Nominal effective exchange rate

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Reference no: EM133065650

Question 1: Purchasing power parity. Define the following terms:
a The law of one price
b Absolute purchasing power parity
c Relative purchasing power parity

Question 2: Nominal effective exchange rate index. Explain how a nominal effective exchange rate index is constructed.

Question 3: Real effective exchange rate index. What formula is used to convert a nominal effective exchange rate index into a real effective exchange rate index?

Question 4: Real effective exchange rates. Figure 6.3 on page 169 compares the daily volatility of the Australian dollar against the Euro, TWI, USD and Yen. Discuss plausible reasons for the similarities and differences between the exchange rates.

Question 5: Exchange rate pass-through. Incomplete exchange rate pass-through is one reason that a country's real effective exchange rate can deviate for lengthy periods from its purchasing power equilibrium level of 100. What is meant by the term 'exchange rate pass-through'?

Question 6: The Fisher effect. Define the Fisher effect. To what extent do empirical tests confirm that the Fisher effect exists in practice?

Question 7: The international Fisher effect. Define the international Fisher effect. To what extent do empirical tests confirm that the international Fisher effect exists in practice?

Question 8: Interest rate parity. Define interest rate parity. What is the relationship between interest rate parity and forward rates?

Question 9: Covered interest arbitrage. Define the terms 'covered interest arbitrage' and 'uncovered interest arbitrage'. What is the difference between these two transactions?

Question 10: Forward rate as an unbiased predictor of the future spot rate. Some forecasters believe that foreign exchange markets for the major floating currencies are 'efficient' and forward exchange rates are unbiased predictors of future spot exchange rates. What is meant by 'unbiased predictor' in terms of how the forward rate performs in estimating future spot exchange rates?

Reference no: EM133065650

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