Solutions to chapter 13

Solutions to chapter 13 - Chapter 13 The Foreign Exchange...

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Chapter 13 The Foreign Exchange Market Foreign Exchange Market What are Foreign Exchange Rates? Why are Exchange Rates Important? How is Foreign Exchange Traded? Exchange Rates in the Long Run Law of One Price Theory of Purchasing Power Parity Why the Theory of Purchasing Power Parity Cannot Fully Explain Exchange Rates Factors That Affect Exchange Rates in the Long Run Exchange Rates in the Short Run Interest Parity Condition Demand Curve for Domestic Assets Supply Curve for Domestic Assets Equilibrium in the Foreign Exchange Market Explaining Changes in Exchange Rates Shift in the Demand for Domestic Assets Case : Changes in the Equilibrium Exchange Rate: Two Examples Changes in Interest Rates Changes in the Money Supply
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Chapter 13 The Foreign Exchange Market 75 ± Answers to End-of-Chapter Questions 1. You are more likely to drink California wine because the franc appreciation makes French wine relatively more expensive than California wine. 2. False. Although a weak currency has the negative effect of making it more expensive to buy foreign goods or to travel abroad, it may help domestic industry. Domestic goods become cheaper relative to foreign goods, and the demand for domestically produced goods increases. The resulting higher sales of domestic products may lead to higher employment, a beneficial effect on the economy. 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. ± Quantitative Problems
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This note was uploaded on 10/12/2011 for the course BIEMF 30006 taught by Professor Ippolito during the Fall '10 term at Università Bocconi.

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Solutions to chapter 13 - Chapter 13 The Foreign Exchange...

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