Ecn 135
Problem set #7
Due Dec. 5th

1) Suppose the euro-dollar exchange rate moves from $0.90 per euro to $0.92 per euro. At the same time, the prices of European-made goods and services rise 1 percent, while prices of American-made goods and services rise 3 percent. What happens to the real exchange rate between the dollar and the euro? Assuming the same change in the nominal exchange rate, what if inflation were 3 percent in Europe and 1 percent in the United States?

2) The most common type of discount lending that the Fed extends to banks is called
a. Seasonal credit
b. Secondary credit
c. Primary Credit
d. Installment Credit

3) Monetary policy is considered time-inconsistent because
of the lag times associated with the implementation of monetary policy and its effect on the economy
policymakers are tempted to pursue discretionary policy that is more contractionary in the short run
policymakers are tempted to pursue discretionary policy that is more expansionary in the short run
of the lag times associated with the recognition of a potential economic problem and the implementation of monetary policy

4) Which of the following is a disadvantage to monetary targeting?
It relies on a stable money-inflation relationship
There is a delayed signal about the achievement of a target
It implies larger output fluctuations
It implies a lack of transparency

5) The monetary policy strategy that provides the least accountability is
Exchange rate targeting
Monetary targeting
Inflation targeting
The implicit nominal anchor

6) If the dollar depreciates relative to the Swiss franc
Swiss chocolate will become cheaper in the United States
American computers will become more expensive in Switzerland
Swiss chocolate will become more expensive in the United States
Swiss computers will become cheaper in the United States




7) According to the law of one price, if the price of Colombian coffee is 100 Colombian pesos per pound and the price of Brazilian coffee is 4 Brazilian reals per pound, then the exchange rate between the Colombian peso and the Brazilian real is:
40 pesos per real
100 pesos per real
25 pesos per real
0.4 pesos per real

8) If the 2005 inflation rate in Canada is 4 percent, and the inflation rate in Mexico is 2 percent, then the theory of purchasing power parity predicts that, during 2005, the value of the Canadian dollar in terms of Mexican pesos will
rise by 6 percent
rise by 2 percent
fall by 6 percent
fall by 2 percent

9) State whether the following statement is true or false AND explain why: "A decrease in the discount rate will always cause a decrease in the federal reserve funds rate."


10) The same television set costs $500 in the United States, 450 Euro in France, 300 Pounds in United Kingdom and 100,000 Yen in Japan. If the law of one price holds, what are the euro-dollar, pound-dollar, and yen-dollar exchange rates? Why might the law of one price fail?

11) One of the ways macroeconomic activity overseas can affect our economy is through exchange rates, especially in the short-run. Discuss how a decrease in European interest rates, keeping everything else constant, affects the euro-dollar parity. Make sure to demonstrate this effect on the exchange rate – dollar asset graph as well.


Chapter 15, question #10 and web exercise # 1