Economics 219

Problem Set #10

1)      Look up the nominal exchange rate between the U.S. dollars and Thai Baht..  If the U.S. CPI is $177 and the Thai CPI is 5,850 Baht, what is the real exchange rate between the U.S and Thailand? (Be very careful about your units here!)

2)      Suppose that the Euro exchange rate is $1.10/Euro while the exchange rate for Indian Rupees is $0.02/Rupee.  Calculate the Euro/Rupee exchange rate. (Again, Be careful with the units!!!).

3)      Suppose that the interest rate on 3-month treasury bills is 4% per year and the rate of return on German 3-month government bonds is 5%. 

a)      If the current Dollar/DM exchange rate is .4500 $/DM, what would uncovered interest parity imply about the market’s expectation of the $/DM exchange rate 1 year from now?

      b) Suppose the rate of exchange for forward contracts on DM one-year forward is .4400. Which asset an American investor would prefer?  Why?

4)      Explain how the following events would most likely affect savings, investment, the trade balance and the interest rate. (Note: there is more than one likely answer to each scenario.)

a)      Consumer confidence in the US falls (think of consumer confidence as a measure of the average citizen’s expectation of economic conditions in the near future)

b)      Microsoft perfects a new operating system that dramatically improves computer performance.

c)      A war in the middle east causes a dramatic rise in oil prices (hint: oil prices impact a consumer’s disposable income as well as the private sector’s bottom line)

d)      The government abolishes the corporate income tax.

e)      New BEA estimates project higher than anticipated economic growth for the upcoming year.