Question

1. Assume the rate of interest on USD deposits is 5% and the rate of interest on French deposits is 3% which of the following is likely to occur?

		The USD will appreciate
		the Euro will appreciate
		the USD will depreciate
		There will be no change to the exchange rate

2. The equilibrium real exchange rate is the rate at which   ?

		the cost of domestic goods is equal to the cost of foreign goods measured in the same currency
		the exchange rate that benefits exporters the most
		the exchange rate that benefits importers the most
		the exchange rate that ensures capital inflows of investment

3. The price of a T-shirt made in China is 40RMB. The price of a T-shirt made in America is $75.00 Assuming an USD:RMB echange rate of 1.5, what does this imply Americas real exchange rate?

		The real exchange rate is overvalued, America will have a trade deficit
		The real exchange rate is undervalued, America will have a trade surplus
		The real exchange rate is in equalibrium.
		American consumers would be better off buying good made by other americans

4.

If you had $100 invested in a German bank earing 3% interest and the USD was expected to depreciate by 5% what would be your overall expected rate of return on this investment?

		3%
		8%
		5%
		Impossible to tell without knowing the current exchange rate

Answer 1

Q-1 Answer :: (A) The USD Will Appreciate

=> Because Of The High Interest Rate USD Deposits Increased In Comparison Of French Deposit So Because Of Increased Deposits Of USD It Leads To Decrease Money Supply In The Market So US Dollar Appreciate In The Country

Q-2 Answer :: (D)The Exchange Rate That Ensure Capital Inflows Of Investment

=> Exchange Rates price Frequently Change so it Increase Capital Inflow Of Investment In The Country Foreigner invest More In The Country Because Of The Exchange Rate.

Q-3 : Answer :: (A) The Real Exchange Rate is Overvalued, America Will Have Trade Deficit.

=>Explanation ::

Real Exchange Rate = Nominal Exchange Rate * Foreign goods/Domestic Goods

= 1.5 * 75/40

= 2.81

=> So, It Increase Americas Import For Chinese T Shirt And Decrease its Export So trade Deficit occur In The Trade Account Of America. Because Of Overvalued Currency American People Buy Chinese T shirts because It Become Cheaper than American T shirt.

Q-4 Answer ::(D) Impossible To tell Without Knowing The Current Exchange Rate

=> Explanation ::

To Calculate The Overall Expected Rate Of Return We Have to Know the Exchange Rates between Both Of The Country Because It Is transaction Made Between Two countries.