ASCC Economics Korean Discussion

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Economics 333
HW #4
Due 10/31/2021
Question 4 is worth 10 points and question 6 is worth 25 points.
Each part of every other question is worth 5 points.
1. The following questions concern the supply and demand for
Korean won. The exchange rate is denoted as E$/Won. For each
question state whether the supply of won, demand for won or both
curves will shift, and in which direction.
a. Korean tax cuts increase Korean GDP
b. The Korean central bank raises interest rates
c. Kimchi (a Korean export), is discovered to be a miracle food
that slows down the aging process.
d. Kia (a Korean company) introduces a new electric car that
sells well in the U.S.
e. Inflation rises in the U.S.
f. Korea closes its borders to American tourists because of the
pandemic
g. Samsung (a Korean company) decides to build a new factory in
the U.S.
2. The exchange rate for the Danish krone, E$/DKr is .15. The
exchange rate for the Uruguayan peso, E$/Peso, is .025. What is
the exchange rate of krone for Uruguayan pesos, EDKr/peso using the
cross rate?
3a. A bottle of Chivas Regal, a scotch whiskey made in the
U.K., costs 30?. What is the price in dollars when the exchange
rate, E$? = 1.2?
When E$? = 1.35?
b. A bottle of Johnnie Walker, a Kentucky bourbon, costs $30.
What is the cost in pounds when E$? = 1.2?
When E$? = 1.35?
c. What is the relative price of Johnnie Walker (price of
Johnnie Walker divided by the price of Chivas Walker) when the
exchange rate, E$? = 1.2?
When E$? = 1.35? Use a common
currency when calculating the relative price.
4.
Exchange rates are often summarized in a matrix that lists
all the exchange rate combinations between a set of countries.
The columns list the exchange rate in terms of home country
currency per foreign currency, where the column heading is the
home country.
The rows list the exchange rate in terms of
foreign currency units per home currency, where the row heading
is the home country. For example, EA/B is the amount of currency
A needed to buy one unit of currency of B. An exchange rate
matrix where there are three countries, A, B and C, would look
as follows:
A
Country
B
C
A
EA/A
EB/A
EC/A
B
EA/B
EB/B
EC/B
C
EA/C
EB/C
EC/C
Suppose you have the following information about the exchange
rates for country C:
A
Country
B
C
A
1
EB/A
EC/A
B
.8
EB/B
EC/B
C
.4
EB/C
1
Complete the rest
arbitrage holds.
of
the
table
assuming
that
triangular
5a. Assume that a basket of goods and services costs $30,000 in
the U.S. and 37,500 Australian dollars (AUD) in Australia.
If
PPP holds, what is E$/AUD ?
b. Provide one explanation for why PPP may not hold in the short
run.
6. The textbook presents a “Big Mac Index” showing the cost of
a Big Mac in different countries. Create your own index of the
cost of the cost of a good or service in the U.S. and two other
countries using the internet to find prices.
Examples of a
service is the cost of hotel room using hilton.com or the cost
of a rental car, using avis.com.
In each case, find the local
price expressed in the local currency, and convert into dollars
using the exchange rate. Then calculate the real exchange rate
as the foreign price expressed in dollars divided by the U.S.
price. Exchange rates can be found on usforex.com but they are
also available on many other sites.
When comparing prices
across countries, try to keep the good or service as similar as
possible;
for example compare the a room with two double beds
at the same hotel chain.
Report the good or service you are
using, the local price, the exchange rate, the price in U.S.
dollars, and the real exchange rate.
Your answer should be in
the following format:
Country
Local
Price
Exchange
Rate
Dollar
Price
Real Exchange
Rate
Bonus – 5 points
7. Assume the following exchange rate:
E$/€ = 1.1, E$/CAD = .8, E€/CAD = .75.
CAD is the symbol for the Canadian dollar.
Explain how you could make money using triangular arbitrage. Be
clear – which currency would you buy, and which currency would
you convert it into? You should begin and end with dollars.
If you had $1,000,000 how much money would you

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Tags:
Interest rates

Korean GDP

Korean tax

Korean central bank

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