Econ 7520 Workbook question
1 0.11 0.12 -0.03
2 0.12 0.1 0.02
3 0.13 0.14 0.01
4 0.04 0.09 -0.04
7％90 60 500
9％110 20 700
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4. Assume the reference commodity costs 200 US dollars in New York, 360 Australian dollars in Sydney, 120 pounds sterling in London, 800 yuan in Shanghai and 22,000 yen in Tokyo.
a. What exchange rates are predicted by the PPP model? List the price of the Australian dollar, British Pound, Chinese Yuan and Japanese Yen, as measured in US dollars.
b. Assume the following current spot exchange rates:
• us$0.60 per Australian dollar
• us$1.70 per British pound
• us$0.20 per Chinese yuan
• us$0.01 per Japanese yen
How do these spot rates compare with the PPP predictions? Which currencies are “overvalued” and which are “undervalued”, based on PPP theory?
c. Calculate the real exchange rate for each of the above currencies (measured in US dollars).
5. Draw the AA/DD model on a graph. Show on the graph the impact of a permanent increase in money supply. What is the impact on the following variables:
a. Short-run output
b. Long-run output
c. Short-run interest rates
d. Long-run interest rates
e. Short-run exchange rates
f. Long-run exchange rates
g. Short-run prices
h. Long-run prices
6. An important difference between fixed and floating exchange rates is the impact on monetary policy. This difference is framed by some economists as being a benefit of floating exchange rates, but other economists frame the same thing as a benefit of fixed exchange rates. Explain each side of the argument, and then give your own opinion.
7. Explain the pillars of the Bretton Woods financial system, and how they were designed to resolve the financial instability of previous decades
8. Using both the arguments from the previous lecture about floating exchange rates and the theory of optimal currency unions, make the arguments both for and against the idea of having a single Australia & New Zealand currency
9. Consider the following investment opportunities:
A = pays $22,000 with 50% probability and $0 with 50% probability
B = pays $25,000 with 20% probability and $6,000 with 80% probability
C = pays $15,000 with 60% probability and $3000 with 40% probability
D = pays $10,000 with total certainty.
a. What is the expected return for each investment opportunity?
b. List the investments in order of preference for a risk neutral person.
c. If a risk-averse investor is willing to pay up to $300 to avoid risk (but they are indifferent between different risks), list the investments in their order of preference.
d. If a risk-seeking investor is willing to pay $300 to experience risk (but they are indifferent between different risks), list the investments in their order of preference.
e. Explain why a risk-averse investor would choose to have a portfolio that included a mix of the above investments.
10. Consider a situation where Kuwait has a current account deficit.
a. What can you conclude about Kuwait’s levels of domestic savings, domestic investment, international capital flows, and their capital account?
b. Assuming that Kuwait has a floating exchange rate and perfect capital mobility, how would a decrease in the level of Kuwaiti savings impact their balance of payments?
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