We would not expect a Japanese financial asset and a U.S. financial asset with i
ID: 1192151 • Letter: W
Question
We would not expect a Japanese financial asset and a U.S. financial asset with identical risk, liquidity, and information characteristics to have different expected returns because
traders would sell the asset with the higher expected yield and buy the asset with the lower expected yield until the yields were brought into equality.
traders would buy the asset with the higher expected yield and sell the asset with the lower expected yield until the yields were brought into equality.
the exchange rate between the dollar and the yen would adjust automatically to eliminate any difference in yields.
the U.S. and Japanese governments have pledged themselves to avoid this outcome.
Nominal exchange rates differ from real exchange rates in that nominal exchange rates
are flexible, while real exchange rates are fixed.
do not measure the purchasing power of the currency.
do not correct for differing interest rates across countries.
are fixed, while real exchange rates are flexible.
The relation between the nominal and real exchange rates is given by which of the following equations?
EX = (EXr x P)/Pf
EXr = (EX x P)/Pf
EX = (EXr x Pf)/P
EXr = (EX x Pf)/P
Since the 1960s, the percentage of U.S. output exported to foreigners
declined by about half.
remained about the same.
increased by more than ten times.
more than doubled.
traders would sell the asset with the higher expected yield and buy the asset with the lower expected yield until the yields were brought into equality.
traders would buy the asset with the higher expected yield and sell the asset with the lower expected yield until the yields were brought into equality.
the exchange rate between the dollar and the yen would adjust automatically to eliminate any difference in yields.
the U.S. and Japanese governments have pledged themselves to avoid this outcome.
Nominal exchange rates differ from real exchange rates in that nominal exchange rates
are flexible, while real exchange rates are fixed.
do not measure the purchasing power of the currency.
do not correct for differing interest rates across countries.
are fixed, while real exchange rates are flexible.
The relation between the nominal and real exchange rates is given by which of the following equations?
EX = (EXr x P)/Pf
EXr = (EX x P)/Pf
EX = (EXr x Pf)/P
EXr = (EX x Pf)/P
Since the 1960s, the percentage of U.S. output exported to foreigners
declined by about half.
remained about the same.
increased by more than ten times.
more than doubled.
Explanation / Answer
1. We would not expect a Japanese financial asset and a U.S. financial asset with identical risk, liquidity, and information characteristics to have different expected returns because "traders would buy the asset with the higher expected yield and sell the asset with the lower expected yield until the yields were brought into equality." Because if Japanase asset ahs a higher epected value tradrs will sell US asset and buy Japanese asset. To which demand for Yen will increase. This demand will push up the value of Yen relative to the dollar's value to the point at which investors are indifferet between these two assets.
2. Nominal exchange rates differ from real exchange rates in that nominal exchange rates "do not measure the purchasing power of the currency" . Because It is not influenced by the change of price or value of the goods and services that currencies can buy.
3.The real exchange rate is the nominal exchange rate times the relative prices of a market basket of goods in the two countries.
EXr = (EX x P)/Pf
where Exr = real exchange rate; Ex = nominal exchange rate; P = average price of good in oe area and Pf = average price in another area.
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