Assume that initially nominal exchange rate is E1=5 ($1 = t5) and domestic (Turkey) inflation rate is nTR=10% percent while the US inflation rate is nUS*=0%. If export value of Turkey equals t 200 billion and it's import is $100 billion. Initially Turkey NX (net export) would display t 300 billion deficit. If the nominal exchange rate increases suddenly from E1=5 to E2=6,6 while the price levels are still fixed (at the first step of J Curve) NX would be t 460 billion deficit in short run. If the real exchange rate elasticity of export is 1 and real exchange rate elasticity of import is -0,8. NX would converge to t billion deficit in long run.

Assume that initially nominal exchange rate is E1=5 ($1 = t5) and domestic (Turkey) inflation rate is nTR=10% percent while the US inflation rate is nUS*=0%. If export value of Turkey equals t 200 billion and it's import is $100 billion. Initially Turkey NX (net export) would display t 300 billion deficit. If the nominal exchange rate increases suddenly from E1=5 to E2=6,6 while the price levels are still fixed (at the first step of J Curve) NX would be t 460 billion deficit in short run. If the real exchange rate elasticity of export is 1 and real exchange rate elasticity of import is -0,8. NX would converge to t billion deficit in long run.

Brief Principles of Macroeconomics (MindTap Course List)

8th Edition

ISBN:9781337091985

Author:N. Gregory Mankiw

Publisher:N. Gregory Mankiw

Chapter13: Open-economy Macroeconomics: Basic Concepts

Section: Chapter Questions

Problem 9PA

See similar textbooks

Similar questions

Assume that the export price of a Toyota Corolla from Osaka, Japan is ¥4,200,000. The exchange rate is ¥109.60/$. The forecast rate of inflation in the United States is 2.5% per year and is 1.5% per year in Japan. Use this data to answer the following questions on exchange rate passthrough. What was the export price for the Corolla at the beginning of the year expressed in the U.S. Dollars? Assuming purchasing power parity holds, what should the exchange rate be at the end of the year? Assuming a 65% pass-through of the exchange rate, what will be the dollar price of a Corolla at the end of the year?
Suppose the annual rate of inflation in the UK is 5.67%, and the annual rate of inflation in Europe is 2.95%. If the EUR depreciates relative to the GBP by 3.60% in real terms, then which of the following would be correct? a. Nominal exchange rate appreciation by 0.630%. b. Nominal exchange rate depreciation by 1.053%. c. Nominal exchange rate appreciation by 6.320%. d. Nominal exchange rate depreciation by 1.959%. e. None of the options in this question are correct.
Suppose we consider two countries, a home country and a foreign country. In the home country, the expected inflation rate is equal to 3.6 per cent, while the expected inflation rate abroad is equal to 4.2 per cent. Furthermore, it is known that the nominal interest rate in the home country is equal to 3.4 per cent, while the nominal interest rate abroad is equal to 4 per cent.a) First explain what is meant by absolute purchasing power parity, relative purchasing power parity and uncovered nominal interest rate parity. Then give an estimate of the expected growth in the nominal exchange rate based on each of the three theories. Finally, show that if both relative purchasing power parity and uncovered nominal interest rate parity apply, real interest rates in the two countries will be approximately equal.
Assume that relative to today, Dollar is expected to depreciate against the Euro by 10% in real terms over the next period. Assume further that the expected rates of inflation (over the next period) is 10% and 5% in Australia and Europe, respectively. If the real interest rate in Europe r€ = 5%, choose the correct option: A. r$ = -5% B. r$ = 10% C. The above information is not enough to calculate r$ D. r$ = 20% E. r$ = 15%
The Mexican peso is trading at 11 pesos per dollar.If the expected U.S. inflation rate is 1% while theexpected Mexican inflation rate is 15% over the nextyear, given PPP, what is the expected exchange rate inone year?
Due to the integrated nature of their capital markets, investors in both the United States and the U.K. require the same real interest rate, 2.5 percent, on their lending. There is a consensus in capital markets that the annual inflation rate is likely to be 3.5 percent in the United States and 1.5 percent in the U.K. for the next three years. The spot exchange rate is currently $1.50 per £. Required: Compute the nominal interest rate per annum in both the United States and the U.K., assuming that the Fisher effect holds. What is your expected future spot dollar-pound exchange rate in three years from now? Can you infer the forward dollar-pound exchange rate for one-year maturity?
Please show all work: Suppose the current $/B₤ exchange rate is $1.56/₤. The inflation rate in the U.S. is projected to be 4.6% for the year, while it is expected to be 3.2% in the U.K. Right now, a consumer can be the same car in the U.S. for $26,000 that costs ₤16,667 in England. What is the project cost of the car in the U.S. and U.K. by the end of the year? What change in the exchange rate is projected by PPP? Demonstrate that the two cars will cost the same at the end of the year if PPP holds.
Suppose the demand for dollars (in exchange for euro) is given by the equation: D = 160 + 0.020Y(for) - 550 r(for) + 700r - 28 e(nom) The supply of dollars is given by: S = 80 + 0.022Y + 300r(for) - 640r + 24 e(nom) Suppose output and the real interest rate in the domestic country and the foreign country are: Y = 8,000, Y(for) = 9000, r = 0.060, r(for) = 0.040 Calculate the equilibrium value of the nominal exchange rate. In your calculations, carry out your intermediate steps to three decimals and round your answer to three decimals.
Assume that interest rate partiy holds. The U.S five year interest rate is 4% annualized, and the Mexican five -year interest rate is 6% annualized. Todays spot rate of the Mexican peso is $0.24. The approximate five-year forecast of the pesos spot rate is $ ______ if the five year foward rate is used as a forecast.
7) On may 1,2015 the yen/dollar and euro/dollar exchange rates were ¥120.15 and €0.8929, respectively. What is the euro/yen cross exchange rate?
ASAP At the beginning of the year, the exchange rate between the Brazilian real and the U.S. dollar was 1.2 reals per dollar. Over the year, Brazilian inflation was 8 percent and U.S. inflation was 2 percent. Explain what should we expect to happen to the U.S. dollar relative to Brazilian real? Provide theintuition.
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.