ECO 4223 Module 10

ECO 4223 Module 10

Question 1

A US based exporter has a cost of $90 per item it exports.  If the exchange rate is $1 US buys 1.5 Euros, what is the minimum price this exporter can charge for his product in Europe and still cover his costs?





Question 2

A US investor is considering investing in Mexico.  The exchange rate today is $1 US buys 5 Pesos, the Mexican interest rate is 12%, and the investor expects that the future exchange rate will be $1 US buys 4.5 Pesos.  Then what is the future value of a $100 investment, in US dollars?





Question 3

In a graph of supply and demand for US dollars, with the exchange rate on the vertical axis, suppose that the US interest rate decreases.  Then the demand curve will shift to the ____  and the exchange rate will ____.

left; decrease

left; increase

right; decrease

right; increase

Question 4

A US investor can invest $100 US in the US or in Japan.  The US interest rate is 3% and the Japanese interest rate is 9%.  The current exchange rate is $1 US buys 2.5 Yen, and the investor believes the future exchange rate will be 2.8 Yen.  Then the US investment yields a future value of ____ US dollars and the Japanese investment yields ____ US dollars.

103; 104.4

103; 97.32

105; 104.4

105; 97.32

Say that a Big Mac in the US costs $2.50, and cost 5.25 Real in Brazil.  The current exchange rate is $1 US buys 2.9 Real.  Then according to the law of one price the exchange rate should be $1 US buys ____ Real and over time, the US dollar should ____.

3.2; appreciate

3.2; depreciate

2.1; appreciate

2.1; depreciate

Here’s the SOLUTION

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