(ii) Show in steady state the equilibrium exchange rate and price level is 100. Show we can reduce the model to the following two equations p=0.01p+ 0.01s $ = 2p - 200
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- An analyst estimates the following exchange rate model for the yen currency against the dollar: Expected rate of appreciation of yen against the dollart(%)= =0.1[idollart-2(%) – iyent-2(%)]+0.5[idollart-1(%) – iyent-1(%)]+1.0[idollar(%)t – iyen(%)t]2+ +0.1[GDPJAPt(%) – GDPUSt(%)]. In this model, idollart(%) is the one-year interest rate in the US in period t, iyent(%) is the one-year interest rate in Japan in period t, idollart-1(%) is the one-year interest rate in the US in period t-1, iyent-1(%) is the one-year interest rate in Japan in period t-1, idollart-2(%) is the one-year interest rate in the US in period t-2, iyent-2(%) is the one-year interest rate in Japan in period t-2,GDPUSt(%) refers to annual GDP growth in the US in period t and GDPJAP(%) refers to annual GDP growth in Japan in period t. Assume idollart-2=4%, iyent-2=2%,idollart-1=5%, iyent-1=3%, GDPUSt=3% and GDPJAPt=1%. Calculate the one-year interest rate differential idollar(%)t – iyen(%)t that delivers an…Suppose for Home: Ms=2488, Md/P=5723-62770*R, P=3 Suppose for Foreign:Ms=1736, Md/P=7147-65320*R, P=2 Suppose Absolute PPP holds. What is the expected exchange rate Ee? Answer: x (1.473)Consider the United States and the countries it trades with the most (measured in trade volume): Canada, Mexico, China, and Japan. For simplicity, assume these are the only four countries with which the United States trades. Trade shares (trade weights) and U.S. nominal exchange rates for these four countries are as follows: Country (currency) Share of Trade $ per FX in 2015 $ per FX in 2016 Canada (dollar) 36% 0.8271 0.6892 Mexico (peso) 28% 0.0683 0.0538 China (yuan) 20% 0.1608 0.1522 Japan (yen) 16% 0.0080 0.0086 Compute the percentage change from 2015 to 2016 in the four U.S. bilateral exchange rates (defined as U.S. dollars per unit of foreign exchange, or FX) in the table provided. Use the trade shares as weights to compute the percentage change in the nominal effective exchange rate for the United States between 2015 and 2016 (in U.S. dollars per foreign currency basket). Based on your answer to (b), what happened to the value of the U.S. dollar against this…
- The graph on the right displays the dollar rate of return on a euro asset as a function of the current exchange rate (Es/€). Plot on the same graph the rate of return on a dollar asset as a function of the current exchange rate (Es/€). Properly label this line. Carefully follow the instructions above and only draw the required object. Exchange rate (dollars per euro) Expected euro return Rate of returnSuppose that you are given the following model for the goods market: C=100 +0.4(Y-T), I=20+.1 Y-200r, G=400, X=200 +0.2Y*-10e, IM=300 +0.3Y+10e and you know that r = 2%, Y*=1,500, e=1 and T =50. Note: e= real exchange rate. The equation for the demand for domestic goods (Z) is and the multiplier for this economy is If the economy were closed, the equation for the demand for domestic goods (Z') would be and the multiplier for the closed economy would be Z = 576 + 0.2Y; multiplier open eco is 2; Z' = 526 + 0.5Y ; multiplier closed eco is 4 O Z = 1000+ 0.4Y; multiplier open eco is 1.67; Z' = 500+ 0.5Y ; multiplier closed eco is 5 Z = 676 + 0.2Y; multiplier open eco is 5; Z' = 496 + 0.5Y; multiplier closed eco is 2 OZ = 576 +0.2Y; multiplier open eco is 5 ; Z' = 500+ 0.4Y; multiplier closed eco is 1.67You work for the Bureau of Economic Analysis (BEA) of the U.S. Department of Commerce. Your supervisor gives you the following U.S. International Transactions Accounts for the Year 20XX (figures are in billions of dollars) and wants it reported in a coherent fashion in accordance with accepted conventions: Investment income payments $24; Export of goods $456; Balance of services $57; U.S purchases of foreign assets were $147.; Imports of goods $589; Change in Official Reserves $15; Investment income receipts $28; Foreign purchases of U.S. assets were $230; Net unliteral transfers were ($32). ($32) means -$32. a)- He wants you to compute the balances of trade, current account, capital account and statistical discrepancy. b)- He also wants you to find out (based on your calculation) if the U.S. is a net debtor or a net creditor. Explain
