Consider the production function of the domestic economy
(subscript h) and of the foreign economy (subscript p):
Q, = KahLIah and Q, =Kale'p
Before capital market integration between h and p, the national
capital-labor ratios are assumed differ
Prole-me _ _
Cement hanks aerose the g at, 'tre'gelly sent with govetmnents over ee-at policies,
hut the eituetton ts. unique in the 12.th etno zone When oountttee the cute.
and retinqntsh power to set their own tenet rates, heel-thing becomes the most
_ _rn rm-.- J
The Michian Fomecenting Servmce (MES) is a eeSeaeeh institute
that sheet-Mines in exchange rate peedtietiue. Market
expectations are such that US money supply is- expeeteel to
increase by 4%, the European by 2% These numhems
Generalize the havecountry model of a floating exchene Paste
(Section 5.1.6) to take ee-eount of the distinction between traded
and non-traded goods. Assume that the price index in each
L) H =P,P,*,) 0<a<1
Where P, P,V a
Use the raw data of the (Jan 2013) table with the Big Mac Index
compiled by the Economist (http:/www.economist.com/content/bigmac-index). It computes the PPP exchange rate implied by the values
of the Big Mac, an international homogenous commodi
Question 1 (12 points)
True, false, uncertain. Prove the following two propositions which are derived from the required
exam material of this course. The grading of this question is based on the defense of your judgment.
Make use of the instruments that h
If a major international bank is offering Yen deposits yielding 1% p.a.
when at the same time dollar deposits are yielding 7% p.a., and the
spot exchange rate is $1.00 = Yen 110.
1. What can you deduce about market expectations regarding the