Econ182_Probset1

Econ182_Probset1 - UNIVERSITY OF CALIFORNIA - Berkeley...

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Unformatted text preview: UNIVERSITY OF CALIFORNIA - Berkeley Department of Economics Econ 182 Prof. Kasa International Monetary Economics Spring 2008 PROBLEM SET 1 (Due February 21) Questions 1-3. Answer True, False, or Uncertain. Briefly explain your answer. No credit without explanation (5 points each). 1. Government budget deficits lead to current account deficits. 2. Overshooting of the exchange rate cannot occur if asset markets are always in equi- librium. 3. According to the theory of Purchasing Power Parity, high inflation countries should have depreciating currencies. The following questions are short answer. 15 points each. 4. Suppose the 12-month forward price of the dollar in terms of yen is 144 yen per dollar. Suppose the spot price of of the dollar in terms of yen is 160. Next, suppose that currently the annual interest rate on yen deposits is 4%, while the interest rate on a comparable dollar deposit is 12%. There are no transactions costs. Is there an arbitrage opportunity here? If so, explain exactlyarbitrage opportunity here?...
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Econ182_Probset1 - UNIVERSITY OF CALIFORNIA - Berkeley...

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