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Chapter 18: Q. 12 (page 495)
If American auto companies make a breakthrough in automobile technology and are able to produce a car that gets 200 miles to the gallon, what will happen to the U.S. dollar exchange rate?
The value of the U.S. dollar will appreciate and the U.S. exchange rate will go up.
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If the Indian government unexpectedly announces that it will be imposing higher tariffs on foreign goods one year from now, what will happen to the value of the Indian rupee today?
Go to the St. Louis Federal Reserve FRED database, and find data on the exchange rate of U.S. dollars per British pound (DEXUSUK). A Mini Cooper can be purchased in London, England, for
a. Use the most recent exchange rate available to calculate the real exchange rate of the London Mini per Boston Mini.
b. Based on your answer to part (a), are Mini Coopers relatively more expensive in Boston or in London?
c. What price in British pounds would make the Mini Cooper equally expensive in both locations, all else being equal?
If the demand for a country鈥檚 exports falls at the same time that tariffs on imports are raised, will the country鈥檚 currency tend to appreciate or depreciate in the long run?
Go to the St. Louis Federal Reserve FRED database, and find data on the daily dollar exchange rates for the euro (DEXUSEU), British pound (DEXUSUK), and Japanese yen (DEXJPUS). Also find data on the daily three-month London Interbank Offer Rate, or LIBOR, for the United States dollar (USD3MTD156N), euro (EUR3MTD156N), British pound (GBP3MTD156N), and Japanese yen (JPY3MTD156N). LIBOR is a measure of interest rates denominated in each country鈥檚 respective currency.
a. Calculate the difference between the LIBOR rate in the United States and the LIBOR rates in the three other countries using the data from one year ago and the most recent data available.
b. Based on the changes in interest rate differentials, do you expect the dollar to depreciate or appreciate against the other currencies?
c. Report the percentage change in the exchange rates over the past year. Are the results you predicted in part (b) consistent with the actual exchange rate behavior?
International travelers and business people frequently need to accurately convert from one currency to another. It is often easy to find the rate needed to convert the U.S. dollar into another currency. It can be more difficult to find exchange rates between two non U.S. currencies. Go to http://www.oanda.com/convert/ classic. This site lets you convert from any currency into any other currency. How many Lithuanian litas can you currently buy with one Chilean peso?
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