HWCh02_000 - FI472 Chapter2HomeworkAnswers Questions 3.

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FI 472 Chapter 2 Homework Answers Questions 3. For each of the following six scenarios, say whether the value of the dollar will appreciate, depreciate,  or remain the same relative to the Japanese yen. Explain each answer. Assume that exchange rates  are free to vary and that other factors are held constant. a. The growth rate of national income is higher in the United States than in Japan. A NSWER The value of the dollar should rise as more rapidly rising GNP in the United States leads to a  relative increase in demand for dollars. b. Inflation is higher in the U.S. than in Japan. A NSWER .  The value of the dollar should fall in line with purchasing power parity. c. Prices in Japan and the United States are rising at the same rate. A NSWER .  According to PPP, the exchange rate should remain the same. d. Real interest rates are higher in the United States than in Japan. A NSWER .  The value of the dollar should rise as the higher real rates attract capital from Japan that must  first be converted into dollars. e.
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HWCh02_000 - FI472 Chapter2HomeworkAnswers Questions 3.

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