Five questions. Each counts for 20 points. 1aRU 100UM order. You must answer eac
ID: 1131126 • Letter: F
Question
Five questions. Each counts for 20 points. 1aRU 100UM order. You must answer each question using the models and approaches that yo class. Use diagrams and equation explanations lealleu to illustrate your answers. All points are awarded for your has maintained a fixed exchange rate against the US since 2000. For the 1. Ecuador purposes of this question, you can assume that the Central Bank of Ecuador operates a reserves. Using what you learned in class answer the following questions. a. What is the backing ratio for Ecuador? curency board. As you know, a currency board is where the monetary base consists of foreign b. Suppose there is a large fall in the price of oil. This reduces real income for Ecuador as the country is an oil exporter. Using the model from class, outline the circumstances where this will lead to an exchange rate crisis. c. Suppose the interest rate in the US is 0.02 and the interest rate in Ecuador is 0.07. How would you explain this? 2 Russi s large oilproducer. Its currency is the Ruble. The Russian interest rate on one ear deposits is twenty percent. The interest rate is two percent in the US. The to the dollar. That is, it costs one hundred rubles to purcha 100 rubles exchange rate oughout you should treat the ruble as the home currency thecageatewrth the dolarto be one year from now? se one dollar. change rate with the dollar to be one year from now? e clearly the assumptions you make. b. Suppose that a survey of exchange rate traders finds that traders expect the ge rate to be 130 one year from now. Is this different from your answer i ou explain the difference? Suppose that you have a million puld you invest it inExplanation / Answer
Backign ratio is specific for each country where Ecuador has backing ratio of 100%.
Currecny Crisis normally occurs due to chronic balance of payment deficits, If Oil prices goes down the only revenue source of Ecuador will proivde less export value which will create less demand & more supply for Ecuador currency hence the currency will become weak with respect to US Dollars and crisis could occur.
Interest of US 2% and Interest rate of Ecuador 7% this implies US dollar is much stronger than Ecuador currency
which will provide Foreign investor an opportunity to borrow in USD and invest in Ecuador to earn higher return in case of if covered interest parity is not met
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