Worksheet 10 - Answer Key

Worksheet 10 - Answer Key - Introduction to Macroeconomics...

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Introduction to Macroeconomics Econ 104a,c,d,e,f, - Spring 2009 Answer Key Worksheet 10 International Finance and the Bush Tax cuts 1. Consider the markets (Supply and Demand) for dollars and yen. Imagine it is 1979. The initial exchange rate between the yen and the dollar is 1 dollar = 75 yen. Fed Chairman Paul Volker undertakes serious contractionary monetary policy to stop inflation, and it has the corresponding (and predicted) effect of drastically increasing interest rates in the U.S., causing real U.S interest rates to go up relative to the real interest rates in other countries, including Japan. This means U.S. T-bills (bonds) are giving a higher real rate of return than the bonds of any other country in the industrialized world. a. Show what would happen to the price of the dollar and the yen in the markets below. Price of Dollars Price of Yen In Yen In Dollars S S New Price Of dollars 100 S’ 75 .01333 .01 New Price D’ Of $ D D Q Dollars Q Yen b. Has the dollar appreciated or depreciated? The $ has appreciated in relationship to the Yen, as we can see in the graph to the left. c.
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This note was uploaded on 11/30/2011 for the course ECON 104 taught by Professor Dolenc during the Fall '08 term at UMass (Amherst).

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Worksheet 10 - Answer Key - Introduction to Macroeconomics...

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