The least appropriate factor used to describe the type of models mentioned in Statement 3 is: A.
Question:
The least appropriate factor used to describe the type of models mentioned in Statement 3 is:
A. inflation.
B. price level changes.
C. risk premium adjustments.
Transcribed Image Text:
Connor Wagener, a student at the University of Canterbury in New Zealand, has been asked to prepare a presentation on foreign exchange rates for his international business course. Wagener has a basic understanding of exchange rates, but would like a practitioner's perspective, and he has arranged an interview with currency trader Hannah McFadden. During the interview, Wagener asks McFadden: "Could you explain what drives exchange rates? I'm curious as to why our New Zealand dollar was affected by the European debt crisis in 2011 and what other factors impact it." In response, McFadden begins with a general discussion of exchange rates. She notes that international parity conditions illustrate how exchange rates are linked to expected inflation, interest rate differences, and forward exchange rates as well as current and expected future spot rates. McFadden states: Statement 1: "Fortunately, the international parity condition most relevant for FX carry trades does not always hold." McFadden continues her discussion: "FX carry traders go long (i.e., buy) high-yield currencies and fund their positions by shorting that is, borrowing in-low-yield currencies. Unfortunately, crashes in currency values can occur, which create financial crises as traders unwind their positions. For example, in 2008, the New Zealand dollar was negatively impacted when highly leveraged carry trades were unwound. In addition to investors, con- sumers and business owners can also affect currency exchange rates through their impact on their country's balance of payments. For example, if New Zealand con- sumers purchase more goods from China than New Zealand businesses sell to China, New Zealand will run a trade account deficit with China." McFadden further explains: Statement 2: "A trade surplus will tend to cause the currency of the country in surplus to appreciate, whereas a deficit will cause currency depreciation. Exchange rate changes will result in immediate adjustments in the prices of traded goods as well as in the demand for imports and exports. These changes will immediately correct the trade imbalance." McFadden next addresses the influence of monetary and fiscal policy on exchange rates: "Countries also exert significant influence on exchange rates both through the initial mix of their fiscal and monetary policies and also by subsequent adjustments to those policies. Various models have been developed to identify how these policies affect exchange rates. The Mundell-Fleming model addresses how changes in both fiscal and monetary policies affect interest rates and ultimately exchange rates in the short term." McFadden describes monetary models by stating: Statement 3: "Monetary models of exchange rate determination focus on the effects of inflation, price level changes, and risk premium adjustments." McFadden continues her discussion: "So far, we've touched on balance of payments and monetary policy. The portfolio balance model addresses the impacts of sustained fiscal policy on exchange rates. I must take a client call, but will return shortly. In the meantime, here is some relevant literature on the models I mentioned along with a couple of questions for you to consider." Question 1: Assume an emerging market (EM) country has restrictive monetary and fiscal policies under low capital mobility conditions. Are these policies likely to lead to currency appreciation or currency depreciation, or to have no impact? Question 2: Assume a developed market (DM) country has an expansive fiscal policy under high capital mobility conditions. Why is its currency most likely to depreciate in the long run under an integrated Mundell-Fleming and portfolio balance approach? Upon her return, Wagener and McFadden review the questions. McFadden notes that capital flows can have a significant impact on exchange rates and have contributed to currency crises in both EM and DM countries. She explains that central banks, like the Reserve Bank of New Zealand, use FX market intervention as a tool to manage exchange rates. McFadden states: Statement 4: "Some studies have found that EM central banks tend to be more effective in using exchange rate invention than DM central banks, primarily because of one important factor." McFadden continues her discussion: Statement 5: "I mentioned that capital inflows could cause a currency crisis, leaving fund managers with significant losses. In the period leading up to a currency crisis, I would predict that an affected country's: Prediction 1: foreign exchange reserves will increase. Prediction 2: broad money growth in nominal and real terms will increase. Prediction 3: real exchange rate will be substantially higher than its mean level during tranquil periods." After the interview, McFadden agrees to meet the following week with Wagener to discuss more recent events affecting the New Zealand dollar.
Fantastic news! We've Found the answer you've been seeking!
