Suppose the annual interest rate in Australia is 1.5% and the interest rate in the United States is 2%. Suppose the spot USD/AUD exchange rate is $73/AUD and the exchange rate on a futures contract for delivery in one year's time is $75/AUD. (a) Suppose the Australian Reserve Bank increases the cash rate, causing Australian interest rates to rise. All else equal, would the USD/AUD exchange rate increase, decrease, or stay the same? (b) An investor wants to save $6,000 USD for a year and is looking for the option with the highest guaranteed return in USD. Would an investor prefer to save $6,000 USD for a year in the United States or in Australia? To support your answer, calculate the profits under each scenario.

Suppose the annual interest rate in Australia is 1.5% and the interest rate in the United States is 2%. Suppose the spot USD/AUD exchange rate is $73/AUD and the exchange rate on a futures contract for delivery in one year's time is $75/AUD. (a) Suppose the Australian Reserve Bank increases the cash rate, causing Australian interest rates to rise. All else equal, would the USD/AUD exchange rate increase, decrease, or stay the same? (b) An investor wants to save $6,000 USD for a year and is looking for the option with the highest guaranteed return in USD. Would an investor prefer to save $6,000 USD for a year in the United States or in Australia? To support your answer, calculate the profits under each scenario.

Principles of Economics 2e

2nd Edition

ISBN:9781947172364

Author:Steven A. Greenlaw; David Shapiro

Publisher:Steven A. Greenlaw; David Shapiro

Chapter29: Exchange Rates And International Capital Flows

Section: Chapter Questions

Problem 25CTQ: If a countrys currency is expected to appreciate in value, what would you think will be the impact...

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