ECON231 Chapter Notes - Chapter 16: Fisher Hypothesis, Money Supply, Money Market

17 views2 pages

lemonbeetle804

27 Dec 2019

School

University of Waterloo

Department

Economics

Course

ECON231

Professor

Barbara Bloemhoff

For unlimited access to Textbook Notes, a Class+ subscription is required.

Document Summary

Purchasing power parity (ppp): theory that the exchange rate between two countries" currencies will equal the ratio of the countries" price levels. P u s = e $ / e * p e. Monetary approach to the exchange rate: theory of exchange rate determination in which only factors that influence money supply or money demand play a role. M s = money supply l(r,y)= aggregate real money demand. Interest rates and inflation rates in ppp: if people expect ppp to hold, the difference between the expected interest rates will equal the difference between expected inflation rates of the currencies over the same horizon. R $ - r e = $ e. Fisher effect: theory that all else equal, a rise in a country"s expected inflation rate will eventually cause an equal rise in the interest rate that deposits of its currency offer. Similarly, a fall in the expected inflation rate will eventually cause a fall in the int erest rate.

Related Questions

1.Purchasing power parity implies that

a. the real exchange rate is equal to 1.

b. the law of one price does not hold.

c. inflation rates are equal across countries.

d. the real exchange rate is equal to 0.

e. if the domestic country has low prices, then the domestic currency will depreciate until foreign citizens can buy the same amount of goods as domestic citizens.

2.Which of the following is a prediction from the PPP model of exchange rates?

A. An increase in the US money supply leads to an appreciation of the dollar in the long run.

B. An increase in US production leads to a depreciation of the dollar.

C. An increase in US production will lead to a proportional increase in the inflation rate.

D, An increase in the US money supply leads to a depreciation of the dollar in the long run.

E.An increase in the US interest rates leads to a fall in prices.

3.Relative purchasing power parity predicts that

A.the difference between the inflation rates in the two countries should equal the ratio of the interest rates in the two countries.

B. the difference between the inflation rates in two countries should equal the per cent change in the exchange rate.

C.inflation rates should be equal across countries.

D.the real exchange rate should equal one.

E.relative price levels in the two countries should be equal when expressed in the same currency.

4.Which of the following is NOT a valid explanation for the failure of purchasing power parity?

a. Differences in monetary policies across countries

b. Lack of competition

c. Transportation costs

d. Trade barriers

5.If P represents (the level of) domestic prices, P* represents (the level of) foreign prices and E represents the exchange rate as units of domestic currency per units of foreign currency, then the real exchange rate equals

a. EP/P*	b. P*/EP
C. E/PP*	d. EP*/P
e. P/P*

6.The difference between nominal and real interest rates is that

A.Nominal interest rates are measured in terms of a country's output, while real interest rates are measured in monetary terms

B.Nominal interest rates are measured in monetary terms, while real interest rates are measured in terms of a country's output

C.Nominal interest rates can fluctuate, while real interest rates always remain fixed

D.Real interest rates can fluctuate, while nominal interest rates always remain fixed

E.Real interest rates are the same in every country, while nominal interest rates are different for every country

7.Which of the following is predicted to cause the value (or price or cost) of U.S. goods to appreciate relative to the value (or price or cost) of foreign goods in the long run?

a. An increase in the growth rate of U.S. GNP. b. A decrease in the growth rate of U.S. GNP.

c. A decline in the growth rate of the U.S. money supply.

d. An increase in the price of petroleum that reduces world demand for American cars. e. An appreciation of the dollar.

jadewallaby469

2. Assume that you are able to borrow $1,000,000 from a local bank. Explain how you could make profits from arbitrage in the following situations. Explain also the amount of profits that you would make, assuming that there are no brokerage or transactions costs.

a. The current dollar-Euro exchange rate (E$/â¬) is equal to 1.1 in Frankfurt and 1.05 in New York.

b. The dollar-Euro exchange rate (E$/â¬) = 1.1, the dollar-pound exchange rate (E$/Â£)= 1.5, and the pound-Euro rate (EÂ£/â¬ )= .8.

c. The nominal interest rate equals 3% in the U.S. and 1% in Europe, the current dollar-Euro exchange rate (E$/â¬) is equal to 1, the forward exchange rate (F$/â¬) is equal to 1.02 and your expected exchange rate one year from now (Ee$/â¬) equals 1.05.

