1) You decide to work in Japan for the next 10 years, accumulate some savings, t

Question

1) You decide to work in Japan for the next 10 years, accumulate some savings, then move back to the United States and convert your savings from yen to dollars. At the time of your move, economists predict that consumers in the United States have reignited their love of Japanese products, especially hybrid cars, and expect that this strong preference for Japanese products will continue for the next decade. Should these predictions encourage or discourage you to work and save in Japan? Why?

2) Refer to figure above. If the Chinese government wants to peg its currency to the dollar to make Chinese exports cheaper to the United States, should they choose an exchange rate of greater than $.13/yuan, less than $.13/yuan, or equal to $.13/yuan?

3) Refer to figure above. Are U.S imports into China cheaper at exchange rates greater than $.13/yuan or less than $.13/yuan?

4) A Big Mac sells for $4.56 in the U.S., and sells for 28.5 kroner in Denmark. The actual exchange rate is 5.82 kroner/dollar.

     a) What is the implied exchange rate?

     b) Is the U.S. dollar overvalued or undervalued vs. the kroner?

Explanation / Answer

(A) If you are a high income spending person then China is the best place to stay as US will have costlier products from China and you can enjoy the same priviledge staying in China only. So this will ecourage you to work and save in China.

(B) Chinese Govt. should choose an exchange rate less than $.13/yuan

(C) US imports to China will be cheaper when Exchange rate is less than $.13/yuan.

(D) Implied Exchange Rate = 28.5K/$4.56 = 6.25

Actual exchange rate 1$= 5.82 kroner

(6.25-5.82)/5.82*100 = 7.38

7 percent US $ overvalued vs. Kroner

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