Consider an open economy flexible exchange rate IS-LM model with consumption, investment and net export functions: C = 550 +0.5(Y – T) I 500-1000i = NX = 350 1000E-0.3Y - Suppose that the interest parity condition is given as: E = 1+1 Ee 1+i* where the expected future exchange rate is fixed at = 1.05 and the foreign interest rate is fixed at i* = 5%. Assume that G = T = 0. Let the real money supply be M³/P = 380 and the real money demand be given by: Md/P=Y-500i
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- Suppose that the current exchange rate is 1.50 = £1, but it is expected to be 1.35 = £1in one year. If the current interest rate on a one-year government bond in the United Kingdom is 4%, what does the interest-rate parity condition indicate the interest rate will be on a one-year government bond in Germany? Assume that there are no differences in risk, liquidity, taxation, or information costs between the bonds.Suppose that today is 1st January 2022, Anthony Tan is interested in hiring a software engineer from Malaysia for his company Grab in the United States by using a 3-month short-term contract to control and monitor the mobile app development. The current exchange rate between US Dollars and Malaysian Ringgit (RM) is:1 USD equals RM 4.12. (i) What should Anthony Tan do to manage the international exposure from operational, if, in March 2022, the exchange rate is 1 USD = RM 4.25? (ii) What should Anthony Tan do to manage the international exposure from operational, if, in June 2022, the exchange rate is USD 1 = RM 3.98?Suppose the current spot exchange rate for the Chinese yuan is USD 0.15 per CNY. If the domestic prices of traded goods rise 70% over the next 10 years in China and 20% over the same period in the United States, then, according to the relative purchasing power parity hypothesis, the spot exchange rate for the yuan in 10 years will be approximately:
- An iPhone 13 costs $600 in the United States. Today, forex exchange rates were identified at:· S1 = €2.25· €1 = P43What should be the price of the same iPhone 13 in Philippines, assuming that the currency markets are efficient and purchasing power parity holds?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?For an investment in a foreign-currency-denominated financial asset, which of the followings is/are true? * The overall return to such an investment comes only from the return on the asset itself. The overall return to such an investment comes only from changes in the exchange-rate value of the foreign currency The overall return to such an investment comes from both the return on the asset itself and changes in the exchange-rate value of the foreign currency The value of investment (in terms of home currency) increases If the foreign currency value increases relative to my own currency. Both c and d Explain with no plagiarism
- According to the interest parity condition, if the domestic interest rate is 12 percent and the foreign interest rate is 10 percent, then the expected appreciation rate of the foreign currency against the domestic currency must be percent (put a negative sign if it is expected to depreciate). Question 13 options:Suppose the current spot exchange rate for the Chinese yuan is USD 0.15 per CNY. If the domestic prices of traded goods rise 70% over the next 10 years in China and 30% over the same period in the United States, then, according to the relative purchasing power parity hypothesis, the spot exchange rate for the yuan in 10 years will be approximately: USD 0.35 per CNY USD 0.60 per CNY USD 0.11 per CNYIf the same basket of goods costs $120 in the United States and €100 in Europe, what would .the purchasing power parity theory’s prediction of the dollar/euro exchange rate be? a. $1- €0.20 b. $1- €0.80 c. $1- €0.83 d. $1- €1.10 e. $1- €1.20
- Q2-12 When considering the change in price of a country's imports when foreign currencies depreciate by 10% relative to the home country, the "elasticity of exchange rate pass-through" would be equal to Select one: a. 1.0 if there were no "pass-through." b. 1.0 if there were complete "pass-through." c. zero if there were complete "pass-through." d. 10% if there were complete "pass-through."Assume that an open economy with a floating exchange rate is described by the equations: C = 0.85(Y-T)T= 1000I= 1500 -200r G= 3000NX= 2000 – 250e (M/P)d = 0.4Y – 500r M= 4000S-I= 750 – 250rP= 2r* = 4 Derive the equation for the IS* curve. Derive the equation for the LM curve. Solve for Y. Solve for NX and e. Using the information from parts a. to d. above, graphically illustrate on a clearly labelled diagram, the short-run impact of contractionary fiscal policy on the exchange rate and level of output in this small open economy. Assuming that the economy adopted a fixed exchange rate system, illustrate on a clearly labelled diagram, the impact of contractionary fiscal policy. In one sentence, explain the type of intervention needed to maintain the fixed exchange rate proposed in part f. above.In the monetary small open-economy model, suppose that money supply equals 100. The money demand function takes the form Md=P(0.5Y-400r). The foreign price level P* is 1. The equilibrium output Y is 200 and the world interest rate r* is 0.2.(a) Determine the equilibrium exchange rate.(b) If the country adopts a flexible exchange rate regime, what will be percentage change in the equilibrium exchange rate if money supply goes up by 10%?