1.

In a newspaper, chose one exchange rate from each of the

regions listed in Following the Financial News box on p347. Which
of these currencies have appreciated, and which have
depreciated since June 23, 2010?
2. If the Japanese price level rises by 5% relative to the price level
in the United States, what does the theory of purchasing power
parity predict will happen to the value of the Japanese Yen in
terms of US dollars?
It predicts that the value of the yen will fall 5% in terms of
dollars.
3. 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?
The Indian rupee will appreciate. The announcement of
tariffs will raise the expected future exchange rate for the
rupee and so increase the expected appreciation of the
rupee. This means that the demand for rupee-denominated
assets will increase, shifting the demand curve to the right,
and the rupee exchange rate therefore rises.
1. The six-month forward rate between the British pound and the
US dollar is $1.75 per pound. If six-month interest rates are 3%
in the United States and 150 basis points higher in England, what
is the current exchange rate?
Spot rate 1.75 (1.045/1.03)^0.5 $1.762/