Download ManEc 453 Homework #1

Acc/ManEc 453 HW #8
Multiple Choice
1. If a basket of goods costs $600 in the U.S., 8000 pesos, and the peso-dollar
exchange rate is 10.6, then the real exchange rate (assuming U.S. is the “home
country”) is
A) 0.5627
B) 0.7950
C) 1.7845
D) 1.5126
2. A 50-acre piece of land in Arizona is sold to an investor in Sweden. The
transaction would be counted as __________ for the United States.
A) A credit to the current account
B) A debit to the current account
C) A credit to the capital account
D) A debit to the capital account
3. A U.S. investor buys 50 shares of stock issued by Banco Bradesco, a Brazilian
bank. The transaction would be counted as __________ for the United States.
A) A credit to the current account
B) A debit to the current account
C) A credit to the capital account
D) A debit to the capital account
4. A U.S. company buys 50 tons of coal from Canada. The transaction would be
counted as __________ for the United States.
A) A credit to the current account
B) A debit to the current account
C) A credit to the capital account
D) A debit to the capital account
5. A U.S. company sells micro chips to Mexico. The transaction would be counted
as __________ for the United States.
A) A credit to the current account
B) A debit to the current account
C) A credit to the capital account
D) A debit to the capital account
6. If a Big-Mac, which costs $2.50 in the United States costs 14 yuan in China, and
the yuan-dollar exchange rate is 6.50, then the The Economist would say the yuan
is ________ against the dollar (see page 241 in text).
A) 14% undervalued
B) 14% overvalued
C) 16% undervalued
D) 16% overvalued
7. If a Big-Mac, which costs $2.50 in the United States costs 1.5 pounds in the UK,
and the pound-dollar exchange rate is 0.45, then the The Economist would say the
pound is ________ against the dollar.
A) 25% undervalued
B) 25% overvalued
C) 33% undervalued
D) 33% overvalued
Free Response
1. Assume the yuan-dollar exchange rate is 8.27 and the dollar-euro exchange rate
is 1.36.
a) What should be the yuan-euro exchange rate?
b) If the yuan-euro exchange rate is 12, how would you take advantage of the
trading opportunity?
2. Look up the current dollar-pound exchange rate in a newspaper or an online
source. If a basket of goods costs $100 in New York and 40 pounds in London,
what is the real UK-US exchange rate? Given this information, would you
consider a trip to the U.K. cheap or expensive?
3. If inflation in the U.S. outpaced inflation in Mexico, explain what would happen
to the dollar-peso fx rate. Why?
4. Analyze the following statements in terms of supply and demand for dollars
a) The dollar was supported by anticipation of a strong report on January
exports in the U.S. today.
b) The pound increased versus the dollar after the U.K. reported that the
U.K.'s consumer price index for January rose 1.9% on the year, below the
expected 2.1% rise and the Bank of England 2.0% target.
c) The dollar edged up further against Southeast Asian currencies as nervous
investors dumped financial assets from Indonesia, Malaysia, and
Singapore on the market.
5. The above quotes come from the “Forex View” column or “Currency Trading”
column of the Wall Street Journal. These columns usually has some explanation
for recent movements in exchange rates. The section is found by first going to the
“Money and Investing” section (for example, section C on 9/12/07), where on the
first page you’ll find a table of contents. Here you will find the exact page
number of the “Forex View” column or “Currency Trading” column. (They are
not included in every paper.) Find three statements from any three days of the
Wall Street Journal in these columns that you can explain using our supply and
demand analysis. For each statement, draw the supply and demand curve for
dollars, and illustrate the author’s argument by showing how supply and demand
curves shift.