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### 203-tutorial-10

Course: ECON201 00000112, Spring 2012
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203 Econ Tutorial #10 Date: Week of Mar. 26 Apr.1 Coverage: Chapter 12 The Balance of Payments, Exchange Rates, Monetary Policy and Fiscal Policy Short Questions Only 1. Real Exchange Rates, Nominal Exchange Rates, and Net Exports: Suppose that, in 1991, the price levels in Argentina and the US were 100. By 2000, the price level in Argentina has increased to 200, while the price level in the US rose to 150....

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203 Econ Tutorial #10 Date: Week of Mar. 26 Apr.1 Coverage: Chapter 12 The Balance of Payments, Exchange Rates, Monetary Policy and Fiscal Policy Short Questions Only 1. Real Exchange Rates, Nominal Exchange Rates, and Net Exports: Suppose that, in 1991, the price levels in Argentina and the US were 100. By 2000, the price level in Argentina has increased to 200, while the price level in the US rose to 150. Suppose the exchange rate between two countries was US\$1 = Peso\$1 in 1991. (i) Find the inflation rates of the two countries. (ii) What was the 1991 real exchange rate? (iii) What must the new nominal exchange rate have been in 2000 if the real exchange rate remained constant? (iv) In reality, Argentina has a fixed exchange rate system against the US\$. The initial nominal exchange rate is fixed. As a result, did Argentinas real rate exchange appreciate or depreciate? (v) Would you expect Argentinas net exports to rise or fall as a result? (vi) Is the Argentina Peso overvalued or undervalued? 2. Interest Rate Parity: Suppose you have C\$1,000. You can either buy a Canadian asset that pays 10% after one year, or a U.S. asset that pays 12% after one year. Both assets are equally safe, and it is certain that you would receive your invested money plus interest payments one year from now. The exchange rate between Canadian dollars and the U.S. dollars is flexible, and the current e = C\$/US\$ is equal to 1.2. (i) State the interest rate parity condition. (ii) Use the interest rate parity condition to find the expected future depreciation or appreciation in the C\$. (iii) Explain intuitively why the Canadian dollar is expected to appreciate or depreciate. 1
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