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Author Question: Under fixed exchange rates A) monetary policy is not an effective policy. B) fiscal policy is ... (Read 291 times)

DelorasTo

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on: Jun 30, 2018
Under fixed exchange rates
 
  A) monetary policy is not an effective policy.
  B) fiscal policy is not an effective policy.
  C) monetary policy and fiscal policy are not effective.
  D) both monetary and fiscal policies are effective.
  E) monetary policy has an unpredictable effect on the domestic money supply.

Question 2

Suppose we observe the following 1-year interest rates:
 
  Euro  = 15
   Euro SF = 12
   The exchange rate is quoted as the dollar price of Swiss francs and is currently E = 0.40.
   (a) Given the information above, what is the 12-month forward rate?
   (b) Suppose the actual 12-month forward rate is not what you found from (a), but instead is 0.42. What would profit-seeking arbitrageurs do?


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Gabe

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Reply #1 on: Jun 30, 2018
Answer to Question 1

A

Answer to Question 2

(a) .15 - .12 = (F - .40)/.40, F = 0.412.
(b) Since the return to holding franc assets is higher, arbitrageurs buy franc assets and sell dollar assets.


DelorasTo

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Reply #2 on: Jun 30, 2018
Thank you :)


Gabe

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Reply #3 on: Jun 30, 2018
Happy to help you


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