Assignment Requirements
Please answer these questions:
Q 1(A)- use a short schedule to show how to compile a real index for the Euro versus the UK(assume the euro is the domestic currency)
(B)- Explain briefly how to compile a real effective exchange rate index.
(c)- The ECB monthly Bulletin (September 2009) shows the performance of the real effective exchange rate of the euro over the period 2003- mid 2009 . comment briefly on this performance and is implications for the financial competitiveness of the euro- area economy .
What was the main variable that contributed to the change in the real effective exchange rate index of the euro in this period?
(d)- Assume that there are just two economies which are both open to trade – the euro- area economy and the UK economy. use a demand/supply diagram to analyse the size of the impact on the nominal exchange rate of the UK£/ € and on the quantity demand/ supplied of € if there is a once-off increase in the price of goods produced in the UK economy . (Assume that the UK £ is free- floating against the €).
Q 2- (A)- The concept of economic efficiency in the foreign Exchange (FX) market is of importance in international finance. Explain how one would test the economic efficiency of the FX market.
Q (B)- Assume that there are just two economies in a FX model – namely Switzerland and Japan with associated currencies the Swiss Franc (CHF) and the Japanese YEN (¥) . Assume also that these currencies are free-floating each other. Draw the demand and supply curves for the CHF (assume that CHF is the domestic currency and the ¥ is the foreign currency) in one diagram. Show clearly the variables on tow axes and show the equilibrium exchange rate. The following changes occur in the next time period:
(i)incomes in Switzerland increase
(ii)Tastes in Japan change and move more in favor of goods from Switzerland.
Both (i) and (ii) have a direct impact on the FX market. Briefly analyses the effects (i) and (ii) on the FX market and incorporate the result of this analysis into the demand / supply diagram.
Q (C) – Use a diagram or diagrams to explain the factors that determine the direction (appreciate / depreciate) and magnitude of changes in both the exchange rate and in the volume of currencies traded as a result of the changes in both (i) and (ii) in part (b) of the question.
Q 3-(A) – Define the real exchange rate of a currency?
Develop a schedule to show how the real effective exchange rate index of a currency is calculated?
Q 3- (B)- what are the weaknesses in using changes in the real effective exchange rate index as a measure of the competitiveness performance of an economy?
Q 3-(C) – Analyse the performance of the real effective exchange rate index of the euro since the years 2000.
Q 4- (A)- create a schedule that shows how the real exchange rate index for the euro – area economy is calculated .
Assume that the euro is the domestic currency and that the Japanese Yen ( JPY) is the only foreign currency.
Q 4 (B)- Explain how the real effective exchange rate index of the euro can be used to assess the competitveness of the euro – area economy.
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