The ECU as a basket of currencies. What is the percentage/weight of the ECU's total value accounted by the Spanish peseta? Refer to Exhibit 3.4 in the text. Would you get a different result if you valued the ECU in Japanese yen instead of the U.S. dollar? Would you expect this weight to change if the ECU depreciates by 10 percent against the U.S. dollar?
The ECU as a basket of currencies. What is the percentage/weight of the ECU's total value accounted by the Spanish peseta? Refer to Exhibit 3.4 in the text. Would you get a different result if you valued the ECU in Japanese yen instead of the U.S. dollar? Would you expect this weight to change if the ECU depreciates by 10 percent against the U.S. dollar?
Chapter1: Making Economics Decisions
Section: Chapter Questions
Problem 1QTC
Related questions
Question
The ECU as a basket of currencies. What is the percentage/weight of the ECU's total value accounted by the Spanish peseta? Refer to Exhibit 3.4 in the text. Would you get a different result if you valued the ECU in Japanese yen instead of the U.S. dollar? Would you expect this weight to change if the ECU
Transcribed Image Text:EXHIBIT 3.4 What Is an ECU, and How Much Is It Worth in Dollars as of January
10, 1991?
Exchange
Rate of the Currency i's ECU Each Currency
Currency in
Dollars (2) $ (3) = (1) × (2)
Amount
Value of the
Weight of
of Each
in the ECU
Currency in
One ECU (1)
Component in
Currency
(4)
German mark (DM)
0.6242
0.6607
0.4127
30.8
French franc (FF)
British pound (£)
Italian lira (IL)
1.332
0.1942
0.2587
19.3
0.08784
1.90250
0.1671
12.5
151.8
0.000877
0.1331
9.9
Dutch guilder (DG)
Belgian franc (BF)
Luxembourg franc (LF)
Spanish peseta (Pta)
Danish krone (DK)
0.2198
0.5848
0.1285
9.6
3.301
0.032
0.1056
7.9
0.130
0.0167
0.0021
0.2
6.885
0.0104
0.0716
5.4
0.1976
0.1711
0.0338
2.5
Irish pound (I£)
Greek drachma (GD)
Portuguese escudo (Esc)
0.008552
1.7415
0.0148
1.1
1.440
0.00328
0.0047
0.4
1.393
0.00384
0.0053
0.4
1.3380
100.0
The currency composition of the ECU was valid from September 21, 1989, until the launch
of the euro on January 1, 1999.
This system of divergence indicators acts as an early warning signal. Once a cur-
rency ECU rate diverges by three-quarters of its allowable band, there is a pre-
sumption that its government will take remedial action, such as raising interest
rates and/or tightening fiscal policy if the currency is weak. Thus, divergence indi-
cators establish which country is at fault when an exchange rate reaches its
floor/ceiling against another currency, simply because the country at fault will
Expert Solution
This question has been solved!
Explore an expertly crafted, step-by-step solution for a thorough understanding of key concepts.
Step by step
Solved in 2 steps
Knowledge Booster
Learn more about
Need a deep-dive on the concept behind this application? Look no further. Learn more about this topic, economics and related others by exploring similar questions and additional content below.Recommended textbooks for you
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (12th Edition)
Economics
ISBN:
9780134078779
Author:
Karl E. Case, Ray C. Fair, Sharon E. Oster
Publisher:
PEARSON
Engineering Economy (17th Edition)
Economics
ISBN:
9780134870069
Author:
William G. Sullivan, Elin M. Wicks, C. Patrick Koelling
Publisher:
PEARSON
Principles of Economics (MindTap Course List)
Economics
ISBN:
9781305585126
Author:
N. Gregory Mankiw
Publisher:
Cengage Learning
Managerial Economics: A Problem Solving Approach
Economics
ISBN:
9781337106665
Author:
Luke M. Froeb, Brian T. McCann, Michael R. Ward, Mike Shor
Publisher:
Cengage Learning
Managerial Economics & Business Strategy (Mcgraw-…
Economics
ISBN:
9781259290619
Author:
Michael Baye, Jeff Prince
Publisher:
McGraw-Hill Education