Macroeconomics
21st Edition
ISBN: 9781259915673
Author: Campbell R. McConnell, Stanley L. Brue, Sean Masaki Flynn Dr.
Publisher: McGraw-Hill Education
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Question
Chapter 21, Problem 5RQ
To determine
Change in supply of dollar.
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8. Suppose that last year, the nominal exchange rate between the Japanese yen and the British pound was ¥150.0 per £1.0, one unit of Japanese output cost ¥1300, and one unit of British output cost £8.0.a. What was the real exchange rate between the U.K. and Japan last year, expressed as the cost of British output (i.e. – the quantity of Japanese output that exchanges for 1 unit of British output)? In which country were goods more expensive last year?
Suppose the 12-month forward price of the yen in terms of dollars is
.02 dollars per yen. Suppose the spot price of of the yen in terms of dollars is .019.
Next, suppose that currently the annual interest rate on dollar deposits is 2%, while
the interest rate on a comparable yen deposit is 1%. There are no transactions costs.
Is there an arbitrage opportunity here? If so, explain exactly how you would take
advantage of this situation to make riskless profits.
Assume that the U.S. interest rate is 12 percent, while the British interest rate is 15 percent. If interest rate parity exists, then: O a.U.S. investors will earn 12 percent whether they use covered interest arbitrage or invest in the United States. O b. U.S. investors will earn a higher rate of return when using covered interest arbitrage than what they would earn in the United States. O c. British investors who invest in the United Kingdom will achieve the same return as U.S. investors who invest in the United States. O d. U.S. investors will earn 15 percent whether they use covered interest arbitrage or invest in the United States.
Chapter 21 Solutions
Macroeconomics
Ch. 21.1 - Prob. 1QQCh. 21.1 - Prob. 2QQCh. 21.1 - Prob. 3QQCh. 21.1 - Prob. 4QQCh. 21.A - Prob. 1ADQCh. 21.A - Prob. 1ARQCh. 21.A - Prob. 1APCh. 21 - Prob. 1DQCh. 21 - Prob. 2DQCh. 21 - Prob. 3DQ
Ch. 21 - Prob. 4DQCh. 21 - Prob. 5DQCh. 21 - Prob. 6DQCh. 21 - Prob. 7DQCh. 21 - Prob. 8DQCh. 21 - Prob. 9DQCh. 21 - Prob. 10DQCh. 21 - Prob. 11DQCh. 21 - Prob. 1RQCh. 21 - Prob. 2RQCh. 21 - Prob. 3RQCh. 21 - Prob. 4RQCh. 21 - Prob. 5RQCh. 21 - Prob. 6RQCh. 21 - Prob. 7RQCh. 21 - Prob. 8RQCh. 21 - Prob. 9RQCh. 21 - Prob. 10RQCh. 21 - Prob. 1PCh. 21 - Prob. 2PCh. 21 - Prob. 3PCh. 21 - Prob. 4PCh. 21 - Prob. 5P
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- Suppose that Great Britain and the United States are trading partners. Assume that the initial exchange rate in Great Britain is £0.76= 1$. Now suppose that the opportunity cost of consumption in the United States begin to rise. Which of the following explain what is expected to happen in the British forex market? O The demand for British pounds will decrease, leading to a depreciation of the US dollar. O The supply of British pounds will increase, leading to an appreciation of the British pound. O The supply of American dollars will decrease, leading to a depreciation of the British pound. O The demand for American dollars will decrease, leading to an appreciation of the British pound. Please do fast ASAP fastarrow_forwardASAP 9) Suppose that Americans decide to increase their saving.a. If the elasticity of US net capital outflow with respect to the real interest rate is very high, will this increase in private saving have a large or small effect on US domestic investment?b. If the elasticity of US exports with respect to the real exchange rate is very low, will this increase in private saving have a large or small effect on the US real exchange rate?arrow_forwardAssume the following exchange rates Value of Canadian Dollar in U.S dollars $.92 value of New Zealand dollar in U.S dollars $.32 Value of Canadian dollar in New Zealand dollars NZ $3.00 Given this information, starting with U.S dollar, you and others can perform triangular arbitrage by________. a. Using U.S dollar to buy New Zealand dollar at $.32. b. Using U.S dollar to buy Canadian dollar at $.92 c. Using New Zealand dollar to buy Canadian dollar at NZ$3.00 d. Using U.S dollar to buy Canadian dollar at NZ$3.00arrow_forward
- Give typing answer with explanation and conclusion Suppose that the current exchange rate is 1.48 euro = 1 pound, but it is expected to be 1.35 euro =1 pound in one year. If the current interest rate on a one-year government bond in the United Kingdom is 9 %, what does the interest-rate parity condition indicate the interest rate will be on a one-year government bond in Germany? Assume that there are no differences in risk, liquidity, taxation, or information costs between the bonds. The German interest rate will be ________ %. (Round your response to two decimal places.)arrow_forward2. Suppose a currency is temporarily undervalued by a fixed exchange rate system, such as the international gold standard. Let that currency be the US dollar, and expressed in terms of British pounds. a. Show this disequilibrium using a supply and demand graph. Be sure to carefully label your axes. b. Clearly explain how one could profit by arbitraging in dollars using a bill of exchange. If it helps, you can use a numerical example.arrow_forwardLet’s suppose you (USA dealer) imported one Earth Equipment machine from German dealer on March 1, 2017 at € 300,000 each, payable in 30 days. The exchange rate on March 1, 2017 was 1.16 US$/€. Then you sold the machine in the US market at US$350,000 in cash on March 29, 2017. On April 1, 2017, you paid to Italian car dealer at the exchange rate of 1.19 US$/€. What was profit or loss from this business in terms of US$? (Please assume all costs are included in price.) Group of answer choices -7000 -9200 -4500 -10200arrow_forward
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