MidtermS07 - Econ 122 Midterm Exam May 8 2007 Part I...

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1 Econ. 122 Midterm Exam May 8, 2007 Part I. True/False (5 0 points ) Answer each of the following questions. State whether each statement is true or false. Then briefly explain you answer in 2 or 3 lines. Each question is worth 5 points. 1. Interest rates in the US are 4 percent per year, while the interest rate in Mexico is 5 percent per year. If foreign exchange markets are in equilibrium, this implies that people expect the peso to depreciate roughly 1 percent against the dollar. 2. To maintain its currency’s exchange rate with the US dollar, China increases its foreign exchange holdings of dollars. This appears as a credit in its balance of payments. 3. Covered interest parity states that the forward premium should approximately equal differences in interest rates. Several tests have shown the covered interest parity applies almost perfectly to Eurocurrency deposits. 4. Relative purchasing power parity posits that differences in rates of change in price levels
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