国际贸易双语教案问题答案Pugel_14_SG_AKEY (19).doc

103 CHAPTER 19 WHAT DETERMINES EXCHANGE RATES Objectives of the Chapter In the short run fluctuations in exchange rates can be related to demands for and supplies of assets denominated in different currencies what we call the asset market approach to exchange rates Here we revisit the international financial investors and incorporate the impact of interest rate differentials and exchange rate expectations into the determination of the current spot exchange rate In the long run purchasing power parity suggests that movements in exchange rates are determined by differences in countries inflation rates The monetary approach to exchange rates explains inflation rates as functions of relative demands for and supplies of domestic and foreign monies Linking the two we get a model that ties exchange rates to fundamentals such as incomes and relative money supplies After studying Chapter 19 you should be able to explain 1 the impact of interest rates on the current exchange rate 2 the impact of expectations about future spot rates on the current exchange rate 3 what exchange rate overshooting is and why it can occur 4 how short run exchange rate movements can diverge from what would be predicted by market fundamentals 5 the purchasing power parity hypothesis in both its absolute and relative forms 6 the quantity theory of money in a two country world 7 the difference between nominal and real exchange rates Important Concepts Asset market approachExplains exchange rates in terms of demands and supplies to exchange rates of all assets denominated in different currencies The monetary approach to exchange rates is a variant of this approach in which only demands and supplies of the money asset are considered Bandwagon A situation in which investors expect the recent trend in exchange rates to extend into the future Law of one price Asserts that a single commodity will have the same price everywhere once the prices are expressed in the same currency This is another way of stating the purchasing power parity hypothesis It seems to be true chiefly for commodities that are standardized and heavily traded internationally Monetary approachSeeks to explain exchange rates by focusing on the demands to exchange rates for and supplies of national monies Nominal bilateral exchange rate The exchange rate we see quoted in foreign exchange markets 104 Nominal effective exchange rate The weighted average exchange value of a country s currency where the weights reflect the importance of the other countries in the home country s total international trade Overshooting When the exchange rate is driven past its ultimate equilibrium rate usually thought to be the PPP level and then back to that rate later during the adjustment of the macroeconomy to an exogenous shock This effect is the consequence of goods prices that are sticky in the short run Purchasing power parity In its absolute form this hypothesis says that the exchange rate will equal the ratio of the domestic price level to the foreign price level or e P Pf In its relative form the hypothesis states that the difference over time in inflation rates will be offset by changes in the exchange rate over that period An approximation of relative purchasing power parity is efuture etoday inflation rate at home minus inflation rate in the foreign country Quantity theoryTheorizes that in any country the money supply is equal to the of money demand for money which is directly proportional to the value of nominal gross domestic product This is symbolized as M kPY Here money s only role is as a medium of exchange Real exchange rate A way of measuring the price of foreign goods not just in currency adjusted terms but also in price level adjusted terms The real exchange rate on a currency at any moment in time is calculated as foreign cost of home currency x P Pf x 100 If purchasing power parity holds between the two countries the real exchange rate will be 100 When the real exchange rate is above 100 the home currency is overvalued and the foreign currency is undervalued when the real exchange rate is less than 100 the home currency is undervalued and the foreign currency is overvalued Speculative bubble A self confirming upward or downward movement in a price here the exchange rate that is out of line with the changes in the fundamental factors that determine the price of that object Warm up Questions True or False Explain 1 T F An expectation that the yen will appreciate can cause the yen to appreciate 2 T F An increase in the domestic interest rate will cause the home currency to depreciate 3 T FInternational interest rate differentials drive exchange rates in the short run international price differentials drive exchange rates in the long run 4 T FThe purchasing power parity hypothesis is unlikely to be true for countries that do not trade commodities internationally 5 T FIf the inflation rate in the United States is lower than the inflation rate in France the euro will depreciate relative to the dollar 105 Multiple Choice 1 If there is a sudden five percent decrease in the domestic money supply we should expect A the domestic currency to appreciate by five percent in the long run B the domestic currency to appreciate by six percent in the short run C the foreign currency to depreciate as demand for foreign assets decreases D all of the above 2 Under the asset market approach if both U S and British interest rates rise by three percentage points we could expect A the dollar to appreciate B the dollar to depreciate C the exchange rate between the dollar and the pound to remain unchanged D investors to move their funds to a third country 3 If a country s nominal interest rate increases by the same percentage that the inflation rate has increased A international investors will withdraw their funds from the country B international investors will pour more funds into the country C international investors will demand an increase in the real interest rate they are paid D none of the above 4 All other things being equal if the British government increases the money supply by 5 while the British economy is experiencing 5 real growth the exchange rate on the pound will be A unaffected B higher C lower D a mystery 5 All other things being equal which of the following would not cause the price of a foreign currency e to fall A A rise in the home country s expected inflation rate B A rise in the foreign country s expected inflation rate C A drop in the foreign country s real income D A rise in the foreign country s money supply 106 Problems 1 What impact will each of the following events have on the current spot exchange rate between the Saxon scudo Ss and the Leinster lira Ll You should assume that each event was not predicted in advance a Leinster residents expect the scudo to appreciate b Saxony s new government was voted in on a Whip Inflation Now platform c A change in saving behavior causes the real interest rate in Leinster to increase d The Minister of Trade announces that Saxony has incurred a much larger trade deficit than had been predicted e An earthquake flattens the major telephone factory in Leinster f The Minister of Finance in Leinster is charged with embezzling one billion lira from the Treasury 107 2 Consider the following information Today s spot exchange rate between the scudo and the lira is Ss 100 Ll People believe that in the next 90 days the lira is going to appreciate to Ss 101 Ll The 90 day interest rate in Saxony is 2 percent the 90 day interest rate in Leinster is 1 5 percent a Does uncovered interest parity hold b If it does not hold at what current spot rate would it hold 3 A group of Saxon economics students is planning to spend a summer in Leinster when they graduate from college in two years Obviously they are concerned about how much it will cost to vacation in Leinster They know that currently the typical vacation basket of goods costs 12 000 scudos in Saxony the same array of goods costs 120 lira in Leinster The exchange rate now is Ss 100 Ll Suppose they have taken a course in international finance and know that the newly elected Finance Minister of Leinster is going to decrease the lira supply by one third in the next two weeks a What can the students expect the exchange rate on the lira to be when they graduate in two years b Will that exchange rate be the same one they can expect to see in the next few months 108 4 Suppose the Saxon monetary authorities are prone to flooding their country with new scudo whereas Leinster s government officials hate to increase the supply of lira In light of this what would you expect to be the long run trend in the exchange rate between the scudo and the lira 5 Calculate the real exchange rate on the British pound assuming the following hypothetical data e 2 PUK 150 PUS 200 6 Suppose the U S price level in 2008 is 120 where the year 1998 100 and the price level in Mexico is 180 where the year 1998 100 The exchange rate in 1998 was 150 Mexican pesos per U S dollar According to the purchasing power parity hypothesis what would be the equilibrium exchange rate between the peso and the dollar in 2008 7 The Cambridge k from the money demand formula is thought to depend on behavioral variables that do not change much in the short run Suppose that some sort of financial innovation in th