Economics

Question 1 –
Consider the US dollar-Chinese Yuan exchange rate. Assume that China is the domestic economy. a. Draw a graph depicting the determination of the price of the foreign currency (USD) in terms of Yuan, the domestic currency.

b. If the exchange rate is above its equilibrium value, is the Chinese currency over-valued or undervalued. Explain. If the central bank of China wanted to maintain this rate, what would it have to do?

c. Examine the implications for the Chinese currency, of each of the following developments. Use graphs to support your answer, and in each explain clearly the mechanism via which the effects occur.

1. The U.S. imposes tariffs on a wide variety of imports from China 2.
2. The U.S. slides into recession
3. 3. Both 1. and 2. occur at the same time.

Question 2 –

A. Consider each of the following exchange rates of the Canadian dollar against a foreign currency.
1 peso ( Argentine) = 0.09355 CAD
1 dollar (Australia) = 0.0842 CAD
1 krone (Denmark) = 0.2051 CAD
1 Euro= 1.5304
CAD I Yen (Japan) = 0.01204 CAD

Suppose the Danish krone and Australian dollar are each expected to appreciate at a rate of 5% the inflation rates in these countries are expected to be: Australia (4%), Denmark (1%) and Canada (2%). In each case, what would you expect the change in real exchange rates to be? Is this a real appreciation of depreciation?

B. How is the spread of a currency defined? What does it represent? (3 points)

Use the left half of the table at this site to calculate the percentage spread of the US dollar rate in trading with the the Canadian dollar (CAD), the Swedish krona (SEK), the South African rand (ZAR), and the Hong-Kong dollar (HKD).

Question 3 – 10 points A. What does it mean to say that a country’s currency is at a forward “discount” or “premium”?

B. Click on the following link to access some data on the monthly spot and forward rates of the US dollar in terms of the Canadian dollar. Choose the “Quick Data” option and select the latest 5 months. Then select the closing exchange rate for both spot and forward transactions.
1. Present your rates for each month in a table.
2. What is the percentage forward premium or discount on the US dollar in each of the five months? (3 points) What does this tell us about market expectations about the short term future of the exchange rate ?
3. Consider the spot and forward rates for the latest month in your table. Suppose that a 3-month Treasury bill was offering a return of 0.005 (0.5 percent) in the US. What interest would Canadian Treasury bills offer if covered interest parity holds ?
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