Question

Need answer for both 3 questions

Question 14 (1 point) Suppose that over the past decade, U.S. inflation is greater than that in Japan. Further assume that during this same period, the U.S. dollar appreciates relative to the Japanese yen, Given this information, and assuming Japan as the domestic economy, 1) the real exchange rate remains unchanged. 2) the real exchange rate must increase. 3) the real exchange rate can decrease or remain the same, but not increase. 4) the real exchange rate can increase or remain the same, but not decrease. 5) the effect on the real exchange rate is ambiguous. Question 15 (1 point) Suppose there is a real appreciation of the Canadian dollar. Which of the following may have occurred? 1) Foreign goods have become more expensive to Canadians. 2) The foreign price level has increased relative to the Canadian price level. 3) Foreign currency has become less expensive in Canadian dollars. 4) Nominal exchange rate has depreciated. 5) Both foreign price level and Canadian price level have increased by the same percentage. Question 16 (1 point) Suppose the Canadian one-year interest rate is 5% per year, while a foreign country has a one- year interest rate of 25% per year. Ignoring risk and transaction costs, a Canadian investor should invest in foreign bonds as long as the expected yearly rate of depreciation of the foreign currency is 1) less than 20%. 2) less than 1%. 3) less than 25%. 4) greater than 25%. 5) greater than 20%.

Answer 1

14) the correct answer is 5. inflation has a negative impact on the exchange rate. since us had a higher inflation than japan, therefore the us dollar decreased in it its value compared to the japanese yen. at the same time the us currency appreciated, which increased its value. thus the overall effect will be ambiguous

15) the correct answer is 2. real exchange rate is defined as the ratio of foreign price level to the domestic price level. since the canadian dollar has had real appreciation, meaning an increase in the real exchange rate. this in turn means that the foreign price level has increased relatively to the domestic price level

16) the correct answer is 1. interest rate parity will hold when the foreign currency depreciates by 20%. however when the currency depreciates by less than 20%, then the foreign becomes more favourable, as it provides a higher return than the domestic bonds