Question 2   (i) Calculate the Nominal and Real Exchange Rate Indices for the pound sterling in periods 1 to 5. (Show your workings in full)   Period $/£rate Nominal  $/£ Index US Price Index UK Price Index Real $/£ Index 1 $2.00/£1.00 ? 100 100 ? 2 $2.40/£1.00 ? 120 110 ? 3 $2.60/£1.00 ? 120 120 ? 4 $2.00/£1.00 ? 130 140 ? 5 $1.80/£1.00 ? 150 145 ?   (5 marks) (ii) Comment on the price competitiveness of the UK economy over each of the periods,2, 3, 4 and 5. Then comment on the UKs competitiveness in period 5 compared to period 1.

8. Why exchange rates matter Suppose that you go on vacation to Canada every summer. Last year, the hotel room where you stayed cost C$100 per night, and it costs the same this year. The exchange rate was 1.04 US$/C$ last year, and it is 0.95 US$/C$ this year. This means you will pay per night this year than you paid last year. The U.S. dollar-Canadian dollar exchange rate is essentially the price of a Canadian dollar in terms of U.S. dollars. When this price falls, the Canadian dollar is said to depreciate against the U.S. dollar. Thus, from your analysis, you can conclude that when the Canadian dollar depreciates against the U.S. dollar, Canadian goods and services become expensive for Americans. DeutschAuto is a German automaker that pays most of its production costs in euros. Suppose that in 2007, DeutschAuto's cost of producing a car was €23,000 and that the company sold a car in the United States for $36,000. Further, suppose that the dollar-euro exchange rate rose from 1.35$/ €…

6. Fixed exchange rates Consider the exchange rate between the Moroccan dirham and the euro. Suppose the Moroccan government and the Eurozone governments agree to fix the exchange rate at 1.25 dirham per euro, as shown by the grey line on the following graph. Refer to the following graph when answering the questions that follow. EXCHANGE RATE (Dirham per euro) 2.00 1.75 1.50 1.25 1.00 0.75 0.50 0.25 0 02 4 6 8 12 QUANTITY OF EUROS (Billions) Supply of Euros Demand for Euros 10 14 At the official exchange rate of 1.25 dirham per euro, the euro is 16 (? , and the Moroccan dirham is I which means