ECON6008 S1 2023 Tutorial 2
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ECON6008 S1 2023
Tutorial 2
1. In Munich a bratwurst costs 7 euros; a hot dog costs $8.00 at Boston's Fenway Park. At an exchange rate of $1.10/per euro, what is the price of a bratwurst in terms of hot dogs?
The relative price of bratwurst is hot dogs (Enter your response rounded to two decimal places.) All else equal, how does this relative price change if the dollar depreciates to $1.40?
Now the relative price of bratwurst is hot dogs (Enter your response rounded to two decimal places.)
Compared with the initial situation, a hot dog has become (1) expensive relative to a bratwurst?
(1) 
less more
2. When the dollar is worth less in relation to currencies of other countries (for example relative to the Japanese Yen in the diagram to the right), are you more likely to buy American-made or foreign-made electronics?
(1) .
Are U.S. companies that manufacture semi-conductors happier when the dollar is strong or when it is weak?
(2)
What about an American company that is in the business of importing electronic consumer goods into the United States?
(3)
Exchange Rate (Yen per dollar)
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(1) |
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American (domestic) products Foreign products |
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When the dollar is stronger. When the dollar is weaker. |
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When the dollar is stronger. When the dollar is weaker. |
3. Calculate the dollar rate of return on a 10,000 pound sterling deposit in a London bank in a year when the interest rate on
pounds is 8 percent and the dollar/pound exchange rate moves from $1.24 per pound to $1.61 per pound.
The rate of return will be percent (Enter your response as a percentage rounded to one decimal place.)
4. Suppose the return on a European bond is 9 percent per year. If we expect the US dollar to depreciate with respect to the euro by 13 percent in the next year, what is the expected dollar return on this European bond?
A. 8 percent.
B. 9 percent.
C. 22 percent.
D. − 4 percent.
5. Suppose a bond issued by the European Central Bank and denominated in euros pays 5% per year. Today the exchange rate is 1.61 dollars per euro. It is expected that the exchange rate in one year will be 1.77 dollars per euro. What is the annual dollar return on this bond?
A. 15 percent.
B. − 4 percent.
C. 21 percent.
D. 5 percent.
6. Suppose the equilibrium exchange rate is determined by the Uncovered Interest Parity (UIP) condition. The graph on the right depicts the dollar return on a dollar asset.
On the same graph, draw the initial dollar return on a euro asset. Label the initial equilibrium "A".
Now suppose the traders in asset markets suddenly learn that the interest rate on dollars will rise in the near future. Use the diagram on the right to show the effect on the current dollar/euro exchange rate, assuming current interest rates on dollar and euro deposits do not change. Label the new equilibrium point "B".
As a result of this change, will the equilibrium exchange rate (dollars per euro) rise or fall?
Return on
a dollar asset
Dollar rate of return
7. The following report appeared in the New York Times on August 7, 1989:
"But now the sentiment is that the economy is heading for a
'soft landing,' with the economy slowing significantly and
inflation subsiding, but without a recession.
This outlook is good for the dollar for two reasons. A soft
landing is not as disruptive as a recession, so the foreign
investments that support the dollar are more likely to
continue.
Also, a soft landing would not force the Federal Reserve to
push interest rates sharply lower to stimulate growth. Falling
interest rates can put downward pressure on the dollar
because they make investment in dollar-denominated
securities less attractive to foreigners, prompting the selling
of dollars. In addition, the optimism sparked by the
expectation of a soft landing can even offset some of the
pressure on the dollar from lower interest rates."
Using the graph on the right, show how lower interest rates
can put downward (depreciation) pressure on the dollar.
8. If the return on a euro asset is 3 percent, and a euro costs 1.46 dollars today and will cost 1.53 tomorrow, then a
comparable dollar asset should have a return of (1) percent in order for the Uncovered Interest Parity (UIP) to hold.
(1) 8 0.08 3
10
2023-05-29