Determine the rmb central parity rate against usd

Reference no: EM133196557

Assignment:

Under the gold standard,

1. We discuss "rules of the game": The selling of domestic assets to acquire money when gold exited the country as payments for imports.

This decreased the money supply and increased interest rates, attracting financial inflows to match a current account deficit.

Traditionally, central bank cannot affects the interest rate under fixed exchange rate system. However, in the more realistic imperfect asset subsitutability framework ρ=ρ(B-A), the central bank can affect the interest rate level.

Use a diagram like Figure (in our slides) or 18-6 in our textbook to explain how a central bank can alter the domestic interest rate, while holding the exchange rate fixed, under imperfect asset substitutability.

2. Suppose we are talking about two large countries, which are macroeconomic interdependent. Now we have ρ(B-A,B^*-A^*). Appendix 1 of discusses this possibility.

1) Suppose the country UK government issues extra government bond to finance for the military expenditure, what will happened to the premium of holding USD asset.

2) Suppose the Bank of England follows "rules of the game" to buy domestic asset when gold enters the country, what will happended to the premium of holding USD asset.

Q3. RMB exchange rate

In the lecture, we introduce an example to show how to determine the RMB central parity rate against USD, after the reform on Aug 2015,

The parity rate was based on the formula of ‘the closing rate + the theoretical RMB exchange rate to keep the index of a currency basket unchanged over the previous 24 hours'.

With the following information provided,

Initially, we assume that the US dollar/Japanese yen (USDYEN) is 100 and US dollar/Chinese renminbi (USDRMB) is 6.2. Let it to be the base time.

RMB6.2 = US$0.6 + 0.4 × ?100.

If divided by 6.2, the equation becomes RMB1 = US$0.097 + ?6.45 renminbi is measured by a basket of two currencies.

Figure out the theoretical RMB exchange rate when USDYEN is 110.

The theoretical RMB exchange rate is 1 USD =E RMB.

Readings:

International Economics Theory & Policy

By Krugman and Obstfeld

Reference no: EM133196557

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