1.   

Assume that real interest rates around the world are

3% and that PPP and the Fisher effect both hold. If inflation in Russia is 10% and in

Switzerland it is 2%, and GDP growth rates are 2% in both countries,

 

 

 

a.   

What will happen to the ruble/Swiss franc exchange

rate over the next year?

 

 

 

b.   

What are the nominal interest rates in Russia and Switzerland?

 

 

 

c.   

How fast is the money supply growing in Russia and Switzerland? [6 points]

 

1.   

Use Balassa-Samuelson theory to fill in the missing

values in the following table 

 

 

 

US       Bangladesh

 

 

 

    Hourly wage              $25    80 takas

 

 

 

    Hourly output, traded good       

5       1

 

 

 

    Hourly output, nontraded

good    4       3

 

 

 

    Local currency price of

 

 

 

     Traded good

 

 

 

    Non traded good

 

 

 

    Market exchange rate

 

 

 

    PPP conversion rate (CB/C$)

 

 

 

 

    (assume traded good is 20% of total)

 

 

 

 

 

 

 

If Bangladesh’s per capita

income is 14,000 takas, how much is that in dollars converted at the market

exchange rate?

 

 

 

How much converted using

PPP?

 

 

 

What is the dollar price of

the nontraded good in Bangladesh, converted using the market exchange rate?

 

 

 

 

 

 

    Briefly explain your

calculations.  

 

The Fed’s target inflation rate is 2%, the

real interest rate is 3%, full employment occurs when the unemployment rate is

4.5%, and the weights on inflation and GDP in the Taylor Rule equation are both

0.5. Suppose the inflation rate is 1%

and the unemployment rate is 7%.                              [10

points]

 

 

 

a. What is the

equation for the Taylor Rule?

 

 

 

b. What is

Okun’s Law?

 

 

 

c. According to

the Taylor Rule, what interest rate should the Fed set?

 

 

 

d. If the ECB’s interest rate is 2%, according

to the interest parity condition, by how much and in which direction will the

spot price of a euro in dollars change over the coming year?

SuperTutor

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Status NEW Posted 05 Jun 2017 06:06 AM My Price 10.00

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