Explain with the help of diagram a) how increase in US domestic money supply in short run can affect interest rate and exchange rate?[10]b) how decrease in EU income can affect Euro interest rate and exchange rate? [10]
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Explain with the help of diagram a) how increase in US domestic money supply in short run can affect interest rate and exchange rate?[10]b) how decrease in EU income can affect Euro interest rate and exchange rate? [10]
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- Consider the exchange rate between the Saudi riyal and the euro. Suppose the Saudi government and the Eurozone governments agree to fix the exchange rate at 1 riyal per euro, as shown by the grey line on the following graph. Refer to the following graph when answering the questions that follow. EXCHANGE RATE (Riyal per euro) 4.0 3.5 3.0 1.5 1.0 0.5 0 0 4 Supply of Euros Demand for Euros 8 12 16 20 QUANTITY OF EUROS (Billions) 24 28 32 At the official riyal price of euros, there is a At the official exchange rate of 1 riyal per euro, the euro is pay and the Saudi riyal is ▼ for European exports than they would with a free-floating exchange rate. of euros in the foreign exchange market. , which means that Saudis Suppose the governments in the Eurozone and Saudi Arabia agree to change the official exchange rate from 1 riyal per euro to 2 riyal per euro. The action represents a of the euro and a of the riyal.change rate $1.75 1.50 1.25 1.00 200 500 S d 700 900 950 1,000 S D₂ Quantity of euros traded (millions per day) 17) Refer to Figure 30-8. The equilibrium exchange rate is at A $1.25/euro. Suppose the European Central Bank pegs its currency at $1.00/euro. At the pegged exchange rate A) there is a shortage of euros equal to 200 million. B) there is a surplus of euros equal to 700 million. Othere is a shortage of euros equal to 500 million. D) there is a surplus of euros equal to 300 million.At the official exchange rate of 2.5 dirham per euro, the euro is and the Moroccan dirham is that Moroccans pay for European exports than they would with a free-floating exchange rate. At the official dirham price of euros, there is a of euros in the foreign exchange market. which means Suppose the governments of the Eurozone and Morocco reevaluate their currencies so that their official exchange rate is now 1 dirham per 1 euro. This action results in of the euro.
- The figure to the right shows the market for Thailand's currency, the baht Suppose market interest rates on financial assets denominated in baht decline relative to market interest rates on financial assets denominated in other nations' currencies. Moreover, assume a floating exchange rate Using the line drawing tool, show how the market for the baht is impacted by this event. Properly label this line Carefully follow the instructions above, and only draw the required objects. According to your graph, the baht has with respect to the dollar Dollars per Bart 0.000 0.054- 0.040 0.042- 0036- 0.030- 0024- 0.018 0.012 0.000 0 000- Quantity of Baht (bitions) 10a) Suppose a computer sells for US$1,200 in the U.S. and for £855 in London. If the exchange rate is £65 per dollar, is there any arbitrage (profit opportunity)? Explain (b) If the Canadian dollar price of one Euro was C$1.30 in 2003 and the exchange rate adjusted to 0.85 Euro per C$ in 2004, did the Canadian dollar appreciate or depreciate against the Euro. Explain.25 The exchange rate between the euro (€) and the US dollar ($) is $1,20 per euro. If an American tourist in Paris purchases a good valued at 60 euros, then in his own currency this would cost: a) $50 4 b) $72 c) $48 d) $720
- 5) Indicate whether each of the following creates a demand for or a supply of European euros in foreign exchange markets: a. Liberty purchases an Airbus plane assembled in France b. Mercedes-Benz decides to build an assembly plant in Knoxville c. A Liberty student decides to spend a year studying at the Sorbonne in Paris d. An Italian manufacturer ships machinery from Rome to Venice on an Egyptian freighter e. It is widely expected that the euro will depreciate in the near future6. Fixed exchange rates Consider the exchange rate between the Moroccan dirham and the euro. Suppose the Moroccan government and the Eurozone governments agree to fix the exchange rate at 1.25 dirham per euro, as shown by the grey line on the following graph. Refer to the following graph when answering the questions that follow. EXCHANGE RATE (Dirham per euro) 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 0 02 4 6 8 12 QUANTITY OF EUROS (Billions) Supply of Euros Demand for Euros 10 14 At the official exchange rate of 1.25 dirham per euro, the euro is 16 (? , and the Moroccan dirham is I which means5. Changes in the foreign exchange market The following questions focus on the exchange rate between the Malaysian ringgit and the Mexican peso. Assume the exchange rate is flexible. The exchange rate is defined as the number of ringgit you must pay for one peso. Suppose an economic expansion in Mexico causes Mexican incomes to rise, while Malaysian incomes remain unchanged. Shift the appropriate curve or curves on the following graph to illustrate how this affects the market for Mexican pesos if all other things remain equal. Note: Select and drag one or both of the curves to the desired position. Curves will snap into position, so if you try to move a curve and it snaps back to its original position, just drag it a little farther. Supply of Pesos Demand for Pesos Supply of Pesos Demand for Pesos QUANTITY OF PESOS The increase in Mexican incomes causes the Mexican peso to relative to the Malaysian ringgit and causes the Malaysian ringgit to relative to the Mexican peso. Suppose the…
- 8. Purchasing-power parity 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 Kingdom = GBP 3.29 x = $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 not given. Note: Round your answers to the nearest cent. Euro area Switzerland United…Assume that the total value of investment transactions between the United States and Mexico is minimal. Also, assume that the total dollar value of trade transactions between these two countries is very large. Now assume that Mexico's inflation has suddenly increased, and Mexican interest rates have suddenly increased. a) Please draw a graph to show how the equilibrium value of Mexican Pesos will change. b) What's more important for Mexican Pesos given the circumstances, change in interest rates, or change in inflation in Mexico?The following questions refer to the relationship between interest rates and exchange rates. use image for 1 and 2 1. Suppose that interest rates in the US rise relative to rates in Europe. -What is the predicted effect on the demand for US savings instruments? What explains this prediction? -What is the predicted effect on the demand for the US dollar? What explains this prediction? -Is the US dollar expected to appreciate or depreciate? Show the result in the diagram below. 2. Suppose that interest rates in the US fall relative to rates in Europe. -What is the predicted effect on the demand for US savings instruments? What explains this prediction? -What is the predicted effect on the demand for the US dollar? What explains this prediction? -Is the US dollar expected to appreciate or depreciate? Show the result in the diagram below. use image for 1 and 2 3. Fill in the blanks: “Monetary policy that increases interest rates is predicted to put pressure on a currency to…