Question

Think of Asset Approach and consider we have an equilibrium in
Foreign Exchange Rate Market (or Forex). Then consider the
following situation: Home Interest Rate (Policy Rate) decreases.
How does (spot) exchange rate change? Show your work on a graph and
explain the intuition step by step.

Answer #1

I Hope my efforts will be fruitful to you,?

1. Consider a foreign exchange market between the euro (labeled
E) and the Swiss franc (labeled F):
a) Illustrate the market equilibrium. Make up a specific
equilibrium exchange rate. Be sure to label the graph carefully and
completely. Be sure to put quantity of Swiss Francs on the
horizontal axis. (10 points)
b) On a new graph, label a situation where the
Swiss franc is an undervalued currency. Is
Switzerland running a balance of payments surplus or deficit? Can
you...

Consider an open economy operating under fixed exchange rate.
using equilibrium condition for the good market, illustrate in a
diagram the short-run effect of an increase in the foreign interest
rate on domestic output. Assume that UIP holds and that market
participants believe that the exchange rate will stay fixed at its
current value in the future. explain why?

According to the asset approach to exchange rates, if the US has
a floating exchange rate regime and the Feds decreases the money
supply temporarily, the short-run effect will be to make The US
interest rates ____ and the value of the US currency ____.
a) rise, appreciate
b) fall, depreciate
c) fall, appreciate
d) rise, depreciate

Alicia Strong is a foreign exchange dealer for a bank in
Australia. She wishes to consider whether International Parity
Condition (IPC) holds between the British pound and the Australian
dollar. Alicia also wonders whether she should invest in AUD or in
British pounds (£) to make a covered interest arbitrage (CIA)
profit. Depending on the CIA opportunity, she can borrow either
A$1,000,000 or £1,000,000 to invest for the next 12 months.
Consider Australia as home market and the UK as...

Using the asset market approach (Uncovered
Interest Parity holds), demonstrate the impact on the E($/€)
graphically (F/X graph) of a temporary increase in the
money supply in the Eurozone. The U.S. is the
home country. Label your short run equilibrium point B. How will
this affect the U.S. interest rate and Price level in the short
run?

Consider the short-run money market model and the short-run
exchange rate model together: a. Draw the combined models in a
single graph, showing the initial domestic interest rate (r1) and
the initial exchange rate (e1) b. Show how the short-run model
would change with a decrease in domestic money supply, specifically
noting the impact on domestic interest rates, exchange rates, and
the price level c. Following on from part (b), explain why the
exchange rate changes d. In the long-run,...

Consider a small, open economy with perfect capital mobility and
a fixed exchange rate regime, whose domestic interest rate is
currently the same as the foreign
interest rate. Suppose that it adopted the USD as its official
currency.
a. Draw the IS-LM diagram for this nation at its general
equilibrium point E1, with equilibrium income level
Y1 and domestic interest rate r1, what
happened if central bank of this country expanded its money supply,
please show the changes in the...

Consider an economy in which the loanable funds market is
initially in equilibrium. Represent this using the appropriate
graphs.
a. Other things the same, if the government increases transfer
payments to households, without raising taxes, then how does the
equilibrium level of national saving, investment and interest rates
change? Explain your answer and show the changes using the graph
from part (a).

2. Using a figure describing both the U.S. money market and the
foreign exchange market, analyze the effects of an increase in the
U.S. money supply on the dollar/euro exchange rate. 3. What are the
main factors that determine aggregate money demand? Why does the
real money demand curve slope downward?
4. What is the expected dollar rate of return on euro deposits
if today's exchange rate is $1.10 per euro, next year's expected
exchange rate is $1.165 per euro,...

Q) Under the monetary approach to exchange rates, if real money
demand is greater at home but relative money supply is greater in
foreign markets, then the exchange rate should be:
The answer is less than 1, but I think we cannot say anything
about the value of the exchange rate itself. We can say the
exchange rate will appreciate, so the rate of change can be less
than 1. However, why can we conclude that the exchange rate itself...

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