e. What is the expected rate of real depreciation for the United States (versus the United Kingdom)?
Answer: Because the real exchange rate will reduce by 0.03, thus rate of real depreciation is equal to -2.5% (= -0.03/1.20). It indicates a real appreciation in the United States relative to the United Kingdom
f. What is the expected rate of nominal depreciation for the United States (versus the United Kingdom)?
Answer: The expected rate of nominal depreciation can be computed as:
Inflation differential + expected real depreciation
Here, inflation differential is -1% and the expected real appreciation is -2.5%
Thus the expected nominal depreciation is -3.5%.
It indicates an expectation of a 3.5% appreciation in the U.S. dollar relative to the British pound
g. What do you predict will be the dollar price of one pound a year from now?
Answer: The current nominal exchange rate is $2 per pound and an expectation of a 3.5% appreciation in the dollar , thus the expected exchange rate in one year equals $1.93 (= $2 * (1- 0.035).
2. You are given the following information. The current dollar-pound exchange rate is $2 per pound....
Challenge Problem. Following are currency exchange “crossrates” between pairs of major currencies. Currency crossrates include both direct and indirect methods for expressing relative exchange rates. Currency crossrates include both direct and indirect methods for expressing relative exchange rates. U.S. U.K. Swiss Japanese European Dollar Pound Franc Yen Euro EMU 1.1406 ? 0.6783 0.0087 --- Japan 130.66 185.98 77.705 --- 114.60 Switzerland 1.6817 2.3936 --- 0.0129 ? United Kingdom ? --- 0.4178 ? 0.6162 United States --- 1.4231 ? 0.0077 0.8767 a. Fill in the missing exchange rates in the crossrates table. b. If the inflation rate is expected to be 3 percent in the European Monetary Union (EMU) and 4 percent in...
Assume that the spot exchange rate of the British pound is $1.73/£. How will this spot rate adjust according to PPP if the United Kingdom experiences an inflation rate of 7 percent while the United States experiences an inflation rate of 2 percent?
3. The following conditions exist in the foreign exchange market: Current spot rate: $1.80/pound Annualized interest rate on 90-day dollar-denominated bonds: 896(296 for 90 days) Annualized interest rate on 90-day pound-denominated bonds: 12% (3% for 90 days) All financial investors expect the spot exchange rate to be $1.77/pound in 90 days. a. If a U.S. investor bases decisions solely on the expected rate of return, should that investor buy pound-denominated bonds or dollar-denominated bonds? Briefly explain. If a United Kingdom...
assume the following: current exchange rate $1.40/pound inflation rate/year in the us 4% inflation rate/year in england 7% if ppp holds what would you expect the exchange rate to be in 7 years?
Suppose that on January 1, the Yen price of the dollar is 95 (C$1= ¥100). Over the year, the Japanese inflation rate is 5%, and the Canadian inflation rate is 7%. At the end of the year, the exchange rate is C$1 = ¥98. (a) Based on this information is Yen undervalued or overvalued according to PPP? Explain.What happened to the real exchange rate? Explain.
Answer #3 please Ch15. Exchange Rates in the Long Run 1. Suppose that on January 1, the yen price of the dollar is 120. Over the year, the Japanese inflation rate is 5 percent and the U.S. inflation rate is 10 percent. If the exchange rate is $1- Yen 130 at the end of the year, does the yen appear to be overvalued, undervalued, or at the PPP level? Explain your answer In 1990, a U.S. dollar sold for 1.30...
4. Assume that exchange rates are the following: Dollar/Pound: 1.60, Yen/Dollar = 100, Yen/Pound = 160 Now assume the following inflation rates over the next year will be: U.S.= 3%, Japan = 1%, and U.K. = 1.5%. What will be the exchange rates one year from now, assuming that Purchasing Power Parity holds: a) Dollar/Pound b) Yen/Dollar c) Yen/Pound
6. Assume that the current dollar-Euro exchange rate (Ese) i equal to 1, the real exchange rate (qua/tur) = 1.26, the price level equals 2 in the U.S. and 2.5 in Europe. Assume that relative PPP holds. a. If inflation is 5% in the u.s. but 28 in Europe, what will be the price levels in the U.S. and Europe a year from now? b. What will be the nominal exchange rate (Ese) a year from now? c. What will...
a. Gold Is $350 per ounce In the United States and 2.800 pesos per ounce In Mexico. The nominal exchange rate between U.S. dollar and Mexican pesos that is Implled by the PPP theory Is: pesos. b. Mexico experiences Inflation so that the price of gold rises to 4,200 pesos per ounce, whlle the price of gold remalns $350 per ounce In the United States. The nominal exchange rate between U.S. dollars and Mexican pesos that is Implied by the...
Several factors affect the exchange rate of a currency with another currency. Which of the following statements are true about the factors that have an impact on exchange rates? Check all that apply. When a government limits imports and restricts foreign exchange transactions, its currency's value tends to increase relative to other currencies. An increase in inflation tends to increase the currency's value with respect to other currencies with lower inflation. If a government intends to prevent its currency's value...