Question

The table below shows the nominal exchange rates (as of 25 February 2020) between the Swedish krona (SEK) and the US dollar (USD) and the British pound (GBP), respectively. Foreign currency USD GBP SEK per foreign currency 10.45 13.46 a) Express the nominal exchange rates for SEK as foreign currency per SEK? (2p) b) What is the nominal exchange rate between USD and GBP, expressed as USD per GBP? (2p) c) Suppose that a representative basket of goods and services costs 10 000 SEK in Sweden, while the corresponding basket of goods in the US costs 800 USD. Calculate the real exchange rate between Sweden and the US. Which country has the highest price level? (3p) d) Suppose that the nominal exchange rate between SEK and USD decreases to 8 SEK per USD. Has the SEK appreciated or depreciated against the dollar? (1p) e) What economic factors could have triggered the change in the exchange rate given in d)? Give two examples. Note: You need to provide more information than just stating the shift of curve/s. Illustrate your examples in a figure of the foreign exchange market, with the horizontal axis showing the amount of SEK traded on the market, and the vertical axis showing the nominal exchange rate expressed as USD/SEK. (4)

Answer 1

.The NOMINAL EXCHANGE RATE is the relative price ofcurrencies of two countries. If Swedish krona(SEK) are usedyo buy USD, the excnage rate is for the SEK/USD.It means it costs 10.45 US dollar for 1 SEK. a)In this case 1/10.45=0.096. It costs 0.096 SEK to buy 1 US dollar.

b) in this case 1/13.46=0.074. it cost 0.074 SEK to buy 1 GBP. 1 usd= 0.085 gbp. but here USD/SEK=0.096 GBP/SEK=0.074 therefore

USD/GBP=0.096/0.074=1.29

C) 0.096 SEK to buy 1 US Dollar.a basket of goods in US Costs 800 USD. real exchange rate measures the price of foreign goods relative to the price of domestic goods. REAL EXCHANGE RATE= e$\times$P/P* = 10000$\times$0.096/800 = 1.2 , P= DOMESTIC PRICE, P*=FOREIGN PRICE, E= NOMINAL EXCHANE RATE

d) nominal exchange rate= 8 SEK/USD. In this case 1/8 = 0.125. it costs 0.125 SEK to buy 1 USD. It depreciates against the dollar.