Finance

Question 1 - Exchange Rates 20 marks) Table 1: The Price of a Big Mac in Several Countries Local $US Country Price $US Exchange Rate (cost of $US1 in local currency) price India 116.25 1.83 63.43 Japan 370 2.99 123.94 United States 4.79 4.79 1.00 Source: The Economist, July 2015 Table 1 provides information on the US exchange rate and the price of a Big Mac (a standardized beef burger) in several countries. Use the information in Table 1 to answer the following questions. a) Based on the theory of purchasing power parity, is the Indian currency overvalued or undervalued relative to the US dollar? Justify your answer (4 marks) b) Explain the likely impact a significant rise in US interest rates would have on the Indian currency if all other variables were held constant. (8 marks) c) Japan's Central Bank has been significantly expanding its money supply in recent times. In 2012 US $1 cost $77 Japanese yen Japan. Explain the role monetary expansion has played in the depreciation of the Japanese yen relative to the US dollar. (8 marks) Question 1 - Exchange Rates 20 marks) Table 1: The Price of a Big Mac in Several Countries Local $US Country Price $US Exchange Rate (cost of $US1 in local currency) price India 116.25 1.83 63.43 Japan 370 2.99 123.94 United States 4.79 4.79 1.00 Source: The Economist, July 2015 Table 1 provides information on the US exchange rate and the price of a Big Mac (a standardized beef burger) in several countries. Use the information in Table 1 to answer the following questions. a) Based on the theory of purchasing power parity, is the Indian currency overvalued or undervalued relative to the US dollar? Justify your answer (4 marks) b) Explain the likely impact a significant rise in US interest rates would have on the Indian currency if all other variables were held constant. (8 marks) c) Japan's Central Bank has been significantly expanding its money supply in recent times. In 2012 US $1 cost $77 Japanese yen Japan. Explain the role monetary expansion has played in the depreciation of the Japanese yen relative to the US dollar. (8 marks)