1.
Define the nominal exchange
rate of Mexico with respect to the US.
2.
One dollar currently buys 3
pounds on the foreign exchange market. In a week’s time it is expected to buy 5
pounds. Is the dollar expected to appreciate or depreciate with respect to the
pound? Answer the same question assuming that the dollar is expected to buy 1
pound in a week’s time.
3.
The price of a loaf of bread is
$1 in the United States, whereas it is 2 pounds in England. The prevailing
exchange rate between the dollar and the pound is $1 for 4 pounds. Is this a
sustainable exchange rate? If not, describe the changes that will bring the
exchange rate to equilibrium.
4.
Answer question 6 with the
assumption that the exchange rate is $1 for 1 pound.
5.
Provide a brief explanation of
the purchasing power parity theory of exchange rates. Also state it utilizing
the concept of the real exchange rate of a country.
6.
Distinguish between the
current/trade account and the capital/financial account in a nation’s BOP.
Explain the following terms – trade deficit, trade surplus, capital account
deficit, capital account surplus.
7.
Assume a nation’s BOP has a
trade and a capital account. When can this nation’s BOP be said to be in
equilibrium?
8.
Assume a nation runs a current
account deficit and a capital account surplus that is smaller than this
deficit. What steps is the central bank of the country taking to make this
scenario possible?
9.
Assume a nation runs a current
account surplus and a capital account deficit that is smaller than this
surplus. What steps is the central bank of the country taking to make this
scenario possible?
10.
Utilizing the concept of the
trade deficit, derive the supply curve of pesos in the peso-dollar market. Draw
and label a graph depicting this curve.
11.
State the interest parity
condition. Provide a brief explanation of the reasoning behind it.
12.
Utilize the concepts of the
current account surplus and the interest parity condition to derive the demand
curve for pesos in the peso-dollar market. Draw and label a graph depicting
this curve.
13.
Assume the prevailing floating
exchange rate is above the rate that ensures equilibrium in the peso-dollar
market. Explain the process via which the rate will fall to equilibrium.
14.
Assume the prevailing floating
nominal exchange rate is below the rate that ensures equilibrium in the
peso-dollar market. Explain the process
via which the rate will rise to equilibrium.
15.
Assume the prevailing exchange
rate in a fixed exchange rate regime is fixed above
equilibrium (undervalued). Explain the
steps the central bank of the country is taking to make this a possible
scenario.
16.
Assume the prevailing exchange
rate in a fixed exchange rate regime is fixed below equilibrium
(overvalued). Explain the steps the
central bank of the country is taking to make this a possible scenario.
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