ss07 - University of Toronto Economics Department...

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University of Toronto Macroeconomics, Theory and policy Masoud Anjomshoa Economics Department Solution set #7 Disclaimer: These solutions are just guidelines for you, and may NOT include a complete solution for the questions and problems in your homework, as you must present in your assignments and/or exams. In your solutions you must show your work, and demonstrate your line of thinking clearly. Please, always check my calculations for unintentional typos or miscalculations. --------------------------------------------------------------------------------------------------------------------------------- Blanchard, Chapter 6, Q# 1. a)- True b)- False. If Singapore has balanced current account, and also export/GDP greater that one, then both import/ GDP is also greater than one. c)- False. Japan has a big economy, which despite huge import/export sectors, they are still small relatively. d)- False. The difference in equal to expected depreciation rate. If there is no expectation of depreciation or appreciation, then interest rates must be equal. e)- True, if it is assumed that Canadian dollar is the domestic currency and American dollar the foreign one. f)- True, if it is assumed that Canada is the domestic country and the US is the foreign one. ----------------------------------------------------------------------------------------------------------------------------------- Blanchard, Chapter 6, Q# 4. a)- i canada = [(10000/9615.38) – 1]= 4%, and i US = [(13333/12698.10) – 1]= 5% b)- i canada = i US + Expected Depreciation Rate Expected Depreciation Rate = 4% – 5%= -1% So we expect an appreciation of Canadian exchange rate: $1 US = 0.95 * (1-0.01) = $0.9405 CAN c)- In this case, it is better to buy American bonds, because rate of return would be higher than 5%. d)- If you substitute the expected exchange rate, E e , by the actual exchange rate, E a , in uncovered interest parity condition, then instead of the expected rate of return, you get the realized rate of return. So given the actual exchange rate in the next year, which is 0.9, and the US interest rate, 5% from above: The realized rate of return= i US + (E a –E)/E =0.05 +[(0.9-0.95)/0.95)] = 0.05 – 0.05263 =0.00263= –0.263% e)- Uncovered interest parity applies only on “Expected Rates”. So it implies that expected rate of return to foreign and domestic assets are equal. But the actual rates can be different depending on how different the expected and actual rates of return turn out to be. The later depends on how expected depreciation rate come true or not. ------------------------------------------------------------------------------------------------------------------------------------
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Blanchard, Chapter 6, Q# 5. a)-
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This note was uploaded on 04/10/2010 for the course ECO ECO202 taught by Professor Masoudanjamshoa during the Spring '10 term at University of Toronto- Toronto.

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ss07 - University of Toronto Economics Department...

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