HW_8_Solutions_Chapters_13_14[1]

HW_8_Solutions_Chapters_13_14[1] - Chapter 13 The Foreign...

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Chapter 13 The Foreign Exchange Market s Answers to End-of-Chapter Questions 4. It predicts that the value of the yen will fall 5% in terms of dollars. 5. In the long run, the fall in the demand for a country’s exports leads to a depreciation of its currency, but the higher tariffs lead to an appreciation. Therefore, the effect on the exchange rate is uncertain. 6. Even though the Japanese price level rose relative to the American, the yen appreciated because the increase in Japanese productivity relative to American productivity made it possible for the Japanese to continue to sell their goods at a profit due to the high value of the yen. 7. The dollar will appreciate. Because expected U.S. inflation falls as a result of the announcement, there will be an expected appreciation of the dollar and so the the expected return on dollar assets will rise. As a result, the demand curve will shift to the right and the equilibrium value of the dollar will rise. 8. The pound depreciates but overshoots, declining by more in the short run than in the long run. Consider Britain to be the domestic country. The rise in the money supply leads to a higher domestic price level in the long run, which leads to a lower expected future exchange rate. In addition, the rise in the money supply lowers the domestic interest rate on pound assets. Both of these changes lower the expected return on pound assets at any given exchange rate, shifting the demand curve to the left. The short-run outcome is a lower value of the pound. However, in the long run, the domestic interest rate returns to its previous value, and the demand curve shifts back to the right somewhat. The exchange rate rises to some extent, but still remains below its initial level. 9. The Indian rupee will appreciate. The announcement of tariffs will raise the expected future exchange rate for the rupee and so increase the expected appreciation of the rupee. This means that the demand for rupee denominated assets will increase, shifting the demand curve to the right and the rupee exchange rate therefore rises. 10. The dollar will depreciate. A rise in nominal interest rates but a decline in the real rate implies a rise in expected inflation that produces an expected depreciation of the dollar that is larger than the increase in the domestic interest rate. As a result, the expected return on dollar assets falls at any exchange rate, shifting the demand curve to the left and leading to a fall in the exchange rate. 11.
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HW_8_Solutions_Chapters_13_14[1] - Chapter 13 The Foreign...

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