Reference no: EM133204170

Assignment:

Please circle the correct answer. Show your work briefly in the blank spaces next to a question.

1. Suppose the UK decides to peg the British pound to the Euro. If inflation in the Eurozone is 1% and nominal interest rate in the Eurozone is 3%, then the expected rate of pound depreciation against euro is ______ and nominal interest rate in the UK is ________.

A) 1%; 2%

B) 0%; 4%

C) -1%; 3%

D) 0%; 3%

2. Suppose the same basket of goods costs $100 in US and 60 euros in Eurozone; The current exchange rate is $1.6 per euro. Which of the following is TRUE?

A) Arbitrage will push up the $ price of the basket in the US.

B) Real exchange rateqUS/EUR is equal to 0.96.

C) One basket in the US is equal to 0.96 basket in the Eurozone.

D) Absolute PPP holds.

3. In the long run, with purchasing power parity being true, the NOMINAL exchange rate will be equal to:

A) the ratio of the two nations' price levels.

B) 1.

C) the two nations' real exchange rate.

D) the ratio of the two nations' GDPs.

4. Consider two investment options for a home investor. If the domestic rate of return (home nominal interest rate) is 5%, and the foreign nominal interest rate is 3%, and there is no change in expected future exchange rates, then as the spot exchange rate increases (i.e., EHome/Foreign gets bigger):

A) the foreign return rises.

B) the domestic return falls.

C) the domestic return rises.

D) the foreign return falls.