- 2) Exchange rates and interest rates are connected through the parity conditions. Let the New Zealand interest rate be 5% per annum, the US interest rate be 10% per annum, the spot exchange rate be 0.8USD/1 NZD, and the one year forward exchange rate to be 0.85USD/1 NZD. a) What is the return, in NZD, a New Zealand financial trader would get if they invested 1 NZD in New Zealand? b) What is the return, in NZD, an New Zealand financial trader would get if they invested 1 NZD in the US? [Hint: you'll have to exchange that NZD for USDI] c) As you should find, the values given mean the parity condition does not hold. Given the interest rates are fixed, what will happen to the value of the spot exchange rate now? Think about this in terms of demand and supply for the NZD in the FOREX market, and you may draw out a diagram if you wish. d) Now repeat c) for the change in value of the forward exchange rate.Consider the following equation: NX(ɛ) = S - I(r*) This equation is used to draw the diagram illustrating the foreign exchange market, where there is a negative relationship between NX and ɛ; and S, - I(r*) is perfectly inelastic. Here NX is net exports, ɛ is the exchange rate, S represents the level of savings in the economy, I represent the level of investment in the economy, and r is the interest rate. a. Use a carefully labeled diagram to illustrate the effect of a contractionary fiscal policy at home on savings, interest rate, net capital outflow and the exchange rate b. Use a carefully labeled diagram to illustrate the effect of a contractionary fiscal policy abroad on savings, interest rate, net capital outflow and the exchange rateView the data below for the exchange rate between the US dollar and the Japanese yen. How many yen could you get per dollar at the earliest date shown on the chart? Explain. How many yen could you get per dollar at the most recent date shown on the chart? Explain. Has the dollar appreciated or depreciated in value over time? Explain.
- 17. Consider two exchange rates X/Y and Z/Y. (For example EUR/USD and JPY/USD.) They both follow perfectly correlated geometric Brownian motions with parameters (1,01) and (μ2,02). (a) The cross-exchange rate X/Z (for example EUR/JPY) follows a standard Brownian motion (b) The cross-exchange rate X/Z (for example EUR/JPY) follows a general Brownian motion (c) The cross-exchange rate X/Z (for example EUR/JPY) follows a geometric Brownian motion (d) The cross-exchange rate X/Z (for example EUR/JPY) does not follow a geometric Brownian motionThe exchange rate is the price of one currency in terms of another currency. An exchange rate specifies how many units of one country's currency are needed to buy one unit of another country's currency. Suppose the following table forecasts exchange rate data for May 21, 2018, in terms of U.S. dollars per unit of foreign currency. Use the information in the table to answer the questions that follow. Foreign Currency Cost of One Unit of Foreign Currency (Dollars) Lithuanian litas (LTL) 0.3666 Canadian dollar (CAD) 0.8493 Euro (EUR) 1.3288 Mexican peso (MXN) 0.0889 United Kingdom pound (GBP) 1.8965 Suppose that on May 21, 2018, an ornamental bookcase handmade in the United Kingdom is priced at GBP 530. The approximate U.S. dollar price of the bookcase would be . If the exchange rate for the U.S. dollar–U.K. pound rises from $1.8965 to $2.2758 per U.K. pound, the U.S. dollar in value, or , relative to the U.K. pound.(a) An analyst argues that exchange rate movements depend on interest rate differentials (that is, the International Fisher effect), country-specific economic policy uncertainty measures and country-specific GDP growth rates. With this in mind, the analyst estimates the following model:Expected rate of appreciation of yen against the dollar(%)= =0.5[idollar(%) – iyen(%)]+0.5[idollar(%) – iyen(%)]2+0.2[σUS(%) – σJAP(%)]++0.2[σUS(%) – σJAP(%)]2+0.1[GDPJAP(%) – GDPUS(%)].In this model, idollar(%) is the one-year interest rate in the US, iyen(%) is the one-year interest rate in Japan, σUS(%) refers to economic policy uncertainty in the US, σJAP(%) refers to economic policy uncertainty in Japan, GDPUS(%) refers toannual GDP growth in the US and GDPJAP(%) refers to annual GDP growth in Japan. Assume idollar=6%, iyen=4%, σUS=5%, σJAP=1%, GDPUS=2% and GDPJAP=1%. Calculate the expected rate of appreciation of the yen against the dollar. Explain your findings in no more than 200 words .(b) An…