Reference no: EM13844488

1. a. If the exchange rate changes from $1.70 per British pound (£1) to $1.68 per £1, has the pound (£) appreciated or depreciated? Has the dollar appreciated or depreciated?

b. What happens to the £-price that British residents pay for a $500 U.S. export good due to the exchange rate change above?

c. What happens to the $-price that U.S. residents pay for a £1200 import good from Britain?

d. How do these changes affect the economic welfare of U.S. exporters and U.S. importers?

2. a. If the exchange rate changes from $1.70 per British pound (£1) to $1.72 per £1, has the pound (£) appreciated or depreciated? Has the dollar appreciated or depreciated?

b. What happens to the £-price that British residents pay for a $500 U.S. export good due to the exchange rate change above?

c. What happens to the $-price that U.S. residents pay for a £1200 import good from Britain?

d. How do these changes affect the economic welfare of U.S. exporters and U.S.importers?

3. Suppose that the euro (€) appreciates from $1.00 per €1 to $1.20 per €1. Determine whether the underlined individuals listed below would see that appreciation as a good or a bad thing.

a. A U.S. business buys €10,000 of chemicals from a German company.
b. An Italian clothing company buys $100,000 of leather from a U.S. leather maker.
c. A U.S. resident has a retirement account totaling €500,000 in a German bank.
d. A U.S. company must make an interest payment of €25,000 to the French bank from which it borrowed last year.

4. You have an accounts payable to a German exporter for 100 Porsche Cayenne SUVs. The seller offers a 2 percent discount for payment within 10 days and full payment due in 30 days (2/10 net 30). Today the exchange rate is $1.40 per Euro. You notice that the 30 day forward rate for the $/Euro is $1.38.....what should you do? You owe 70,000 Euros for each of the cars (before any discounts).

5. You are changing planes in London for a flight to Paris where you will connect with your flight to Capetown. You are picking up reading material for the flight and are looking at the prices listed on the Economist magazine which conveniently lists prices in several different global currencies. You note that the price in Pounds is 2.40 pounds and the price in Euros is 2 Euros. The exchange rate for the dollar (your credit card was issued in the USA) is $1.59/pound and $1.3837/euro. Should you buy reading materials now or wait until you're in Paris?

6. You notice that the price of a Big Mac in Argentina is 40 pesos. Here in the USA the price is $4.00.

a. What is the purchasing power parity exchange rate between Argentina and the USA?
b. If the actual exchange rate is 15 pesos to the $ is the Argentine currency undervalued or overvalued.
c. Assume that inflation in Argentina during the next year is expected to be 15% and that inflation in the USA is expected to be around zero. What would you expect to happen to the $/peso exchange rate?