Principles of Macroeconomics (12th Edition)
12th Edition
ISBN: 9780134061115
Author: CASE
Publisher: PEARSON
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Chapter 19, Problem 3.5P
To determine
The impact of change in the exchange rate
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When Great Britain voted to leave the eurozone, the pound depreciated 17% against the dollar. It also raised fears that the eurozone, which uses the euro as a common currency, would fall apart. Suppose that the dollar is considered safer than the euro, given these conditions.
The following graph shows the market for dollars, with the quantity of dollars measured along the horizontal axis and the price of dollars in terms of euros measured along the vertical axis (in other words, the euro/dollar exchange rate).
Suppose that you hold a piece of land in the city of London that you may want to sell in one year. As a U.S. resident, you are concerned with the dollar value of the land. Assume that if the British economy booms in the future, the land will be worth £2,000, and one British pound will be worth $1.50. If the British economy slows down, on the other hand, the land will be worth less, say, £1,500, but the pound will be stronger, say, $1.60 per pound. You feel that the British economy will experience a boom with a 60 percent probability and a slowdown with a 40 percent probability.
Required:
Estimate your exposure (b) to the exchange risk.
Note: Negative amount should be indicated by a minus sign.
Compute the variance of the dollar value of your property that is attributable to exchange rate uncertainty.
Using data from The Economist's Big Mac Index for 2019, the following table shows the local currency price of a Big Mac in several countries as well as the actual exchange rate between each country and the United States. At the time of the data collection, a Big Mac would have cost you $5.74 in the United States and GBP 3.29 in the United Kingdom. The actual exchange rate between the British pound and the U.S. dollar was $1.25 per pound. The dollar price of a Big Mac purchased in the United Kingdom was, therefore, computed as follows:
Dollar price of a Big Mac in the United KingdomDollar price of a Big Mac in the United Kingdom
= =
GBP 3.29×$1.25GBP 1.00GBP 3.29×$1.25GBP 1.00
= =
$4.11$4.11
For the price you paid for a Big Mac in the United States, you could have purchased a Big Mac in the United Kingdom and had some change left over for fries!
Complete the final column of the table by computing the dollar price of a Big Mac for the countries where this amount is…
Chapter 19 Solutions
Principles of Macroeconomics (12th Edition)
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- This question relates to the following news article New Zealand dollar drops to lowest value against US dollar since 2020 (27/09/2022) The New Zealand dollar has dropped to its lowest value against its US equivalent since March 2020. The bad news for Kiwis is that it means it'll take longer for consumer price inflation to fall. ...a weak Kiwi dollar means importing is more expensive. "While we do expect inflation rates to slowly fall from here, the longer the New Zealand dollar remains low. the slower it will take for those inflation rates to fall." ASB senior economist Mark Smith said. Six months ago the New Zealand dollar was US68.9c - now it's at US56.6c, a fall of 18 percent. Aotearoa's dollar is suffering because the US dollar is being pumped up by the US Federal Reserve lifting interest rates to tackle inflation. "interest rates globally are going up, and when rates are going up, generally people tend to look to where their money will be safest, and at the moment it's certainly…arrow_forwardThis question relates to the following news article New Zealand dollar drops to lowest value against US dollar since 2020 (27/09/2022) The New Zealand dollar has dropped to its lowest value against its US equivalent since March 2020. The bad news for Kiwis is that it means it'll take longer for consumer price inflation to fall. ...a weak Kiwi dollar means importing is more expensive. "While we do expect inflation rates to slowly fall from here, the longer the New Zealand dollar remains low. the slower it will take for those inflation rates to fall." ASB senior economist Mark Smith said. Six months ago the New Zealand dollar was US68.9c - now it's at US56.6c, a fall of 18 percent. Aotearoa's dollar is suffering because the US dollar is being pumped up by the US Federal Reserve lifting interest rates to tackle inflation. "interest rates globally are going up, and when rates are going up, generally people tend to look to where their money will be safest, and at the moment it's certainly…arrow_forwardQuestion 13 As the price level rises, Answer the exchange rate falls, so net exports fall. the exchange rate falls, so net exports rise. the exchange rate rises, so net exports fall. the exchange rate rises, so net exports rise. Question 14 Other things the same, as the price level rises, the real value of a dollar Answer rises, and interest rates rise. rises, and interest rates fall. falls, and interest rates rise. falls, and interest rates fall. Question 15 Other things the same, as the price level falls, a country’s exchange rate Answer and interest rates rise. and interest rates fall. falls and interest rates rise. rises and interest rates fall. Question 16 Suppose a fall in stock prices makes people feel poorer. The decrease in wealth would induce people to desire Answer decreased consumption, shown as a movement to the left along a given aggregate-demand curve. increase consumption, shown as a movement to the right along a given aggregate-demand curve. decreased…arrow_forward
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