Its not a paper, its questions regarding international finance, i forgot today was the date its due and do not have any time to complete this, thanks!
Practice Questions for Topics 1 PAGE 8 EC249OC ASSIGNMENT #1 (Lessons 6-9) Instructions: 1. Please enter your NAME and ID Number in the space below. 2. Answer all questions, typing your answers in the spaces provided in this template. 3. Submit your assignment in PDF format to the MyLS dropbox by the deadline. 4. There is a total of 80 marks for this assignment, worth 7.5 percent of your final grade. NAME: ID Number: Lesson 6 Questions 6.1 The table below contains hypothetical figures in each of 2 years for 3 variables: the Canadian dollar/ U.S. dollar exchange rate (EC$/US$); the US$ price of a basket of goods if purchased in the U.S. (Pus); and the C$ price of the same basket of goods if purchased in Canada (Pc). Year EC$/US$ Pus Pc 1 1.30 100.0 125.0 2 1.313 102.0 128.75 a) Using the data in the above table we can calculate that the real exchange rate (q) [rounded to 2 decimal places] in Year 1 equals _________ and in Year 2 equals _______. (2 marks) b) From the calculated values for the real exchange rate (q), we can conclude that the data for Year 1 and Year 2 is ___________________ (consistent / not consistent) with absolute purchasing power parity. Explain your answer below. (2 marks) c) From the calculated values for the real exchange rate (q), we can conclude that the data for Year 1 and Year 2 is ___________________ (consistent / not consistent) with relative purchasing power parity. Explain your answer below. (2 marks) 6.2 Consider a long-run model of the type analysed in sections 6.1 - 6.3 of Lesson 6 in which there is a domestic economy and a foreign economy, each with its own national currency and each pursuing an independent monetary policy. As usual, the exchange rate (E) is defined as the domestic currency price of one unit of foreign currency. The table below contains values for 3 variables in each of two years (2017 and 2019): 1) the annual rate of domestic money supply growth (ΔM/M); 2) the annual rate of foreign money supply growth (ΔM*/M*); and 3) the expected real interest rates in the domestic and foreign economies which are assumed to be equal (re = re*). Year ΔM/M ΔM*/M* re = re* π π* R R* ΔE/E 2017 0.05 0.03 0.01 2019 0.02 0.06 0.01 a) Complete the table above by inserting for each of the two years the long-run equilibrium values of the annual rates of domestic and foreign price inflation (π, π*), the domestic and foreign nominal interest rates (R, R*), and the annual rate of change of the exchange rate [ΔE/E = ( Et - Et-1 )/Et- 1]. Base your answers on the assumptions we made in Lesson 6, including: i) that in both years the real demands for money in both the domestic and foreign economies are constant in value over the year; ii) that relative purchasing power parity prevails and is expected to prevail; iii) that inflation is everywhere fully anticipated; and iv) that in each year all variables have fully adjusted to their long-run equilibrium values. (5 marks) b) In the space below show and explain your calculation of the rate of change of the exchange rate [ΔE/E] in 2017 as shown in your answer to part a). (2 marks) c) In the space below use Fisher’s hypothesis to show and explain your calculation of the two nominal rates of interest (R, R*) in 2017 as shown in your answer to part a). (3 marks) d) In the space below use the general interest parity equation to show and explain why (nominal) interest parity does, or does not, prevail in 2017. (2 marks) 6.3 Suppose that in a particular year there is a both an increase in the long-run equilibrium real exchange rate ((q) and a decrease in the long-run equilibrium nominal exchange rate ((E). Within the context of the general model of long run exchange rate determination developed in section 6.5 of Lesson 6, this combination of events could be explained by an ______________(increase /decrease) in the level of domestic absorption (A), accompanied by a large ___________ (increase/decrease) in the domestic money supply (M), assuming no changes in any other determinants of q and E. (2 marks) Lesson 7 Questions 7.1 The diagram below shows two points (labeled A and B) on the DD curve of an economy. Aggregate demand for output in this economy is determined as follows: D = C+I+G+CA C = 15 + 0.75(Y‒T) I = 35 G= 50 T = 40 CA = 10E∙P*/P ‒ 0.25(Y‒T) P=P* =1.0 a) Given the information above, and applying the definition of the DD curve, we can calculate that Y1 = _______ , while Y2 = ________. (4 marks) b) As the economy moves up the DD curve from point A to point B, with the exchange rate rising from E1 to E2 and output increasing from Y1 to Y2, aggregate demand for output (D) increases by a total of ________ units which is the sum of an increase in the current account balance (CA) of ________ units and an increase in consumption spending (C) of ________ units. (3 marks) c) Now suppose that the level of foreign prices increase ((P*) from their current value of 1.0, with no change in domestic prices (P) and no change in any other exogenous variable. How, and why, does an increase in P* affect the DD curve shown in the diagram above? Explain. (3 marks) 7.2 The diagram below shows two combinations (labeled A and B) on the AA curve of an economy. The real demand for money function of this economy is: Md/P = L(R,Y) = 0.6Y ‒ 500R Assume the following values for the domestic real money supply (MS/P), foreign interest rate (R*), and the expected exchange rate (Ee): (MS/P) = 50; R* = 0.05; and Ee = 2.00. a) Given the information above, and applying the definition of the AA curve, we can calculate that E1 = _______ while E2 = ________. (Round answers to 2 decimal places.) (4 marks) b) As the economy moves down the AA curve from point A to point B the rise in national income from Y1 to Y2 ____________ (increases/ decreases) real money ___________ (demand/supply) which creates excess _________________(demand for /supply of ) money which results in a(n) _____________ (increase/decrease) in the domestic interest rate (R) which ____________ (increases/decreases) domestic demand for foreign currency and results in an excess _______________ (demand for /supply of ) foreign currency at the initial exchange rate of E1 requiring a fall in the exchange rate (E) to restore interest parity and FX market equilibrium.