Exam 5: The Global Financial System and Exchange Rates

$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Table 5.2 Scenari Current interest rate-Canada Current interest rate-Japan Current exchange rate Expected exchange rate in year 2\% 4\% ¥100=\ 1 ¥103=\ 1 3\% 6\% ¥100=\ 1 ¥102=\ 1 5\% 2\% ¥100=\ 1 ¥97=\ 1 4\% 7\% ¥100=\ 1 ¥106=\ 1 Suppose that you intend to invest $10 000 in one-year government bonds. You are looking for the highest return on your investment and do not care whether you invest in Canada or Japan, but as a Canadian resident, you want your investment return to be in Canadian dollars. Table 5.2 lists four scenarios, each showing the current interest rate for one-year government bonds in Canada and Japan, the current exchange rate between the dollar and the yen, and the expected exchange rate in one year. Other than the interest rates, you assume the bonds from each country to be identical. -Refer to Figure 5.2If you choose to invest in Japanese bonds,your investment return from Scenario A will be

If the exchange rate changes from $1.52 = £1.00 to $1.65 = £1.00,then relative to each other,

Explain what happens to the world real interest rate if the government of Panama runs a large government budget deficit.

The part of the balance of payments that records purchases of assets a country has made abroad and foreign purchases of assets in the country is the

When determining interest rates,the loanable funds model is more useful when we are concerned with the determinants of the ________,and the money market model is more useful when we are concerned with the determinants of the ________.

The part of the balance of payments that records (generally)minor transactions such as migrant's transfers,copyrights,and trademarks is the

The current account includes all of the following accounts except

All else equal,an increase in net exports accompanied by a decrease in expected future profits would definitely result in

An agreement among countries about how relative currency values should be determined is known as

If the world real interest rate were 6% and the domestic real interest rate in Estonia were 4%,borrowers in Estonia would borrow at the rate of ________ and lenders in Estonia would lend at the rate of ________.

If the world real interest rate were 6% and the domestic real interest rate in Denmark were 9%,borrowers in Denmark would borrow at the rate of ________ and lenders in Denmark would lend at the rate of ________.

The return that a domestic investor receives on a foreign investment is equal to

What is the difference between nominal exchange rates and real exchange rates?

If the current account is in surplus and the capital account is zero,then

Why is the balance of payments always zero?

When the Bank of Canada pursues a monetary policy of low interest rates,the exchange rate between the dollar and other currencies will tend to ________,generally making it ________ for foreign firms to sell their goods in Canada.

Figure 5.2 -Refer to Figure 5.2.A shift from D₂ to D₁ will result from which of the following?

Other things equal,if foreign holdings of Canadian dollars decrease,

$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$$\quad$ Table 5.2 Scenari Current interest rate-Canada Current interest rate-Japan Current exchange rate Expected exchange rate in year 2\% 4\% ¥100=\ 1 ¥103=\ 1 3\% 6\% ¥100=\ 1 ¥102=\ 1 5\% 2\% ¥100=\ 1 ¥97=\ 1 4\% 7\% ¥100=\ 1 ¥106=\ 1 Suppose that you intend to invest $10 000 in one-year government bonds. You are looking for the highest return on your investment and do not care whether you invest in Canada or Japan, but as a Canadian resident, you want your investment return to be in Canadian dollars. Table 5.2 lists four scenarios, each showing the current interest rate for one-year government bonds in Canada and Japan, the current exchange rate between the dollar and the yen, and the expected exchange rate in one year. Other than the interest rates, you assume the bonds from each country to be identical. -Refer to Figure 5.2With which scenario will you be worst off by investing in Japanese bonds instead of Canadian bonds?

Figure 5.4 Suppose the world consists of two large open economies, Canada and the rest of the world. The figures above represent loanable funds graphs for these two economies. -Refer to Figure 5.4.At an interest rate of 7%,