Question Details

What are the factors behind the recent decline in the value of the dollar 



1. "The 4.8 percent yield on Japanese short-term securities is due to a strong yen; Australia's 16.1 percent yield is a product of its weak dollar." The most reasonable explanation for these numbers is that 132 
a) Japan has a low inflation rate and Australia a high inflation rate 
b) interest rates are not relevant here - Japan must have a balance of payments surplus and Australia a balance of payments deficit 
c) the explanation should be reversed - the weak dollar is creating a high Australian interest rate and the strong yen is creating a low Japanese interest rate 
d) there is a typo - the numbers should be reversed - the high interest rate is creating capital inflows making the Australian currency strong and the low interest rate is making the yen weak 
2. "In a forward contract, the bank guarantees the exchange rate for the investor when the issue is bought, so the investor is protected against a fall in the exchange rate. But there's a catch: ______. This usually renders the actual yield on the foreign bonds ________ the yield on domestic bonds." Assuming a zero risk premium, the blanks are best filled with 
a) the cost is more than the actual fall in the exchange rate; equal to 
b) the cost is more than the actual fall in the exchange rate; less than 
c) the cost is more than the expected fall in the exchange rate; equal to 
d) the cost is more than the expected fall in the exchange rate; less than 
3. "Higher inflation in both Germany and Japan has pushed up their interest rates. What he doesn't understand is why the U.S. interest rate hasn't followed suit. He claims that international financial markets are so closely integrated these days that the U.S. interest rate reaction should have been apparent by now." The U.S. interest rates have not risen because 
a) inflation in the U.S. has not increased 
b) the lower U.S. interest rate is a lower real, not a lower nominal rate 
c) the Fed has increased the U.S. money supply to keep its interest rate low 
d) the U.S. is too large an economy to be influenced by foreign interest rates 
4. "What are the factors behind the recent decline in the value of the dollar? A speculative blip can be ruled out as the reason because the currency was selling at a forward premium for most of the period." A forward premium implies that the 
	real exchange rate is expected to increase 

b) real exchange rate is expected to decrease 
c) nominal exchange rate is expected to increase 
d) nominal exchange rate is expected to decrease 
5. "He believes that Canada's lower inflation rate could lead to tighter spreads between Canadian and U.S. interest rates." This would happen because 
a) the closer Canada's inflation gets to zero, the closer it's interest rate will be to that of the U.S. 
b) the closer Canada's inflation gets to U.S. inflation, the closer it's interest rate will be to that of the U.S. 
c) from IRP, lower inflation means a lower risk premium, moving Canada's interest rate closer to that of the U.S. 
d) from PPP, lower inflation means a rising exchange rate which will force Canada's interest rate down to that of the U.S.



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