3. Use the information below to answer question 3.

L M Y

U.S 0.1 2,000 10,000

U.K 0.04 500 5,000

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.

c. Assume that output rises in the U.S. to 11,000. Calculate the new nominal exchange rate.

d. Assume that output in the U.S. is 10,000 but that the money supply rises to 2,200 in the U.S. and to 600 in the U.K. Calculate the new nominal exchange rate.

e. Assume values at the beginning of the problem but assumethat L in the U.K. rises to .06. Calculate the new nominal exchange rate.

rubygoose336

1. In which market will a company arrange to receive currency for a transaction at a future date?

Select one:

a. the forward market

b. the currency futures market

c. the arbitrage market

d. the forward spot market

2. The U.S. dollar is overvalued and the peso is undervalued in the foreign exchange market

Select one:

a. if a visitor to Mexico from the United States can buy more goods in the United States
than he can buy in Mexico when he converts dollars to pesos.

b. if a visitor to Mexico from the United States can buy the same amount of goods in
Mexico as he can buy in the United States when he converts dollars to pesos.

c. if a visitor to Mexico from the United States can buy more goods in Mexico than he can
buy in the United States when he converts pesos to dollars.

d. if a visitor to Mexico from the United States can buy more goods in Mexico than he can
buy in the United States when he converts dollars to pesos.

3. Given the following data (t is current time; t+1 is time after one period)

E_t = Â¥ 110 = $1

E_t+1 = Â¥ 95 = $1

Current Interest rate in the US = i_US= 8%

If the interest parity condition is expected to hold, interest rates in Japan (i_Japan) should equal approximately:

Select one:

a. 3.38%

b. 8%

c. -5.64%

d. None of the above.

4. Suppose the Japanese interest rate is I% while the interest rate in Britain is 3%. Interest rate parity predicts that relative to the Japanese Yen,

Select one:

a. the British pound will depreciate by 4%.

b. the British pound will appreciate by 2%.

c. the British pound will depreciate by 2%.

d. the British pound will appreciate by 4%.

5. Suppose the U.S. grows more slowly than Canada. The best medium term prediction is that the

Select one:

a. U.S. interest rates will rise.

b. U.S. dollar will appreciate against the Canadian dollar.

c. U.S. dollar will depreciate against the Canadian dollar.

6. Purchasing Power Parity (PPP) implies that

Select one:

a. In the long run, a forward exchange rate can purchase an interest rate swap for the same
price as the spot rate.

b. In the medium run, a forward exchange rate can purchase an interest rate swap for the
same price as the spot rate.

c. The short run, a given amount of money can buy the same amount of goods, whether
they are purchased at home or abroad.

d. the long run, a given amount of money can buy the same amount of goods, whether
they are purchased at home or abroad.

7. The current account balance will fall if

Select one:

a. the real exchange rate depreciates and disposable income goes up

b. the real exchange rate appreciates or disposable income goes up

c. the real exchange rate depreciates or disposable income goes down

d. the real exchange rate appreciates and disposable income goes down

8. A person who paid $10 for an umbrella in the U.S. sees the exact same umbrella in a store in London, England for 6 British pounds. If the person could expect the real exchange rate to be 1 U.S. umbrella per 1 English umbrella, then the person could infer that the nominal exchange rate is

Select one:

a. 0.6 U.S. dollars per 1 English pound.

b. 1.67 U.S. dollars per 1 English pound.

c. 0.6 English pounds per I U.S. dollar.

d. 1.67 English pounds per 1 U.S. dollar.

9. A U.S. wine merchant travelling in France has found a French wine of the same quality as a U.S. wine they regularly sell. She assumes that the real exchange rate should be 1 case of U.S. wine equals one case of French wine. The French wine merchant will sell her a case of the French wine for 350 euros. She knows that a case of the equivalent U.S. wine sells for $400. The euro is selling in France for $1.20. Assuming transportation costs are zero, the U.S. wine merchant should

Select one:

a. buy the French wine and sell it in the U.S. and make a profit.

b. buy the U.S. wine and sell it in France and make a profit.

c. It doesn't matter either way; there is no profit in the deal.

d. None of the above.

10. In a fixed exchange rate system, how do countries address the problem of currency market pressures that threaten to lower or raise the value of their currency?

Select one:

a. If demand falls, then countries must increase demand by buying up the excess supply
with domestic currency.

b. If demand rises, countries must fill the excess demand for foreign currency by selling
their reserves.

c. If demand rises, then countries can adjust the value of the exchange rate to the desired
level.

d. A and B only.

ECON231 Chapter Notes - Chapter 16: Fisher Hypothesis, Money Supply, Money Market

Document Summary

Get access

Related Documents

ECON231 Lecture Notes - Lecture 5: Eurodollar, Federal Reserve System, Aggregate Demand

ECON231 Chapter Notes - Chapter 14: Interbank, Economic Equilibrium

ECON231 Lecture Notes - Lecture 3: Utah Transit Authority, Arbitrage, Interest Rate

Related Questions