Int++l+Finance++HW+1-7+2011

Int++l+Finance++HW+1-7+2011 - International Finance Problem...

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International Finance Problem and Solution Set 1-7 Dr. A. Sohrabian
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International Finance Problem Set #1 Dr. A. Sohrabian 1. A memorandum by then Labor Secretary Robert Reich to President Clinton suggests that the government penalize U.S. companies that invest overseas rather than at home. According to Reich, this kind of investment hurts exports and destroys well-paying jobs. Comment on this argument. 2. Some economists have argued that a lower government deficit could cause the dollar to drop by reducing high real interest rates in the United States. What does the asset view of exchange rates predict will happen if the United States lowers its budget deficit? What is the evidence from countries such as Mexico and Brazil? 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. b. Inflation is higher in the United States than in Japan. c. Prices in Japan and the United States are rising at the same rate. d. Real interest rates are higher in the United States than in Japan. e. The United States imposes new restrictions on the ability of foreigners to buy American companies and real estate. f. U.S. wages rise relative to Japanese wages, while American productivity falls behind Japanese productivity. 4. On November 28, 1990, Federal Reserve Chairman Alan Greenspan told the House Banking Committee that, despite possible benefits to the U.S. trade balance, “a weaker dollar also is a cause for concern.” This statement departed from what appeared to be an attitude of benign neglect by U.S. monetary officials toward the dollar’s depreciation. He also rejected the notion that the Fed should aggressively ease monetary policy, as some Treasury officials had been urging. At the same time, Mr. Greenspan didn’t mention foreign exchange market intervention to support the dollar’s value. a. What was the likely reaction of the foreign exchange market to Mr. Greenspan’s statements? Explain. b. Can Mr. Greenspan support the value of the U.S. dollar without intervening in the foreign exchange market? If so, how? 5. The Russian government is trying to figure out how to stabilize the value of its currency. What advice would you offer to it? 6. Between 1988 and 1991, the price of a room at the Milan Hilton rose from Lit 346,400 to Lit 475,000. At the same time, the exchange rate went from Lit 1,302:$1 in 1988 to Lit 1,075:$1 in 1991. a. By how much has the dollar cost of a room at the Milan Hilton changed over this three- year period? b. What has happened to the lira’s dollar value during this period?
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7. During the currency crisis of September 1992, the Bank of England borrowed DM 33 billion from the Bundesbank when a pound was worth DM 2.78, or $1.912. It sold these DM in the foreign exchange market for pounds in a futile attempt to prevent a devaluation of the pound. It repaid these DM at the post crisis rate of DM 2.50:£1.
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This note was uploaded on 12/13/2011 for the course ECON 161B taught by Professor Branch during the Fall '05 term at UC Irvine.

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Int++l+Finance++HW+1-7+2011 - International Finance Problem...

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