ECON303 Tutorial 2 - Econ303 International Money and Finance Tutorial 2 1 Imagine that everyone in the world pays a tax of t on interest earnings

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Unformatted text preview: Econ303: International Money and Finance Tutorial 2 1. Imagine that everyone in the world pays a tax of t % on interest earnings and on any capital gains due to exchange rate changes. How could such a tax alter the analysis of the interest parity condition? How does the answer change if the tax applies to interest earnings but not to capital gains, which are untaxed? 2. Analyse how the current exchange rate between Home currency and Foreign currency will be affected in the following cases: a) A temporary decrease in demand for money in Home country. b) A temporary decrease in money supply in Foreign country. c) A permanent decrease in money supply in Foreign country. d) A change in expectations about monetary policy: Home country residents expect that the central bank will permanently increase money supply next quarter. 3. Suppose that country A's expected inflation rate is 50% and country B's expected inflation is 70%, According to relative PPP, what should happen over the year to the exchange rate between country A's currency and country B's currency 4. Assume that money supply in Home country is growing at the constant rate gm. Assume that the central bank in the Home country is worried about inflation and therefore, decides to decrease the growth rate of money to g'm ( where g'm < gm) starting from period t0 . Given that there is no change in monetary policy of the foreign country, analyse what will happen to prices and the interest rate in the Home country over time. What will happen to the exchange rate between Home and Foreign currencies? Use graphs in your answer. 5. Read the Economist article "Invested interests". ...
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This note was uploaded on 05/26/2010 for the course ECON 1160 taught by Professor Byrke during the Spring '10 term at Macomb Community College.

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