Question

5. Consider two countries: Poland (whose currency is the zloty) and Germany

     (whose currency is the euro). Shown below are average annual rates of inflation

     expected over the next twenty years. The numbers in the table are filled in for

     Germany. Make up numbers for Poland that are consistent with two conditions:

     (1) that productivity growth in Poland’s traded sector will be sufficiently rapid to

     bring about a fall in the relative price of traded to nontraded goods; and (2) that the

     nominal exchange rate expressed as euros per zloty (the value of the zloty) will fall

     over the next twenty years. After filling in the table, use the numbers to answer

     questions (a) and (b) below. (16 pts)

                                           Inflation in              Inflation in                Average

                                            Prices of                  Prices of                   Overall

                                         Traded Goods        Nontraded Goods         Inflation

                                           (avg annual)             (avg annual)          (avg annual)

            Poland                                %                              %                          %

           

            Germany                           3%                            3%                         3%

      According to exchange rate theory, what will be the average annual percentage

          change in the euro per zloty nominal exchange rate? Show work/formula.

    What will be the average annual percentage change in the real exchange rate,

           expressed as the relative price of Polish goods to (divided by) the price of German

           goods? Show work/formula.

Answer 1

This statistic displays the annual exchange rate (average or standardized measure) of the euro to the Polish zloty (EUR PLN), according to data from the European Central Bank, from the introduction of the euro in 1999 to 2019. The average, or standardized, measure shows the calculation based on many observations throughout the period in question, which is different than an annual measure at point in time: this denotes concrete values as of the end of the year. Between the years of 2001 and 2004, the average annual exchange rate of the euro to the Polish zloty noted a steep increase. In 2004, the euro to Polish zloty annual average exchange rate was equal to 4.53, which meant that one euro could buy 4.53 Polish zloty. It dipped at the height of global recession, in 2008. Between 2010 and 2016 the value increased overall, to 4.36 which meant that one euro could buy 4.36 Polish zloty before falling once again in 2019 to 4.3 Polish zloty. This overall increase in an average annual euro to Polish zloty exchange rate is also reflected in the monthly exchange rate in recent years, although in this case the values are measured at one point in time (end of month).