Alabama Southern Community College Calculate Nominal Exchange Rate Questions
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Economics 333
HW #5
Due November 21, 2021
1. Use the information below to answer question 1.
U.S.
L
.1
U.K.
.05
M
3,000
Y
20,000
600
10,000
a. Calculate the price levels in both the U.S. and the U.K. according to the quantity
theory of money.
b. Calculate the nominal exchange rate (dollars per pound) assuming the quantity theory
of money and absolute PPP.
2. Assume that the current dollar-Euro exchange rate (E$/) is equal to 1, the real exchange
rate (qus/Eur) = 1.26, the price level (P) equals 2 in the U.S. and 2.5 in Europe. Assume
that relative PPP holds.
a. If inflation is 5% in the U.S. but 2% in Europe, what will be the price levels in the
U.S. and Europe a year from now?
b. What will be the nominal exchange rate (E$/) a year from now?
3. Assume that output growth in the U.S. is 4%, money demand (L) is constant and
money supply growth is 8%. Assume that output growth in China is 5%, L is constant
and money supply growth is 8%.
a. Assume that relative PPP and the quantity theory of money holds. What is the growth
rate of the dollar-China exchange rate (%?E$/China)?
b. What should money supply growth be in China if China wants to fix its currency to
the dollar?
4. This question concerns equilibrium in the foreign exchange market, as shown by
figure 15-2 in the textbook. For each of the following explain whether the foreign return
or domestic return will shift, and in which direction, and the effect on the spot exchange
rate, (E$/).
a. The euro is expected to appreciate versus the dollar in the future
b. The Federal Reserve increases the U.S. interest rate
5. For each of the following, explain whether the U.S. return is greater, equal to, or less
than the foreign (European) return.
a. E$/ = 2, Ee = 2.04, i$/ = .03, i = .02
b. E$/ =4, Ee = 4.08, i$/ = .05, i = .03
6. Assume that the dollar-Euro exchange rate (E$/) = 1.1, the U.S. interest rate is 4% and
the Euro interest rate is 1%, and that both covered interest parity and uncovered interest
rate parity hold.
a. How many Euros will an American investor with $1,000 have a year from now?
b. What is the forward exchange rate (F$/) ?
c. What is the expected growth in the Euro exchange rate (E$/) ?
7. Use the information below to answer question 5:
Consumption
$10,000
Government purchases of goods and services $6,000
Investment $4,000
Eports of goods and services 2,000
Imports of goods and services 3,000
Exports of factor services 700
Imports of factor services 500
Net unilateral transfers -100
Calculate the following:
a. GNE
b. GDP
c. GNDI
d. Current account
e. National saving (S)
8. Assume that there are only three countries in the world: Amazonia, Babylonia and
Carthaginia. Amazonia has a current account deficit of 30 and Babylonia has a financial
account surplus of 50.
a. Calculate Amazonias financial account and Babylonias current account.
b. Calculate Carthaginias financial account and current account.
9. Extra Credit: Read the articles for hw #5 on blackboard.
a. Why do Japan and Germany usually have current account surpluses?
b. Are rapidly growing countries likely to have a financial account surplus or deficit?
Why?
Point Values: Each part of a question is worth 5 points.
Purchase answer to see full
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Tags:
money demand
nominal exchange rate
dollarChina exchange rate
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