# Aids: Non-programmable calculator Questions

Aids: Non-programmable calculator
Part A: Multiple Choice. 15 marks. Each question is worth 3
marks.

1. Random Walk exchange rates imply
a. deviations from PPP can be permanent.
b. deviations from PPP may only be corrected by offsetting random
shocks
c. both (a) and (b).
2. Suppose S0 = 1.32, i = 0.062, i∗ = 0.073 then E0S1 equals
a. 1.4328
b. 1.3065
c. 1.6893
3. Suppose domestic consumption rises and there are restrictions on holding foreign assets then with a floating exchange rate, in the long run the
Fleming-Mundell model predicts
a. a rise in Y and a fall in X − M.
b. depreciation of the domestic currency, a rise in Y and a rise in X −M.
c. jumps in the domestic interest rate and a rise in X − M.
4. Purchasing power parity is more likely to hold when
a. exchange rates are a random walk.
b. countries are geographically close.
c. countries have different consumption patterns.
page 2 of 4 2
5. Suppose foreign consumption rises then with a fixed exchange rate the
supply-demand model of exchange rates predicts
a. a rise in domestic central bank reserves of foreign currency and rise in
domestic net exports.
b. a fall in domestic central bank reserves of foreign currency and a fall
in domestic net exports.
c. a fall in the domestic money supply.
Part B: Numerical Problems. 20 marks
(5) 1. Consider the following direct quotes: 95.83 yen per CAD, 1.04 CAD
per USD and 98.56 yen per USD. Calculate the cross rate between CAD and
USD using the yen as an intermediate currency. Is there an opportunity for
triangular arbitrage?
euros) is currently 1.26. In 4 months time the exchange rate will be either
1.28 or 1.24. A European call option on euros expiring in 4 months has strike
price K = 1.25 CAD per euro. The risk free rate in Canada is 2 percent per
annum and the European risk free rate is 1 percent per annum. Solve for the
option price in the one step binomial model.
6. Suppose the Canadian dollar-Euro spot rate is S0 = 1.38 CAD per
euro. The one year dollar-Euro forward rate is F0,1 = 1.39 CAD per euro.
The one year interest rate in the Canada is 2 percent; in Europe the one year
interest rate is 1.8 percent.
(5) a. Suppose an investor has 500,000 Canadian dollars to invest then
converts it to euros at the spot rate, invests the resulting capital at the
European interest rate for one year and converts the proceeds back to CAD
at the forward rate. Determine returns from this trade.
with the 500,000 instead. Determine whether this strategy or the one in
(a) generates greater profit. Based on this calculation explain in a sentence
whether this forward rate is the equilibrium rate.
page 3 of 4 3
Part C: Theoretical Problems. 65 marks.
7. Assume that capital is perfectly mobile. The foreign and domestic
economies are initially at potential GDP. The domestic economy is small
and the foreign economy is large. Using the AD-AS model analyze the long
run impact on domestic X − M, I, C, Y and P of the following independent
shocks.
(10) a. Suppose domestic consumption depends positively on real wealth
meaning that rises in real wealth increase consumption. Let investor fears
cause a domestic stock market crash. Assume the exchange rate is fixed.
(10) b. a fall in the foreign money supply M∗
. Assume the exchange rate
is floating.
8. Using diagrams analyze the impact on domestic Y and i of the following
independent shocks in the Fleming-Mundell model.
(5) a. Investors believe that in the foreign economy a left wing government
with unsound economic policies will replace the pro business government.
There is a fixed exchange rate and perfect capital mobility.
(5) b. Foreign preferences for domestic goods falls. There is a floating
exchange rate and imperfect capital mobility.
(5) c. For the shock in (b) state the long run effect on domestic investment
I.
9. Compare the short and long run effects on the depreciation rate of the
domestic currency for the following independent shocks. Expectations are
(5) a. The foreign money growth rate rises.
(5) b. The price of oil experiences a transitory rise. Assume the domestic
economy is more dependent on oil than the foreign economy.
(10) c. For the shock in (a) compare short and long run depreciation of
the domestic currency if investors have Rational Expectations.
page 4 of 4 4
10. (10) The foreign and domestic economies are initially at potential
GDP. The domestic economy is small and the foreign economy is large. The
exchange rate is floating and capital is perfectly mobile. Assume a Keynesian
model so that adjustment to any shock is lagged. Using the AD-AS model
analyze the short run impact on domestic X − M, I, C, Y, P and E for the
following shock:
Environmental toxins discharged into water result in 15 percent
of domestic farmland being rendered useless for cultivation.
End of Exam
Pages (550 words)
Approximate price: -

## Reasons to trust Research Paper 101

On Time Delivery

We pride ourselves in meeting the deadlines of our customers. We take your order, assign a writer but allow some more time for ourselves to edit the paper before delivering to you. You are guaranteed a flawless paper on a timely manner...

24x7 Customer Live Support

Our team at Research Paper 101 is committed to handling your paper according to the specfications and are available 24*7 for communication. Whenever you need a quick help, you can talk to our writers via the system messaging or contact support via live chat and we will deliver your message instantly.

Experienced Subject Experts

Online Experts from Research Paper 101 are qualified both academically and in their experiences. Many are Masters and Phd holders and therefore, are qualified to handle complex assignments that require critical thinking and analyses...

Customer Satisfaction

We offer dissertation papers as per students’ wishes. We also help craft out the best topics and design concept papers. By ordering with us, you are guaranteed of defending and making through those hard faced professors in the defense panel!

100% Plagiarism Free

We at Research Paper 101 take plagiarism as a serious offence. From the start, we train our writers to write all their papers from scratch. We also check if the papers have been cited appropriately. Our website also has a tool designed to check for plagiarism that has been made erroniusly. In essense, the paper you get will be 100% legit...

Affordable Prices

We understand that being a student is very challenging, some students balance between work and studies in order to survive. We therefore offer pocket friendly rates that are very competitive in the market.

Try it now!

## Calculate the price of your order

Total price:
\$0.00

How it works?

Fill in the order form and provide all details of your assignment.

Proceed with the payment

Choose the payment system that suits you most.

Our Services

No need to work on your paper at night. Sleep tight, we will cover your back. We offer all kinds of writing services.

## Essay Writing Service

No matter what kind of academic paper you need and how urgent you need it, you are welcome to choose your academic level and the type of your paper at an affordable price. We take care of all your paper needs and give a 24/7 customer care support system.