International Finance Theory and Policy
by Steven M. Suranovic

Finance 40

Finance 40

Finance Questions 40 2-1


1. Consider the three events listed along the top row of the following Table. Using the FOREX Market, and Money Market models developed in class, indicate the effect of each change, sequentially, on the variables listed in the first column. For example, expansionary monetary policy will cause an increase in the Real US money supply. Therefore a "+" is placed in the first box of the table. Next in sequence, answer how US interest rates will be affected.You do not need to show your work. Note E$/* represents the dollar/foreign exchange rate. 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

Expansionary US monetary policy

II

Increase in US price level

III

Increase in US real GDP

Real US money supply

+

   
US interest rates      
RoR on US assets      
Foreign interest rates      
RoR on foreign assets      
US dollar value      
E$/*      

 

International Finance Theory and Policy - Chapter 40: Last Updated on 1/6/08