Discuss the real exchange rate of finland

Assignment Help Macroeconomics

Reference no: EM133289252

Assignment:

1. Consider situation in the foreign exchange market on a particular day. The triangular arbitrage condition holds. USD/EUR is 1,09 i.e. by one euro you get 1,09 US dollars. NOK/EUR is 9,90 i.e. by one euro you get 9,90 NOK. What is the value of USD/NOK i.e. how many US dollars will you get by one Norwegian krona?

2. Assume the uncovered interest rate parity holds. In the euro area the one year interest rate is 0% and in Norway 1,5% = 0,015. NOK/EUR rate is 9,90 and thus EUR/NOK rate is 0,1010. What is the expected EUR/NOK rate? Is the euro expected to appreciate or depreciate?

3. Assume the purchasing power parity holds. Inflation in the euro area is 2% and global inflation outside the euro area is 0%. What is the expected appreciation or depreciation of the euro in the foreign exchange market?

4. Consider the real exchange rate of Finland. Inflation in Finland is 2% and global inflation (countries relevant from the point of view of Finland's foreign trade) is 0%. The external value of the euro is exogenous from the point of view of Finland and it appreciates in the foreign exchange market by 5%. How much does the real exchange rate of Finland change? Does it appreciate or depreciate? Is this good or bad for Finnish exports?

5. Let us consider the monetary model of exchange rate determination as explained during the lectures. Assume that the elasticity of money demand with respect to income is 1 and the semi-elasticity with respect to interest rate (bond yield) is 0,5. Consider developments in the euro area and Norway during the forthcoming 5 years. We expect that the ECB boosts monetary expansion by 20% during the 5 year period, cumulative increase in output is expected to be 8% and we expect no change in 5 the year bond yield. Respectively, in Norway monetary expansion is expected to be 10%, cumulative increase in output also 10% and we expect no change in the Norwegian 5 year bond yield. What is the expected inflation in the euro area and in Norway? What is the expected appreciation / depreciation of the euro?

Reference no: EM133289252

Questions Cloud

How can the decision of us citizens to save money : How and why can the decision of U.S. citizens to save money cause economic problems for the economy?

Types of goods into normal goods-inferior goods : New cars, used cars, rental cars - classify these 3 types of goods into normal goods, inferior goods, and luxury goods?

Effect of interest rate reduction in philippineeconomy : Suppose the Philippine Reserve Bank reduced interest rates in order to reduce the severity of the recession on the economy.

Examine decision by the victorian department of transport : Examine the factors that could have contributed to the decision by the Victorian Department of Transport to reject Singh.

Discuss the real exchange rate of finland : The external value of the euro is exogenous from the point of view of Finland and it appreciates in the foreign exchange market by 5%.

Compare perfectly competition with monopolistic competition : Explain whether a firm in monopolistic competition can achieve allocative and productive efficiency.

Role of macroeconomics in poverty alleviation : Macroeconomics is the study of the economy as a whole. It looks at the big picture of how the economy works and how it affects people.

How do solve problem of lasting unemployment in a recession : If not, as a classical economist, how do you solve the problem of lasting unemployment in a recession?

What are the sources of productivity change : And discuss what might be contributing to the change in productivity. In other words, what are the sources of productivity change?

User Account

All Pages