Question

1. Suppose the exchange rate between US$ and Euro, US$ and Japanese Yen are:

    1 US$ = 2 Euro; 1 US$ = 100 Yen.

    Suppose the interest rates published by central banks in the U.S., Euro zone, and Japan are 2%, 3%, and 4%, respectively;

    And, suppose the inflation rates in the U.S., Eurozone, and Japan are 1%, 2%, and 1%,

    respectively. Therefore, (calculation formula is optional)

Q1.1: How much Yen can 1 Euro exchange for?

Answer1.1:

Q1.2: What is the real interest rate for the US, Euro zone, and Japan, respectively?

Answer1.2:

            US=

            Euro zone=

            Japan=

Q1.3: (True/False) A person with 2 Euro can convert the money into Yen and save it in Japanese banks for one year, and get 103 Yen back.

Answer1.3:

Answer 1

(1.1) 1US$ = 2 Euro.

1US$ = 100 Yen

---> 100 Yen = 2 Euro

1 Euro = 100 Yen / 2

1 Euro = 50 Yen

1 Euro can exchange for 50 Yen.

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(1.2) Real interest rate = Nominal Interest rate - Infaltion rate.

The real interest rate in US = Nominal Interest rate in the US - Inflation rate in the US

The real interest rate in US = 2% - 1%

The real interest rate in US = 1%

The real interest rate in Eurozone = Nominal interest rate in Euro Zone - Inflation rate in Eurozone.

The real interest rate in Eurozone = 3% - 2%

The real interest rate in Euro zone = 1%

The real interest rate in Japan = Nominal interest rate in Japan - Inflation rate in Japan.

The real interest rate in Japan = 4% - 1%

The real interest rate in Japan = 3%

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(1.3)  1 Euro = 50 Yen (See part 1.1)

A person with 2 Euro convert the money into Yen and will get 100 Yen in return of that,

and saves 100 Yen (i.e., 2 Euro) in Japanese banks for one year.

The nominal interest rate in Japan is 4%.

So, after 1 year the person will get 104 Yen

i.e., 100 Yen (1 + 0.04) = 100 Yen (1.04) = 104 Yen.

So, the given statement is False.

A person with 2 Euro can convert the money into Yen and save it in Japanese banks for one year, and get 103 Yen back. (FALSE)