Question

Question 1

1. a) Discuss the exchange rates (real and nominal).
2. b) Discuss what is an appreciation and what is a depreciation.
3. c) Discuss how an appreciation of Euro can affect Irish current account surplus. What will happen to the NCO then?
4. d) Can you explain what you are expecting to happen we have a depreciation of Euro?
5. e) Connect you answers in (d) above with the IS-LM model. Show it in a graph.
6. f) Briefly discuss what does the PPP theory say? Can you explain the limitations of PPP?

Answer 1

(A ) Exchange rate is the relative price of two different currencies, that is, a measure of the value of another currency in terms of one [currency (gesture) | currency]. The rate of exchange between any two currencies is their mutual demand and supply.

:The real exchange rate refers to the difference in inflation between countries. For example, suppose a rupee is valued at 40 rupees per dollar at the beginning of a year. Now if inflation has increased at the rate of 10 percent in the Indian economy and inflation has increased at the rate of five percent in the American economy.

:

Nominal Effective Exchange Rate (NEER) is a simulated weighted average rate at which a country's currency is exchanged for a basket of multiple foreign currencies. In economics, NEER is an indicator of a country's international competitiveness in terms of the foreign exchange (foreign exchange) market. Forex traders sometimes refer to NEER as a trade-weighted currency index.

Appreciation is when the price of an asset goes up in value. Investors that purchase commodities or real estate want the price of these investments to go up over time. For instance, if you purchase stock at $10 and it goes up to $15 in a month and then $20 after two months, the stock is said to have appreciated by $10, or 100 percent. There are many reasons for a stock to appreciate in value, including inflation, lack of supply, or an increase in demand.

(B) Depreciation has two meanings in the world of finance. It refers to the process of writing off the cost of business equipment over time, and not solely in the year the asset was incurred. Depreciation also refers to the devaluation of assets over time. As assets lose value, either due to lower prices, increased supply, or decreased demand, they are said to depreciate in value. In the latter case, depreciation is the opposite of appreciation.

Appreciation is when the price of an asset goes up in value. Investors that purchase commodities or real estate want the price of these investments to go up over time. For instance, if you purchase stock at $10 and it goes up to $15 in a month and then $20 after two months, the stock is said to have appreciated by $10, or 100 percent. There are many reasons for a stock to appreciate in value, including inflation, lack of supply, or an increase in demand

(F)

Public-private partnership (PPP) is a funding model for a public infrastructure project such as a new telecommunications system, airport or power plant. The public partner is represented by the government at a local, state and/or national level. The private partner can be a privately-owned business, public corporation or consortium of businesses with a specific area of expertise.

PPP is a broad term that can be applied to anything from a simple, short term management contract (with or without investment requirements) to a long-term contract that includes funding, planning, building, operation, maintenance and divestiture. PPP arrangements are useful for large projects that require highly-skilled workers and a significant cash outlay to get started. They are also useful in countries that require the state to legally own any infrastructure that serves the public.

Different models of PPP funding are characterized by which partner is responsible for owning and maintaining assets at different stages of the project. Examples of PPP models include:

Design-Build (DB): The private-sector partner designs and builds the infrastructure to meet the public-sector partner's specifications, often for a fixed price. The private-sector partner assumes all risk.

Operation & Maintenance Contract (O & M): The private-sector partner, under contract, operates a publicly-owned asset for a specific period of time. The public partner retains ownership of the assets.

Design-Build-Finance-Operate (DBFO): The private-sector partner designs, finances and constructs a new infrastructure component and operates/maintains it under a long-term lease. The private-sector partner transfers the infrastructure component to the public-sector partner when the lease is up.

Build-Own-Operate (BOO): The private-sector partner finances, builds, owns and operates the infrastructure component in perpetuity. The public-sector partner's constraints are stated in the original agreement and through on-going regulatory authority.

Build-Own-Operate-Transfer (BOOT): The private-sector partner is granted authorization to finance, design, build and operate an infrastructure component (and to charge user fees) for a specific period of time, after which ownership is transferred back to the public-sector partner.

Buy-Build-Operate (BBO): This publicly-owned asset is legally transferred to a private-sector partner for a designated period of time.

Build-lease-operate-transfer (BLOT): The private-sector partner designs, finances and builds a facility on leased public land. The private-sector partner operates the facility for the duration of the land lease. When the lease expires, assets are transferred to the public-sector partner.

Operation License: The private-sector partner is granted a license or other expression of legal permission to operate a public service, usually for a specified term. (This model is often used in IT projects.)

Finance Only: The private-sector partner, usually a financial services company, funds the infrastructure component and charges the public-sector partner interest for use of the funds.