Question 1

First, write out the expression/equation for the real exchange rate. Second, explain all factors that determine the real exchange rate.

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Question 2

What are the differences between the real exchange rate and nominal exchange rate? Explain.

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Question 3

Explain what factors determine the expected return on a foreign bond.

Accepted Answer

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Question 4

Discuss what factors could cause a real depreciation.

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Question 5

Suppose the interest parity condition holds and that the domestic interest rate is greater than the foreign interest rate. What does this imply about the current versus future expected exchange rate? Explain.

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Question 6

Explain the difference between gross domestic product and gross national product.

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Question 7

Suppose you are considering the purchase of a bond issued in another country. What calculations must you do to calculate the expected return on a foreign bond? Explain.

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Question 8

Explain why a comparison between the interest rates on domestic and foreign bonds might provide misleading information about which bonds yield the highest expected returns.

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Question 9

Suppose the interest parity condition holds. Also assume that the one- year interest rate in Australia (home country) is 5.5% and that the one- year interest rate in Canada (foreign country) is 5.5%. What does this imply about the current versus future expected exchange rate (for the Australian and Canadian dollars)? Explain.

Accepted Answer

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Quiz 18: Openness in Goods and Financial Markets