Consider two open economies: Singapore and the U.K., and both economies are in their respective long-run...
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Consider two open economies: Singapore and the U.K., and both economies are in their respective long-run equilibrium. Each part of the question is NOT related to each other. a) Suppose you observe the price of an ounce of gold in London and Singapore are £1000 and S$1750 respectively. At the same time, the current spot S$/£ spot rate is 1.843, where S$ = Singapore dollar. Based on the information provided, answer the following questions: ● If there is any arbitrage opportunity? If yes, what should you do? If not, explain why. (4 points) What happens to the prices of gold in both markets and the S$/£ spot rate? Explain. (6 points) b) According to the monetary approach to the long-run exchange rate, what happens to the S$/£ exchange rate when the retail sales in the U.K. drop? Explain. (5 points) ● Consider two open economies: Singapore and the U.K., and both economies are in their respective long-run equilibrium. Each part of the question is NOT related to each other. a) Suppose you observe the price of an ounce of gold in London and Singapore are £1000 and S$1750 respectively. At the same time, the current spot S$/£ spot rate is 1.843, where S$ = Singapore dollar. Based on the information provided, answer the following questions: ● If there is any arbitrage opportunity? If yes, what should you do? If not, explain why. (4 points) What happens to the prices of gold in both markets and the S$/£ spot rate? Explain. (6 points) b) According to the monetary approach to the long-run exchange rate, what happens to the S$/£ exchange rate when the retail sales in the U.K. drop? Explain. (5 points) ●
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a Based on the information provided we can determine if there is an arbitrage opportunity by comparing the exchange rate implied by the gold prices in ... View the full answer
Related Book For
Microeconomics An Intuitive Approach with Calculus
ISBN: 978-0538453257
1st edition
Authors: Thomas Nechyba
Posted Date:
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