknowledge that lower exchange rates OA couid result in a reluctance from other countries to accept this nation's currency for payment of any goodn or services OB. could make a currency virtually worthless. O C. make a nation's imports more expensive. COD. None of the above responses are acknowledged by the statement.How does the appreciation of a currency affect the balance of payments? a. Appreciation of a currency decreases current accounts as exports fall and imports rise O b. Appreciation of a currency decreases current accounts as both exports and imports fall O c. Appreciation of a currency increases current accounts as both exports and imports rise O d. Appreciation of a currency increases current accounts as exports fall and imports rise All of the following fall under the Philippines' capital account except for a. OFW remittances O b. Cash aid from the US for families affected by typhoon Odette O c. Stocks O d. All of the aboveSuppose the real exchange rate is 10, the domestic price level is 8, and the foreign price level is 4. (i) What is the nominal exchange rate?e - enor-P Use the expression: rea! - PrOT ,where ereal is real exchange rate, enor is nominal exchange rate, P is domestic price level and Pro, is foreign price level (ii) Suppose the real exchange rate rises by 10%, the inflation rate in the domestic country is 6%, and the inflation rate in the foreign country is 4%. By what percentage does the nominal exchange rate change?