ECON, Money and Banking.
Help me study for my Economics class. I’m stuck and don’t understand.
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Econ 635
Name: ___________________________
Problem Set 6
Fall 2019
To obtain full credit, you need to show ALL your work
. Feel free to work in groups, but the
answers must be written up individually!
Round your answers to two decimal places.
1.
(5 points) Name 2 factors that affect the behavior of the (nominal) exchange rate (defined as
euros per dollar) in the LONG run. Explain how a change in each of the factors will affect the
exchange rate (whether it increases or decreases) and what happens to the value of the dollar
relative to euro (i.e. does the dollar appreciate or depreciate?).
2. (10 points) Name 2 factors that affect the behavior of the (nominal) exchange rate (defined as
euros per dollar) in the SHORT run. Explain how a change in ea
ch of the factors will affect the
exchange rate (whether it increases or decreases) and what happens to the value of the dollar
relative to euro (i.e. does the dollar appreciate or depreciate?).
Use the
Foreign Exchange market
to
GRAPHICALLY ILLUSTRATE
your reasoning
(don’t forget to label all axes, curves etc
.)
3.
(5 points)
The president of the United States announces that he will increase inflation with his
new pro-
inflation program. If the public believes him, predict what will happen, holding
everything else constant,
to the exchange rate for the U.S. dollar (relative to other currencies) in
the short run. Use the
Foreign Exchange market
to
GRAPHICALLY ILLUSTRATE
your
reasoning
(don’t forget to label all axes, curves etc.)
4.
(5 points)
The current exchange rate is 0.93 euros per dollar, but experts
believe the exchange
rate
will
drop
to
0.85 euros per dollar. What will be
the percentage change in
the
exchange rate if
experts are right
? Will the euro (relative to $)
appreciate or d
epreciate?
5. (5 points) An investor in England purchased a 91-
day
US
T-bill for $987.65
with a face value
of $1,000. At that time, the exchange rate was $1.75 per pound. At maturity, the exchange rate was
$1.83 per pound. What was the investor’s percentage
holding period return (given that investor’s
domestic currency is pounds
)?
In general, if
investors
expect the dollar to appreciate in the future
, how will these
expectations affect the demand for US assets and the
current value of the US dollar? Is
this
in line with the Efficient Market Hypothesis? Explain briefly.
