3.2. Suppose in the year 2015 (where price level is 100), the Japanese Yen and t

Question

3.2. Suppose in the year 2015 (where price level is 100), the Japanese Yen and the Dollar exchange rate (Yen/Dollar) is 80. If the price level in 2020 stands at 90 Yen in Japan and 120 Dollar in Home country, what will be the exchange rate in 2020 based on the Purchasing Power Parity? (3 Marks) 3.3. Suppose in 2017 the Euro interest rate is 2% and the Russian Ruble interest rate is 10%. A year later, if the expected rate of real Ruble depreciation against Euro is 2, and the expected inflation rate in the Eurozone is 2%, calculate Russia's expected inflation level. (3 Marks) 3.4. The central bank has in its balance sheet $100 millions foreign assets, $200 millions domestic assets, $50 millions in deposits held by private banks, and S250 millions currency in circulation. Calculate the currency in circulation after sterilized foreign exchange rate intervention with $20 foreign asset sale. (3 Marks) .5 Suppose the Peso rate of return of a million Argentine Peso deposit in a Buenos Aires bank in a year is 20%. If the interest rate on Dollar is 5% per year and the Peso/Dollar exchange rate is currently 15 Peso per Dollar, calculate the total return from carry trade investment according to the interest rate parity. (3 Marks)

Explanation / Answer

3.2.

Rn = Rn-1 [( PJ1 /PJ0 ) / ( PU1 / P U0)]

Here, Rn = new equilibrium exchange rate

Rn-1 = Base period exchange rate

PJ1 = Price index of japan in current period

PJ0 = Price index of japan in base period

PU1 = price index of USA in current period

PU0 = Price index of USA in base period.

Therefore,

Rn = 80 [ (90/100)/(120/100)] = 80 (0.75) = 60

Exchange rate in 2020 = 60 yen / dollar

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