You are given the following information about a country’s international transactions during a year: a.Calculate the values of the country’s goods and services balance,current account balance,and official settlements balance? a.Merchandise trade balance: $330198 + 196198 + 1968 = $119 Official settlements balance: $330204 + 3202 + 4 = $23
b.What are the value of the change in official reserve aets(net)?Is the country increasing or decreasing its net holdings of official reserve aets? b.Change in official reserve aets (net) =(1 + 0.01) = 0.005.(Note that the interest rate used must match the time period of the investment.) There is a covered interest differential of 0.5% for 30 days (6 percent at an annual rate).The U.S.investor can make a higher return, covered against exchange rate risk, by investing in SFr-denominated bonds, so presumably the investor should make this covered investment.Although the interest rate on SFr-denominated bonds is lower than the interest rate on dollar-denominated bonds, the forward premium on the franc is larger than this difference, so that the covered investment is a good idea.
c.Because of covered interest arbitrage,what preures are placed on the various rates?if the only rate that actually changes is forward exchange rate,to what value will it bu driven? c.The lack of demand for dollar-denominated bonds (or the supply of these bonds as investors sell them in order to shift into SFr-denominated bonds) puts downward preure on the prices of U.S.bonds—upward preure on U.S.interest rates.The extra demand for the franc in the spot exchange market (as investors buy SFr in order to buy SFr-denominated bonds) puts upward preure on the spot exchange rate.The extra demand for SFr-denominated bonds puts upward preure on the prices of Swi bonds—downward preure on Swi interest rates.The extra supply of francs in the forward market (as U.S.investors cover their SFr investments back into dollars) puts downward preure on the forward exchange rate.If the only rate that changes is the forward exchange rate, this rate must fall to about $0.5025/SFr.With this forward rate and the other initial rates, the covered interest differential is close to zero.
Why is testing whether uncovered interest parity holds for actual rates more difficult than testing whether covered interest parity holds? In testing covered interest parity, all of the interest rates and exchange rates that are
needed to calculate the covered interest differential are rates that can observed in the bond and foreign exchange markets.Determining whether the covered interest differential is about zero (covered interest parity) is then straightforward (although some more subtle iues regarding timing of transactions may also need to be addreed).In order to test uncovered interest parity, we need to know not only three rates—two interest rates and the current spot exchange rate—that can be observed in the market, but also one rate—the expected future spot exchange rate—that is not observed in any market.The tester then needs a way to find out about investors\' expectations.One way is to ask them, using a survey, but they may not say exactly what they really think.Another way is to examine the actual uncovered interest differential after we know what the future spot exchange rate actually turns out to be, and see whether the statistical characteristics of the actual uncovered differential are consistent with an expected uncovered differential of about zero (uncovered interest parity) the following rates currently exist: spot exchange rate: ＄1.000/euro.Annual interest rate on 180-day euro-denominated bonds:3% Annual interest rate on 180-day U.S dollar-denominated bonds:4% Ibvestors currently expect the spot exchange rate to be about＄1.005/euro in180 days.a.show that uncovered interest parity holds(approximately)at these rates a.The euro is expected to appreciate at an annual rate of approximately ((1.0054% = 0, so uncovered interest parity holds (approximately).
What is likely to be the effect on the spot eschange rate if the interest rate on 180-day dollar-denominated bonds declines to 3%? If the euro interest rate and the expected future spot rate are unchanged,and if uncovered interest parity is reestablished,what will the new current spot exchange rate be?has the dollar appreciated or depreciated? b.If the interest rate on 180-day dollar-denominated bonds declines to 3%, then the spot exchange rate is likely to increase—the euro will appreciate, the dollar depreciate.At the initial current spot exchange rate, the initial expected future spot exchange rate, and the initial euro interest rate, the expected uncovered interest differential shifts in favor of investing in euro-denominated bonds (the expected uncovered differential is now positive, 3% + 1%3% = 0)
You observe the following current rates: Spot exchange rate: ＄0.01/yen Annual interest rate on 90-day U.S dollar-denominated bonds:4% Annual interest rate on 90-day yen-denominated bonds:4% a.if uncovered interest parity holds,what spot exchange rate do investors expect to exist in 90 days? a.For uncovered interest parity to hold, investors must expect that the rate of change in the spot exchange-rate value of the yen equals the interest rate differential, which is zero.Investors must expect that the future spot value is the same as the current spot value, $0.01/yen.
b.a close U.S presidential has just been decided.the candidate whom international investors view as the stronger and more probusine person won.because of this,investors expect the exchange rate to be＄0.0095/yen in 90 days.what will happen in the foreign exchange market? b.If investors expect that the exchange rate will be $0.0095/yen, then they expect the yen to depreciate from its initial spot value during the next 90 days.Given the other rates, investors tend to shift their investments toward dollar-denominated investments.The extra supply of yen (and demand for dollars) in the spot exchange market results in a decrease in the current spot value of the yen (the dollar appreciates).The shift to
expecting that the yen will depreciate (the dollar appreciate) sometime during the next 90 days tends to cause the yen to depreciate (the dollar to appreciate) immediately in the current spot market.
To aid in its efforts to get reelected,the current government of o country decides to increase the growth rate of the domestic money supply by two percentage points.the increased growth rate becomes”permanene”because once started it is difficult to reverse.a.according to the monetary approach,how will this affect the long-run trend for the exchange rate value of the country’s currency? a.Because the growth rate of the domestic money supply (M s ) is two percentage points higher than it was previously, the monetary approach indicates that the exchange rate value (e) of the foreign currency will be higher than it otherwise would be—that is, the exchange rate value of the country\'s currency will be lower.Specifically, the foreign currency will appreciate by two percentage points more per year, or depreciate by two percentage points le.That is, the domestic currency will depreciate by two percentage points more per year, or appreciate by two percentage points le.
b.explain why the nominal exchange rate trend is affected,referring to PPP b.The faster growth of the country\'s money supply eventually leads to a faster rate of inflation of the domestic price level (P).Specifically, the inflation rate will be two percentage points higher than it otherwise would be.According to relative PPP, a faster rate of increase in the domestic price level (P) leads to a higher rate of appreciation of the foreign currency.
A country has a marginal propensity to save of 0.15 and a marginal propensity to import of 0.4 real domestic spending now decreases by＄2 billion a.according to the spending multiplier(for a small open economy),,by how much will domestic product and income change? a.The spending multiplier in this small open economy is about 1.82 (= 1/(0.15 + 0.4)).If real spending initially declines by $2 billion, then domestic product and income will decline by about $3.64 billion (= 1.82$2 billion)
b.what is the change in the country’s imports? b.If domestic product and income decline by $3.64 billion, then the country\'s imports will decline by about $1.46 billion (= $3.64 billion0.4).
c.if this country is large,what effect will this have on foreign product and income?explain c.The decrease in this country\'s imports reduces other countries\' exports, so foreign product and income decline.
d.will the change in foreign product and income tend to counteract or reinforce the change in the first country’s domestic product and income?explain d.The decline in foreign product and income reduce foreign imports, so the first country\'s exports decrease.This reinforces the change (decline) in the first country\'s domestic product and income—an example of foreign-income repercuions.
