Problem 1
If \(\$ 1\) is traded for 1 euro and \(\$ 1.40\) is traded for \(£ 1\), what is the exchange rate between the euro and the pound sterling? Can the dollar appreciate against the euro but not against the pound?
Problem 2
Suppose the initial exchange rate is \(\$ 4 / \mathfrak{E}\). After 10 years, the US price level has risen from 100 to 300 and the UK price level has risen from 100 to 200 . What nominal exchange rate would preserve purchasing power parity?
Problem 3
Which of the following statements is correct? (a) An exchange rate appreciation causes a loss of competitiveness. (b) If a country gained competitiveness for other reasons, such as a technological improvement, the consequence would be an appreciation of its equilibrium real exchange rate. (c) In the short run, exchange rates are driven more by the views of speculators than the need to balance imports and exports. (d) All of the above. (e) None of the above.
Problem 5
For decades, Japan has had a trade surplus. Must countries eventually get back to external balance? Is there more pressure on deficit countries than surplus countries to restore external balance?
Problem 6
A country has a current account surplus of \(£ 6\) billion but a financial account deficit of \(£ 4\) billion. (a) Is its balance of payments in deficit or surplus? (b) Are its foreign exchange reserves rising or falling? (c) If the country has a fixed exchange rate, is the central bank buying or selling domestic currency? Explain.
Problem 7
Newsreaders say that 'the pound had a good day' if the sterling exchange rate rises When is an annreciation (a) desirahle and \((\mathrm{h})\) undesirable?
Problem 9
A country discovers oil and its real exchange rate appreciates. Manufacturers go bust because their exports are no longer competitive. Could the country be worse off as a result of finding this valuable resource?
Problem 13
Essay question 'Capitalist firms have no problem prospering despite the volatility of stock markets. Nobody has ever suggested government policies to fix stock market prices. Exchange rates are just another asset price and it is just as silly to fix exchange rates. Let them float.' Why do governments ever want to fix exchange rates?
