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Chapter 18: Q. 7 (page 495)

From 2009 to 2011, the economies of Australia and Switzerland suffered relatively mild effects from the global financial crisis. At the same time, many countries in the euro area were hit hard by high unemployment and burdened with unsustainably high government debts. How should this have affected the euro/Swiss franc and euro/Australian dollar exchange rates?

Short Answer

Expert verified

The trading scale between the euro/Swiss franc and euro/Australian dollar reduces. One Swiss franc can purchase a more prominent number of euros than already. This is the comparable with the Australian dollar.

Step by step solution

01

Concept Introduction

The worldwide financial crisis indicates to the time of intense pressure in worldwide financial business sectors and banking frameworks that happened in the last part of the 2000's.

02

Explanation 

Money related types of countries in the euro district that persevered through financial droops decay. Thusly, these financial guidelines decrease in worth and can purchase fewer items than already. Then again, the Australian dollar and Swiss franc don't lose their characteristics so much. Since they encountered commonly smooth effects on the overall financial crisis. Consequently, the trading scale between the euro/Swiss franc and euro/Australian dollar reduces. One Swiss franc can purchase a more prominent number of euros than already. This is the comparable with the Australian dollar.

03

Final Answer 

The trading scale between the euro/Swiss franc and euro/Australian dollar reduces.

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Most popular questions from this chapter

In September 2012, the Federal Reserve announced a large-scale asset-purchase program (known as QE3) designed to lower intermediate and longer-term interest rates. What effect should this have had on the dollar/euro exchange rate?

In1999, the euro was trading at \(0.90per euro. If the euro is now trading at \)1.18per euro, what is the percentage change in the euro’s value? Is this an appreciation or depreciation?

Go to the St. Louis Federal Reserve FRED database, and find data on the daily dollar exchange rates for the euro (DEXUSEU), British pound (DEXUSUK), and Japanese yen (DEXJPUS). Also find data on the daily three-month London Interbank Offer Rate, or LIBOR, for the United States dollar (USD3MTD156N), euro (EUR3MTD156N), British pound (GBP3MTD156N), and Japanese yen (JPY3MTD156N). LIBOR is a measure of interest rates denominated in each country’s respective currency.

a. Calculate the difference between the LIBOR rate in the United States and the LIBOR rates in the three other countries using the data from one year ago and the most recent data available.

b. Based on the changes in interest rate differentials, do you expect the dollar to depreciate or appreciate against the other currencies?

c. Report the percentage change in the exchange rates over the past year. Are the results you predicted in part (b) consistent with the actual exchange rate behavior?

Go to the website that contains the most recent calculations of the Economist’s Big Mac Index, http://www .economist.com/content/big-mac-index.

a. Plot the relationship between the local price of a Big Mac and the actual exchange rate. Does this plot suggest that there is a close relationship between the local price and the actual exchange rate? Does this suggest that the theory of PPP has some validity? Explain why.

b. Does your evidence above indicate that PPP is a good theory for exchange rates in the short run?

c. Which country’s currency is the most overvalued in terms of purchasing power parity? Is it expensive or cheap to shop there?

d. Which country’s currency is the most undervalued in terms of purchasing power parity? Is it expensive or cheap to shop there?

Go to the St. Louis Federal Reserve FRED database, and find data on the exchange rate of U.S. dollars per British pound (DEXUSUK). A Mini Cooper can be purchased in London, England, for£17,865orinBoston,UnitedStates,for$23,495.

a. Use the most recent exchange rate available to calculate the real exchange rate of the London Mini per Boston Mini.

b. Based on your answer to part (a), are Mini Coopers relatively more expensive in Boston or in London?

c. What price in British pounds would make the Mini Cooper equally expensive in both locations, all else being equal?
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