# PS2 354 - METU FEAS Department of Economics Econ 354...

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1 METU / FEAS / Department of Economics Econ 354: Introduction to International Economics II / Spring 2010 Student assistants: Merve Mavu ş ([email protected]) & Erman Kılınço ğ lu ([email protected]) Course assistant: Seda Ekmen ([email protected]) Instructor: Emre Özçelik ([email protected]) Problem Set # 2 – Chapter 20 Part A. Multiple Choice Questions 1. Avoiding potential losses due to expected exchange rate changes is called _________ , whereas making a profit as a result of exchange rate changes is known as ________. a. speculation; hedging b. hedging; speculation c. arbitrage; hedging d. speculation; arbitrage 2. Under a flexible exchanges rates regime, suppose that Turkish citizens decrease their imports from Greece. At the same time, Greek citizens increase their purchases of stocks and bonds in Turkey. The first action (i.e., Turkish imports) will lead to ______ of Turkish Lira (TL) against Euro (€). The second action will _____ of TL against €. 3. Assume that in 2009, the equilibrium exchange rate between TL and \$ was 1.60 TL/\$. Turkish prices doubled in 2009, while U.S. prices rose by 60 %. Then the (relative) purchasing power parity theory would say that the equilibrium exchange rate in 2009 was: 4. In which of the following relationships between the expected future spot rate (E(e)) of a foreign currency and the current forward rate (e fwd ) of a foreign currency would a speculator have an incentive to buy foreign currency in the forward market? 5. Assume that exchange rate is stated in terms of domestic currency (TL) per unit of foreign currency (Yen). If the forward rate is 1.05 TL/Yen while spot rate is 1.10 TL/Yen, then the Yen is ______. a. at discount b. at premium c. in depreciation d. in appreciation

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