Step by Step Answer:
Answer rating: 100% (QA)
Answered By
OTIENO OBADO
I have a vast experience in teaching, mentoring and tutoring. I handle student concerns diligently and my academic background is undeniably aesthetic
4.30+
3+ Reviews
10+ Question Solved
Related Book For
Economics For Investment Decision Makers
ISBN: 9781118111963
1st Edition
Authors: Sandeep Singh, Christopher D Piros, Jerald E Pinto
Question Posted:
Students also viewed these Business questions
-
Python and most Python libraries are free to download or use, though many users use Python through a paid service. Paid services help IT organizations manage the risks associated with the use of...
-
CANMNMM January of this year. (a) Each item will be held in a record. Describe all the data structures that must refer to these records to implement the required functionality. Describe all the...
-
List three specific parts of the Case Guide, Objectives and Strategy Section (See below) that you had the most difficulty understanding. Describe your current understanding of these parts. Provide...
-
After attending a seminar on measuring customer profitability, Mason Ford decided to examine Olson Optics' customers to determine if the company truly knew how profitable its customers were. Olson...
-
Calculate the kinetic energy and momentum of a proton traveling 2.90 108 m/s.
-
Lacy is a single taxpayer. In 2019, her taxable income is $40,000. What is her tax liability in each of the following alternative situations? a. All of her income is salary from her employer. b. Her...
-
Tandrin Aviation Holdings Ltd. agreed to sell a jet aircraft to Aero Toy Store, LLC, for \($31.75\) million. ATS paid a \($3\) million deposit to a third party with the balance due upon delivery....
-
Meiji Isetan Corp. of Japan has two regional divisions with headquarters in Osaka and Yokohama. Selected data on the two divisions follow (in millions of yen, denoted by): Required: 1. For each...
-
What is a sampling distribution? Explain
-
The best response to Question 1 is that the policies will: A. have no impact. B. lead to currency appreciation. C. lead to currency depreciation. Connor Wagener, a student at the University of...
-
In Statement 2, McFadden is most likely failing to consider: A. the initial gap between the country's imports and exports. B. the price elasticity of export demand versus import demand. C. the lag in...
-
Refer to Example E2. What are the implications for Great Lakes, Inc., if the engineering department wants to change the engine in the third and subsequent tugboats that the firm purchases?
-
Prepare the income tax accrual assuming the tax rate is 20%. The differences between book and tax are as follows: Future deductible amounts: Warranty expense 80,000 and vacation pay 20,000. Future...
-
X: what does the following subroutine X do? PCTAR U READ, INCPC U DRTAR JMP NEXT JMP NEXT U MAP
-
How can research information providers use qualitative techniques to violate a customers trust?
-
Compare and analyse, in detail, your two chosen companies, focussing on their: - financial and market performance - staff, shareholders, customers, and other key stakeholders (either internal or...
-
Given the following information, calculate the debt ratio percentage: Liabilities = $25,000 Liquid assets = $5,000 Monthly credit payments = $800 Monthly savings = $760 Net worth = $75,000 Take-home...
-
When a force F is applied to the handle of the valve shown, its moments about the x and z axes are, respectively, Mx = 77 lb ft and Mz = 81 lb ft. For d = 27 in., determine the moment My of F...
-
Use the method of Example 4.29 to compute the indicated power of the matrix. 1 0 1
-
Use economic analysis to explain why the optimal amount of product safety may be less than the amount that would totally eliminate risks of accidents and deaths. Use automobiles as an example.
-
Carefully evaluate: The supply and demand for agricultural products are such that small changes in agricultural supply result in drastic changes in prices. However, large changes in agricultural...
-
The key to efficient resource allocation is shifting resources from low-productivity to high-productivity uses. In view of the high and expanding physical productivity of agricultural resources,...
-
Explain the concept of objective function in linear programming and its significance in optimizing operational performance.
-
Let qn Pn[-1,1], n = N, be the Chebyshev least squares polynomial for a given polynomial Pn+1 Pn+1[1,1]. Show that on coincides with the Lagrange interpola- tion polynomial for pm with respect to the...
-
How does the film "To Sir, With Love" use color or light/dark to suggest tone and mood in different scenes? Are there any striking uses of perspective (seeing through a character's eyes, camera...
Study smarter with the SolutionInn App