Solved by verified expert :56. What predictions does the purchasing-power
parity theory make concerning the impact of domestic inflation on the home country’s
exchange rate? What are some limitations of the purchasing-power parity theory?
.
57. Suppose
it is widely expected that theU.S.economy will grow faster than the
Japanese economy, have lower interest rates, more rapid inflation, and have a
greater growth in money supply. What do these expectations suggest will happen
to the value of the dollar? (Please reference the various approaches to
exchange rate determination in your answer.)
58. According
to the Monetary Approach to Exchange Rate Determination, how should an increase
inforeignreal income
affect the value ofdomesticcurrency? Explain the logic of your
answer.
59. In 1974, the price level forPacificawas 100, the price level for Atlantica
was also 100, and in the foreign exchange market 1Pacificapound was equal to 1 Atlantica mark.
In 2003, the price level inPacificahad risen to 280 and the price level
in Atlantica had risen to 360.
a. According to PPP, what should the pound-mark exchange
rate be in 2003?
b. If the actual pound-mark exchange rate is 0.5
pound/mark in 2003, is the mark overvalued or undervalued relative to PPP?
60. You observe the following current rates:
Spot
exchange rate: $1.25/SFr
Annual
interest rate on 90-day U.S.-dollar-denominated bonds: 8%
Annual
interest rate on 90-day SFr-denominated bonds: 2%
Assuming
uncovered interest parity holds, what spot exchange rate do investors expect in
90 days? What is likely to be the effect on the spot exchange rate if theU.S.money
supply unexpectedly jumps 10%? In your answer assume that the asset market
clears faster than the goods market (i.e. that prices adjust slowly and
interest rates adjust quickly). Also
in your answer address short-run changes in the exchange rate as well as
long-run changes.
61. Why
does exchange rate overshooting occur?
62. Why
is our ability limited in explaining exchange rate movements for short periods
into the future? Why is there some success in predicting exchange rates in the
long run?
