Question

The average price of a Boone’s Farm bottle of wine is $2.00 in the US. The...

  1. The average price of a Boone’s Farm bottle of wine is $2.00 in the US. The same wine in Japan is priced at ¥300. Assuming no transportation costs or tariffs (or other extra costs), and that the current exchange rate is ¥135=$1, then we conclude that:
  1. The Yen is overvalued by 100%
  2. The Yen is undervalued by 25%
  3. The Yen is overvalued by 10%
  4. The US Dollar is undervalued by 135%
  5. All the above
  1. The exchange rate between the dollar and the euro is $1.20=€1; the rate between the dollar and the yen is $0.0125/¥. What is the exchange rate between the euro and the yen?
  1. €1=¥80
  2. ¥96=€1
  3. €1=¥0.0104
  4. €0.0104=¥1
  5. All the above
  1. The interest rate on one-year Japanese government securities is 1.5%. The real rate of interest in Japan is 2%. According to the Fisher Effect, the expected inflation rate in Japan is:
  1. 0.5%
  2. 3.5%
  3. -0.5%
  4. -3.5%
  5. 2%
  1. Which one of the following would be an indirect quote from the perspective of a German investor?
  1. £0.80=€1
  2. $1.20=£1
  3. £0.011=¥1
  4. $1.00=€0.80

Homework Answers

Answer #1

Part a)

cost of bottle in US - 2 dollars

in japan - 300 yen

Exchange rate = 1dollar = 135 yen

2 dollars = 270 yen

which means yen is overvalued by 10% ((300-270)/300)

Part b)

Exchange rate of dollar and euro - 1.2$ = 1 euro

dollar and yen - $0.0125 - 1 yen

Exchange rate between euro and yen = (1/1.2) *(0.0125/1) = 0.0104

1 euro = 0.0104 yen

Part c)

Inflation rate = (1+interest rate)/(1+ real rate of interest) - 1

= (1+1.5%)/(1+2%)- 1

= -0.05%

Part d)

Indirect quote for german investor would be-

$1.00=€0.80

Know the answer?
Your Answer:

Post as a guest

Your Name:

What's your source?

Earn Coins

Coins can be redeemed for fabulous gifts.

Not the answer you're looking for?
Ask your own homework help question
Similar Questions
Suppose a bottle of french wine costs 500 euros when sold in Paris but the same...
Suppose a bottle of french wine costs 500 euros when sold in Paris but the same wine costs 350 British pounds in London. If the LOOP holds what is the Pound-euro exchange rate? Suppose the dollar-euro exchange rate is 1.10 and the wine costs $600 in Ohio. Does the LOOP hold between France and the US? Explain
In the US, the price of a Big Mac is $3.5. In China, the price of...
In the US, the price of a Big Mac is $3.5. In China, the price of a Big Mac is ¥12. a. What is the exchange rate of Chinese Yuan under purchasing power parity? b. What is the dollar price of Big Mac in China, if the actual exchange rate is $0.15/¥? c. Is the Chinese Yuan overvalued or undervalued? By how much? d. If China’s GDP in 2018 is ¥80 Trillion, what is its Nominal GDP in USD (use...
Assume the reference commodity costs 200 US dollars in New York, 360 Australian dollars in Sydney,...
Assume the reference commodity costs 200 US dollars in New York, 360 Australian dollars in Sydney, 120 pounds sterling in London, 800 yuan in Shanghai and 22,000 yen in Tokyo. a.         What exchange rates are predicted by the PPP model? List the price of the Australian dollar, British Pound, Chinese Yuan and Japanese Yen, as measured in US dollars. b.         Assume the following current spot exchange rates: •           us$0.60 per Australian dollar •           us$1.70 per British pound •           us$0.20 per...
According to the law of one price, if the exchange rate between the Euro and the...
According to the law of one price, if the exchange rate between the Euro and the US dollar is €1 = US$ 1.20, a costume that retails for €250 in Paris should sell for _____ in Chicago.
1.Suppose that a Big Mac costs $5.79 in the US, and CHF 6.5 in Switzerland. You...
1.Suppose that a Big Mac costs $5.79 in the US, and CHF 6.5 in Switzerland. You are told that the exchange rate between $ and CHF is CHF=$0.5 From what you know about PPP theory and Law of One Price, the swiss franc is ____________ (undervalued/overvalued/just right) 2.Suppose that a Big Mac costs $5.79 in the US, and CHF 6.5 in Switzerland. You are told that the exchange rate between $ and CHF is CHF=$0.5 From what you know about...
4.Suppose that the exchange rate between the euro and US dollar is 0.92 euro/dollar. The price...
4.Suppose that the exchange rate between the euro and US dollar is 0.92 euro/dollar. The price index in the United States is 112 and the price index in Europe is 205. What is the real exchange rate between euros and dollars? Question 4 options: 0.50 1.83 1.68 0.55 0.92 5.Suppose that the exchange rate between the euro and US dollar is 0.92 euro/dollar. What is the exchange rate expressed in dollars/euro? Options: 0.92 0.73 1.02 1.80 1.09 Question 6 (1...
1. In the long run, the most important determinant of the exchange rate between the US...
1. In the long run, the most important determinant of the exchange rate between the US dollar and the Euro is a. the prices of goods in the US and in Europe. b. economic growth in the United States. c. the flow of financial capital. d. the precautionary motive. e. speculation. 2. An increase in the U.S. demand for the Euro causes a. an increase in the U.S. dollar price of a Euro. b. the Euro to appreciate. c. the...
Suppose that you are told that the interest rate on a US government bond is 3...
Suppose that you are told that the interest rate on a US government bond is 3 percent compared to a 2 percent interest rate on a comparable German bond (i.e. equal risk and maturity). a) Assuming that uncovered interest parity holds (so that investors are currently indifferent between the two assets), what would this imply about the market's expectation of the future value of the dollar in the exchange market? Explain. (10 points) b) Suppose that the current spot rate...
2. Suppose that you are told that the interest rate on a US government bond is...
2. Suppose that you are told that the interest rate on a US government bond is 3 percent compared to a 2 percent interest rate on a comparable German bond (i.e. equal risk and maturity). a) Assuming that uncovered interest parity holds (so that investors are currently indifferent between the two assets), what would this imply about the market's expectation of the future value of the dollar in the exchange market? Explain. (10 points) b) Suppose that the current spot...
Dollar Return on Foreign Investments - (A) Over the past year, the dollar has depreciated by...
Dollar Return on Foreign Investments - (A) Over the past year, the dollar has depreciated by about 10 percent against the euro. A year ago you took out a home equity loan in the U.S. at an interest rate of 8 percent and you invested the money in a German mutual fund that paid a 5 percent euro return. What net return did you earn on all of these transactions over the year? (PLEASE INCLUDE FORMULAS USED TO SOLVE PROBLEM)....