Question Details

Approximately what forward exchange rate do you expect to pay 



1. Suppose the United States and Canadian economies are in mutual equilibrium with a flexible exchange rate, both with long-run real growth of 2 percent. The U.S. money supply growth rate is 8 percent and its real interest rate is 3 percent. If the risk premium (Canada is riskier) is 1 percent, and the value of the U.S. dollar is appreciating by 1.5 percent per year, what is Canada's nominal interest rate? 
a) 10% or less b) more than 10% but not more than 11% 
c) more than 11% but not more than 12% d) more than 12% 
Suppose Canada and the U.S., on a fixed exchange rate, have real growth rates of 2%, and a risk premium of 1% (Canada is riskier). Canada's real interest rate is 4% and the U.S. nominal interest rate is 8%. 
2. Canada's inflation rate is 
a) less than or equal to 4% b) 5% c) 6% d) greater than 6% 
3. Canada's nominal interest rate is 
a) less than or equal to 7% b) 8% c) 9% d) greater than 9% 136 
4. Suppose the Canadian economy, on a flexible exchange rate, has a real growth rate of 3 percent and is increasing its money supply by 10 percent per year. Suppose changes in the U.S. cause its real interest rate to rise from 4 percent to 5 percent and its inflation rate to increase by 2 percentage points. Assuming a risk differential premium of one percentage point, after the Canadian economy has settled to a new equilibrium, what is its nominal interest rate? 
a) 12% or less b) more than 12% but not more than 13% 
c) more than 13% but not more than 14% d) more than 14% 
5. Suppose under a flexible exchange rate system the current exchange rate is 4 francs per dollar, inflation in France is 5 percent and inflation in the U.S. is 10 percent. Suppose you are an American expecting to pay 10,000 francs in a year's time and wish to hedge against an unfavorable exchange rate movement. Approximately what forward exchange rate do you expect to pay ? 
a) 3.6 fr/$ b) 3.8 fr/$ c) 4.2 fr/$ d) 4.4 fr/$



Economics Assignment Help, Economics Homework help, Economics Study Help, Economics Course Help