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Briefly
1. describe the relationship between a country's inflation rate and its exchange rate.
2. explain why the above relationship exists.
Step by step
Solved in 2 steps
- What are some of the reasons a central bank is likely to care, at least to some extent, about the exchange rate?20. Suppose 1 CAD = 30 MXN was the actual exchange rate. Predict how people would respond to this exchange rate given that the exchange rates between USD and CAD and MXN are as listed above. I4) Suppose the price level in India is 9,500, the price level in the United States is 140, and the price level in Brazil is 750. Suppose the current nominal exchange rates are 75 Indian rupee per dollar and 5 Brazilian real per dollar. Calculate the real exchange rates (rounded to two decimal places) between each pair of countries. Note that you will have to first calculate the nominal exchange rate between Brazil and South India before calculating the real exchange rate between those two countries. (4
- 5. Suppose there are only two countries in the world, U.S. and Mexico, with two currencies associated with them, dollar and peso respectively, traded in the foreign exchange market. All other things constant, explain how value of Peso changes, either appreciates or depreciates as the result of the following two events. Briefly explain why. Event a: Interest rates on savings bonds in Mexico rise above interest rates on savings bonds in the U.S. Event b: GDP grows faster in the U.S. than it does in Mexico.1. Explain how nominal exchange rate affects real exchange rate. Suppose that a chocolate bar costs 20 euros in France and 30 Singaporean dollars in Singapore. If the exchange rate is 1.20 euros per Singaporean dollars, what is the real exchange rate?4. Before 12th August 2005, the US Dollar (USD) was trading at 8.20 Renminbi yuan per dollar (RMB, China’s official currency) in the financial market of China. After that date, the USD was trading at only 7.50 RMB yuan per dollar in China. (1) If you received $100 US dollars from your friend in New York in July 2005, hold it for half a year and finally exchange it for RMB in Chengdu in late January 2006, how much value in RMB would you lose? (2) What is the percentage change in the US Dollar’s value?
- 11. Suppose that apples were the only good produced in the United States and Mexico. In Mexico, apples sell for 12 pesos apiece. In the Unites states, apples sell for $0.50 apiece. a. According to the theory of Purchasing Power Parity, what is the equilibrium nominal exchange rate between the U.S. dollar and the Mexican peso? What would the real exchange rate between the U.S. and Mexico in that case? b. Suppose the price of apples rises at a rate of 3% per vear in the U.S., but at a rate of 12% per year in Mexico. According to PPP, by how much should we expect the nominal U.S dollar/Mexican peso exchange rate to change in the course of 1 year (up, or down, and by what %)? c. Starting at the exchange rate you calculated in (a), and assuming the rates of inflation remain the same as in (b), what nominal exchange rate would you expect in 3 years?15. Why do exchange rates frequently violate the theory of PPP? To what extent does this diminish the theory's usefulness for understanding exchange rate determination?2. In 2015 one barrel of Brent oil traded for GBP 42.5 and South Africa rands (ZAR) 790. What is theexchange rate between the pound and the rand? How would the exchange rate change if the oilprice jumps to GBP 50/barrel (assume no change in the price in S. Africa)?
- 1- In Myanmar to fix the exchange rate at 1 US$ = 5 Kyat, the government has imposed law stated that for people who buy and sell US dollars at any exchange rate that is different from this rate will be imprisoned in jail for 10 years. However, 3 months later, after the failure of the implementation, the government revoked and gave up the law and let the exchange rate floated at market rate of 1 US$ = 1,320 Kyat. Using the concept about "US dollar reserves at Myanmar central bank" and "US dollar black market", explain the reasons leading to failure of this law!28. Assuming the exchange rate of the US$ to Mexican Peso (MXN) changes from US$1 MXN 20.44 to US$1 = MXN 22. The value of the US currency has _ in value and that %3D US exports to Mexico will appreciated ; increase depreciated ; increase depreciated ; decrease appreciated ; decrease3. A US company wants to arrange a forward contract to buy euros in year. The interest rates for investments in US dollars and euros are 3% and 4%, respectively. The current exchange rate is 0.79 euros to a dollar. What is the forward exchange rate?
