Macroeconomics (Fourth Edition)
4th Edition
ISBN: 9780393603767
Author: Charles I. Jones
Publisher: W. W. Norton & Company
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Question
Chapter 20, Problem 5E
a)
To determine
The effect of increased interest rate in the peso–dollar exchange rate.
b)
To determine
The effect of increasing interest in Country U in the peso, when Country M keeps a fixed exchange rate and allows an open market.
(c)
To determine
Summarize the effect of interest rate in exchange rate.
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Suppose that yesterday, the U.S. dollar was trading on the foreign exchange market at 0.75 eurosper U.S. dollar and today the U.S. dollar is trading at 0.80 euros per U.S. dollar. Which of the twocurrencies (the U.S. dollar or the euro) has appreciated and which has depreciated today?b) Suppose that the exchange rate for the Mexican peso fell from 15 pesos per U.S. dollar to 10 pesosper U.S. dollar. What is the effect of this change on the quantity of U.S. dollars that people plan tobuy in the foreign exchange market?c) Suppose that the exchange rate rose from 80 yen per U.S. dollar to 90 yen per U.S. dollar. What isthe effect of this change on the quantity of U.S. dollars that people plan to sell in the foreignexchange market?
A case study in the chapter analyzed purchasing-power parity for several countries using the price of Big Macs. Here are data for a few more
countries:
For each country, select the predicted exchange rate of the local currency per U.S. dollar. (Hint: Recall that the U.S. price of a Big Mac was $4.93.)
Price of a Big Mac Predicted Exchange Rate
Actual Exchange Rate
Country
Chile
2,100 pesos
715 pesos/$
900 forints
293 forints/$
75 korunas
25.1 korunas/$
13.5 real
4.02 real/$
5.84 C$
1.41 C$/$
Hungary
Czech Republic
Brazil
Canada
According to purchasing-power parity, the predicted exchange rate between the Hungarian forint and the Canadian dollar is
dollar. However, the actual exchange rate is forints per Canadian dollar.
forints per Canadian
What is an appreciation in the exchange rate of a currency? Outline two (2) positive effects of an appreciation in the value of the Australian Dollar. How is the level of unemployment in Australia likely to be affected by an appreciation in the value of the Australian Dollar.
Chapter 20 Solutions
Macroeconomics (Fourth Edition)
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