International Finance Theory and Policy
by Steven M. Suranovic

Finance 20

Finance 20

Finance Questions 20 2-2


1. Consider the three different economic changes listed along the top row of the following Table. In the boxes indicate the effect of each change, sequentially, on the variables listed in the first column. For example, a decrease in US interest rates will cause a decrease in the rate of return (RoR) on US assets. Therefore a "-" is placed in the first box of the table. Next in sequence, answer how the RoR on Euro assets will be affected. Use the interest rate parity model to determine the answers. You do not need to show your work. Use the following notation:

+    the variable increases
-    the variable decreases
0    the variable does not change
A    the variable change is ambiguous (i.e. it may rise, it may fall)

I

A decrease in US interest rates

II

A decrease in Euro interest rates

III

A reduction in next year's expected dollar value

RoR on US assets

-

   
RoR on Euro assets      
Demand for US dollars on the Forex      
Demand for Euros on the Forex      
US dollar value      
Euro value      
E$/Euro      

 

International Finance Theory and Policy - Chapter 20: Last Updated on 1/6/08