aq22Ap - g. Over the past year, the number of Cherokees...

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22 April Kia cars are made in Korea, whose currency is the Won. Jeep Cherokees are made in the US. Today’s exchange rate is $1 = 1,205 Won. A year ago, the exchange rate was $1 = 1,309 Won. Assume inflation rates in the US and Korea are similar, specifically the cost of making cars in each place has not changed relatively. a. Over the past year, against the Won the $ has appreciated; NO, the price of the $ went down, not up. b. Over the past year, against the Won the $ has depreciated; YES c. Over the past year, against the $ the Won has appreciated; YES, if the $ depreciated, the Won must have appreciated. d. Over the past year, against the $ the Won has depreciated e. Over the past year, in the US Cherokees should have become cheaper relative to Kias; YES. If the price in Won of a Kia has stayed the same, its price in dollars must have got higher, so now Cherokees should be relatively cheaper [their price in dollars won’t have changed much]. f. Over the past year, in the US Cherokees should have become more expensive relative to Kias; NO
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Unformatted text preview: g. Over the past year, the number of Cherokees sold in Korea should have increased; YES. Cherokees also should be cheaper in Korea [if the $ price did not change, that is now fewer Won], so more should have been sold. h. Over the past year, the number of Cherokees sold in Korea should have fallen; NO. i. Probably, Korean interest rates are even lower than US ones, if interest rate parity holds; YES. If you had taken a $, changed it to Won a year ago, and then changed it back to $ now, you would have made a profit [got more than a $ back $(1,309/1,205) to be precise] even with no interest. So if expectations were correct, Korean interest rates should have been lower than US ones. Interest rates on appreciating currencies are generally lower than on depreciating ones. j. Probably, Korean interest rates are higher than US ones, if interest rate parity holds. NO....
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This note was uploaded on 05/22/2011 for the course ECO 2013 taught by Professor Denslow during the Spring '05 term at University of Florida.

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