Question

In: Economics

1. A fixed exchange rate regime A. forces a country to give up free international flows...

1. A fixed exchange rate regime

A. forces a country to give up free international flows of capital.

B. forces a country to abandon independent monetary policy

C. can eliminate exchange rate uncertainty

D. is the model used by the U.S. Federal Reserve.

2. An asset management firm generated the following annual returns in their U.S. large cap equity portfolio:

Year

Net Return (%)

2008

-34.8

2009

32.2

2010

11.1

2011

-1.4

The 2012 return needed to achieve a trailing five year geometric mean annualized return of

5.0% when calculated at the end of 2012 is closest to:

A. 17.9%

B. 27.6%

C. 35.2%

3. If the exchange rate between the Australian dollar and the US dollar is expressed in direct quotation from an Australian perspective, then a rise in the exchange rate implies

A. appreciation of the US dollar.

B. depreciation of the US dollar.

C. appreciation of the Australian dollar.

D. B. and C.

4. If the AUD/USD exchange rate declines from 1.2500 to 1.2430, then the fall is equal to

A. 70 points.

B. 7000 pips.

C. 700 points.

D. 70 pips

Solutions

Expert Solution

1. A fixed exchange rate either restrict the capital mobility or the independent monetary policy because as per the impossible trinity, these three can't exist at the same time. However, a fixed exchange rate does not force both to happen at the same time but of course, enables a nation to keep its exchange rate fixed and thus eliminate the exchange rate uncertainty. (c)

2. The geometric mean for five years would be the fifth root of the product of each year's return.

GM= (-34.8*32.2*11.1*-1.4*x)^(1/5) where x is 2012's return.

5= (-34.8*32.2*11.1*-1.4*x)^(1/5)

5^5= (-34.8*32.2*11.1*-1.4*x)

3125= 17413.50x

x= 3125/17413.30 = .179 or 17.9% (a)

3. The direct quote from the perspective of Australia would be the number of Australian dollars that can be exchanged for 1US $. Now, when the exchange rate increases, implying that the number of Australian dollars which are now required to be exchanged for 1US$ will increase and thus the Australian dollar would depreciate or US$ will appreciate. (a)

4. The point means the change in the part on the left side or the decimal, while the pip is the 1/100th of a 1 percent. Since there change is from 1.2500 to 1.2430 or by 0.0070 which is the same as 70 pips. (d)


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