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Document3 TAKE HOME EXAMS COVER PAGE SPRING 2021 BEFORE STARTING THE EXAM YOU MUST READ AND SIGN THIS MANDATORY STUDENT STATEMENT As a student at UC Davis, I hold myself to a high standard of integrity, and by signing/accepting the statement below I reaffirm my pledge to act ethically by honoring the UC Davis Code of Academic Conduct. I will also encourage other students to avoid academic misconduct. I acknowledge that the work I submit is my individual effort. I did not consult with or receive any help from any person or other source. I also did not provide help to others. I may work with others only if the instructor gave specific instructions, and only to the extent allowed by the instructor. I understand that suspected misconduct on this assignment/exam will be reported to the Office of Student Support and Judicial Affairs and, if established, will result in disciplinary sanctions up through Dismissal from the University and a grade penalty up to a grade of “F” for the course. I understand that if I fail to acknowledge or sign this statement, an instructor may not grade this work and may assign a grade of “0” of “F”. Signature: ___________________________________________________________ 1 UC Davis ECN 160B: International Macroeconomics Winter 2021 Midterm Exam 1 Start: April 26, 2021, 12 noon, California time End: April 28, 2021, 12 noon, California time Professor Alan M. Taylor Please: Enter your name and ID# below DO NOT OPEN the exam until you are given instructions to do so This exam contains 8 pages. There are 4 questions worth 10 points each. This is a 1 hour and 20 minute exam. Spring 2021: FOR THIS REMOTE EXAM: You have 48 hours to submit and the exam is open-book. You must show your work on all questions to receive credit. The UC Davis Code of Academic Conduct applies
Name: ______________________________________________________________ ID #: ______________________________________________________________ Question 1 (10 points) Question 2 (10 points) Question 3 (10 points) Question 4 (10 points) Total (40 points) 2 1.MiscellaneousShortQuestions[1pointeach] a. GiveanexampleofaEuropeancountrywhichhasitsowncurrencybutwhich currentlypegsitscurrencytotheeuro. b. YouareawineimporterandhaveboughtalargeFrenchwineshipmentfor€10 million(includingdeliverycosts)withpaymentduein90days.Youhaveacontract tosellthewineshipmentontoaliquorstorefor$12millionwithpaymentdueon thesamedate.Todaythespotrateis$1.05pereuro,andthe90-dayforwardrateis $1.10pereuro.Canyoulockinaprofitbyhedgingwithaforwardcontract?How much?Explain.Canyoupotentiallylosemoneyifyoudon’thedge? c. OneyearagotheAustraliandollarwasworth$0.75inU.S.dollars.Nowitisworth $0.80inU.S.dollars.ComputewhattheU.S.dollarwasworthateachtimein Australiandollar.(Hint:Startwithfractions.) d. Inthelastquestion,hasthedollarexperiencedanappreciationoradepreciation againsttheAustraliandollaroverthelastyear? e. Assumetheworldrealinterestrateisr*=4.0%peryear.Yourcountryhasalong runaverageinflationrateofp=2.0%.Whatwillbetheaveragenominalinterest rate(i)inyourcountry?(Writedowntheequationyouuse.) 