i) Under a fixed exchange rate, a continuous increase in domestic credit will finally cause... i. ii. iii. iv. V. unemployment to rise unemployment to fall exchange rate regime to collapse exchange rate regime to get stronger economic growth
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- Suppose the real exchange rate is constant – say, at the level required for net exports (or the current account) to equal zero. In this case, if foreign inflation is higher than domestic inflation, what must happen to the nominal exchange rate over time?Consider the AA-DD model with flexible exchange rates. Assume the economy is initially at full employment. a) Suppose a temporary shock to the money demand pushes the economy into recession. Describe one policy intervention that takes the economy back to its pre- shock equilibrium position.Explain, why appreciation of exchange rate (E) today results in the increase of expected return from foreign currency deposits (investments), assuming expected exchange rate does not change?
- Identify the statement as True, False, or Uncertain, and explain your reasoning: Consider a temporary positive inflation shock in a flexible exchange rate regime (with an inflation targeting central bank) and in a fixed exchange rate regime (where there is no policy intervention). Assume that both economies converge to a medium run equilibrium. Following the shock, inflation converges to its equilibrium value from above in both cases.Question Which of the following is a determinant of exchange rates? Answer a. A change in consumer preferences b. A change in productivity c. A change in real interest rates d. all of theseQ1-10 If a PPP estimate of the dollar/pound exchange rate is $1.61/£ and the current spot rate is observed to be $1.68/£, on the basis of these two rates you should, viewing the long-run, a. expect the dollar to appreciate against the pound. b. take a "short" position in dollars. c. expect the pound to appreciate against the dollar. d. have no expectation regarding the likely movement of the dollar/pound exchange rate.
- Due to ____, market forces should realign the relationship between the interest rate differential of two currencies and the forward premium (or discount) on the forward exchange rate between the two currencies. A. forward realignment arbitrage B. triangular arbitrage C. covered interest arbitrage D. locational arbitrageQ1-20 Covered interest parity (CIP) refers to the situation in which: a. interest rates are the same in both currencies. b. spot and forward rates are the same in both currencies. c. the forward rate between the two currencies is equal to the ratio of their returns times the spot rate between the two currencies. d. there is an opportunity for arbitrage whenever prices are sluggish and sticky.Let i be home interest rates, i* a foreign interest rates and p be the forward foreign exchange premium (=F/S-1). Assume there is a transaction cost equal to C incurred in any covered interest rate arbitrage. Write down the relation by which incentives are present for money to move from the foreign country to home.
- Which of the following is a determinant of exchange rates? a. A change in consumer preferences b. A change in productivity c. A change in real interest rates d. all of theseif we to use the monetary approach to exchange rate determination, what would be the predicted effect on the xchange rate of domestic currency if domestic real income increasesH10. Assume that initially, the risk premium, ρ = 0 and that the domestic and foreign interest rates are given by R = .06, R* = .05. Suppose that the risk premium depends linearly on the difference between domestic government debt, B, and domestic assets of the central bank, A, i.e., ρ = ρ (B-A) Find the new domestic interest rate if a sterilized purchase of foreign assets adjusts A s.t. (a) B - A = -.01/ ρ0 (b) B - A = .03/ ρ0