Flexible exchange rates, it was once thought, would bring more stability to the market. Instead, volatility and large fluctuations exist. If investors expected a decrease of 5% in interest rates for 3 years, but rates were only decreased 2% for years 2 and 3, would occur. In a flexible exchange rate regime, domestic and foreign interest rates are in parity. The central bank decides to reduce the current domestic interest rate from 6.25% to 3.75% for one year. The current exchange rate (rounded to the nearest percent) then decreases to
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- Turkey experienced hyperinflation in the late 1990s and early 2000s. The exchange rate for the Turkish lira was TRL650,000=$1 on January 1, 2001. In 2001, inflation in Turkey was 140%, while in the USA was only 2.5%. This led the Central Bank of Turkey to implement a mini-devaluation policy at the monthly rate of 7.5%. What was the official exchange rate on December 31, 2001? Was the Turkish lira properly valued? (Hint: Pay attention to the monthly devaluation process)In the last 4 years, the exchange rate Pound to Euro depreciated (decreased) to an average of 1.13 (from 1.30 before 2016). When citizens from the UK would go on holidays in a Euro zone country (e.g. Spain), would a lower exchange rate of 1.13(Sterling Pound to Euro) instead of an exchange rate of 1.30 (Pound to Euro) be of advantage or disadvantage for British tourists in Europe? Explain.It costs 100 GBP to buy a certain basket of goods in the UK. It costs 200 USD to buy the same basket in the US. 1 year deposit rates are 10% in both countries. Everyone expects these numbers to remain the same indefinitely. What is the current exchange rate between USD and GBP implied by purchasing power parity? What is the current exchange rate between USD and GBP implied by the overshooting model? Today, the Bank of England announces that it is going to lower the short-term interest rate to 5% in May 2024 and to return it to 10% in May 2025. It also says that the price level will go up and, eventually, it will cost 150 GBP to buy the same basket of goods in the UK. The price adjustment will be completed by May 2026. What is the current exchange rate between USD and GBP implied by the overshooting model? Under the circumstance described in (3), what will be the exchange rate between USD and GBP in May 2024?
- As per the Uncovered interest parity (UIP) which of the following is true? If the interest rates in India, USA, and Japan are 8%, 5%, and 3 % , then Japanese Yen is likely to depreciate against INR. If the interest rates in India, USA, and Japan are 8%, 5%, and 3 %, then USD is likely to appreciate against INR, but depreciate against Japanese Yen INR is expected to depreciate by 3% against USD approximately. Both b and cIn mid-2006, a British pound sterling (the monetary unit in the United Kingdom) was worth 1.4 euros (the monetary unit in the European Union). If a U.S. dollar bought 0.55 pound sterling in 2006, what was the exchange rate between the U.S. dollar and the euro?In 1961, Charles de Gaulle decided he did not want the French franc to be considered as a second-rate currency, so he chopped two zeros off the value of the franc, which meant the exchange rate was approximately FF5/$ instead of FF500/$ (he also ordered that the $ key on IBM punchcard machines be replaced by the FF symbol). This had no immediate impact on any domestic or international transactions, but was supposed to convince the French people to put inflation behind them and keep their currency in line with the Dmark and the British pound. Whether or not this change in currency values made any difference, the relative inflation rate did slow down and the value of the FF did rise relative to the dollar over the next two decades. At the same time, the current account balance improved slightly. Based on these factors, explain what happened to the growth rate, show how the NX and NFI curves must have shifted, and describe the underlying economic developments.
- Suppose that the current interest rate in the US is 0.89%. If the NIRP predicts that the exchange rate between Madagascar's Ariary and the US dollar will jump from 3,750 Ariary/Dollar to 4,244 Ariary/Dollar, what is the current interest rate in Madagascar? Round your answer to two decimal points and omit any units (e.g., 1.23 NOT 1.23%).i) The UK inflation rate is predicted to be 10% and the Eurozone inflation rate is predicted to be 6%. The current euro per pound exchange rate is €1.20/£1. What is the forecast $/£ rate in one year’s time according to Purchasing Power Parity? Is the euro expected to appreciate or depreciate and by approximately what percentage? (Show your working in full) ii) The euro per pound spot rate is €1.20/£1. The UK interest rate is 4% and the Eurozone interest rate is 6%. Calculate the six-month forward rate using the covered interest parity formula. State if the pound is at a forward discount or at a forward premium. (Show your working in full)Assume Saudi Arabia to be home and US to be the foreign economy. Suppose that the real exchange rate q (riyal per dollar) between Saudi Arabia and US is 1.2. Inflation rate in the US is 6% and inflation rate in Saudi Arabia is 4%. Given a 15% speed of convergence in the real exchange rate, what would be the expected rate of change in the nominal exchange rate (riyal per dollar)?
- If the exchange rate at time t is Et = €1/$. You invest $1 in an euro asset at t, which has an interest of 8%. When the asset expires at t+1, you get paid € (x.xx round to two decimal places). If dollar appreciates by 2 % against euro, that is, Et+1 = €_______/$(x.xx round to two decimal places), then you can buy back $ (x.xx round UP to two decimal places). Question 10 options: Blank # 1 Blank # 2 Blank # 3If the exchange rate at time t is Et = €1/$. You invest $1 in an euro asset at t, which has an interest of 8%. When the asset expires at t+1, you get paid €_ _(x.xx round to two decimal places). If dollar appreciates by 2 % against euro, that is, Et+1 = € /$(x.xx round to two decimal places), then you can buy back $ (x.xx round UP to two decimal places). Blank # 1 Blank # 2 Blank # 3What is the current (within the last 48 hours) exchange rate between the U.S. dollar and the Chinese Yuan?