3 f. ABigMaccosts€5.00intheEurozoneand$6.05intheU.S.Thespotexchangerate is$1.10pereuro.WhatisthePPP-impliedvalueofthe$/€exchangeratebasedona basketofBigMacs?WhatistheUS/EURrealexchangerate(q)?Isthedollar undervaluedorovervaluedagainsttheeuro(andbyhowmuch)? g. Inthe(flexibleprice)monetarymodel,ifacountryinitiallyhasastableexchange rateandpricelevel,butthensuddenlyincreasesitsmoneysupplygrowthrateby 10%peryear,whathappenstoitsrateofinflationandrateofdepreciation? h. SupposetheECBkeepstheeurointerestrateat2%forever.TheFednow temporarilyraisesitsinterestratethisyearfrom2%to7%.Afterthisevent,whatis theexpectedrateofdollardepreciationifUIPholdsoverthecomingyear?(Hint: UsetheapproximateUIPformula.) i. Inthelastquestion,supposethepoliciesaretemporary,andeveryonebelievesthe exchangeratewillreverttoitsexpectedlongrunPPPvalueof$1.26pereuroone yearfromnow.Whatwillbethespotexchangerate($/€)today?(Hint:Usethe approximateUIPformula.) j. Accordingtothetrilemma,whichthreemacroeconomicpoliciesaremutually inconsistent? 4 2.UncoveredInterestParity[10points] ConsideraDutchinvestorwith1000eurostoplaceinabankdepositineitherthe NetherlandsorGreatBritain.The(one-year)interestrateonbankdepositsis2%on poundsinBritainand4.04%oneurosintheNetherlands.The(one-year)forwardeuro- poundexchangerateis1.575eurosperpoundandthespotrateis1.5eurosperpound. Answerthefollowingquestions,usingtheexactequationsforUIPandCIPasnecessary. a. Iftheyinvest1000eurosinDutcheurodeposits,howmanyeuroswilltheyhavein oneyear’stime?[2] b. Whatisthe(riskless)amountofeurostheywillhaveinoneyeariftheyinvest1000 eurosinBritishpounddepositsanduseforwardstocoverrisk?[2] c. Istherearisklessarbitrageopportunityhere?Explainwhyorwhynot.Isthisan equilibriumintheforwardexchangeratemarket?[2] d. Ifthespotrateis1.5eurosperpound,andinterestratesareasstated,whatisthe trueequilibriumforwardrate,accordingtoexactcoveredinterestparity(CIP)?[2] e. Ifexactuncoveredinterestparity(UIP)holds,whatistheexpecteddepreciationof theeuro(againstthepound)overoneyear?Whatthenistheexpectedeuro-pound exchangerateoneyearahead?[2] 5 3.MonetaryModel[10points] AssumeHungary’smoneygrowthrateiscurrently16%andoutputgrowthis9%.Europe’s moneygrowthrateis4%anditsoutputgrowthis2%.Also,assumetheworldrealinterest rateis2%.Forthequestionsbelow,usetheconditionsassociatedwiththesimple monetarymodel(L=constant).TreatHungaryasthehomecountryanddefinethe exchangerateasHungarianforint(Ft)pereuro,EFt/€. a. ComputetheinflationrateinHungary.[2] b. ComputetheinflationrateinEurope.[2] c. Computetheexpectedrateofdepreciationoftheforintversustheeuro.[2] d. SupposetheHungarianNationalBankdecreasesthemoneygrowthratefrom16% to12%.IfnothinginEuropechanges,whatisthenewinflationrateinHungary?[2] 6 e. Fillinthetimeseriesdiagrams(timeonthehorizontalaxis)belowtoshowhowthe policychangeinpartdattimeTaffectsthefollowingvariables:moneysupplyMHUN, realmoneybalancesMHUN/PHUN,pricelevelPHUN,andexchangerateEFt/€overtime. Clearlylabelthebeforeandaftergrowthratesforeachvariableonthechart.[2] 7 4.PermanentVersusTemporaryPolicies[10points] Thisquestionconsidershowtheforeignexchange(FX)marketwillrespondtochangesin monetarypolicy.Forthesequestions,thehomecountryisBritain,andforeignisthe Eurozone.ThehomeexchangerateisBritishpounds(£)pereuroE£/€.Usethecombined (side-by-side)homemoneymarketandFXdiagramstoanswerthefollowingquestions. Clearlylabelthefigures:axes,equilibriumpoints,levelsofvariables.Explainbriefly. a. SupposetheBankofEnglandtemporarilyincreasesitsmoneysupply.Illustratethe shortrun(labelequilibriumpointB)andlong-runeffects(labelequilibriumpointC) ofthispolicy.[5] Explanation: 8 b. SupposetheBankofEnglandpermanentlyincreasesitsmoneysupply.Illustratethe shortrun(labelequilibriumpointB)andlong-runeffects(labelequilibriumpointC) ofthispolicy.[5] Explanation: