Multiple Choice PB 1-3

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• If the exchange rate between SEK and USD is 10.12 SEK/USD and the exchange rate between KRW and USD is 1302.14 KRW/USD what is the exchange rate between SEK and KRW 0.0078 SEK/KRW, 0.0078 KRW/SEK, 128.67 SEK/KRW
• Current exchange rate is 9.44 SEK/USD and it is expected to be 9.56 SEK/USD a year later Now suppose that you want to buy a stock in the US the current stock price is 120 USD and it is expected to be 130 USD a year later Using SEK as the denominating currency which of the following gives the one-year expected return from this investment 9.71%, -9.71%, 8.33%
• Suppose that there is a 1% increase in the nominal interest rate of the domestic country and simultaneously there is a 2% increase in foreign interest rate how will the exchange rate move Both A and B are possible, domestic currency appreciates against the foreign currency, domestic currency depreciates against the foreign currency
• Suppose that the US is the home economy and the Euro area is the foreign economy Recall the interest parity that accounts for the risk premium ρ R$ = Re + (Ee$/e - E$/e) / E$/e + ρ Which of the following may make ρ different from zero The European union issues too much government debt, Investors do not care about risk, Investors do not care about liquidity
• If relative PPP holds then the real exchange rate is approximately equal to a constant, nominal exchange rate, unable to decide from the condition in question
• How does the DD schedule move when there is a temporary increase in the money supply Not move, to the right, to the left
• How does the domestic AA schedule move in the short-run when there is a permanent increase in the domestic government spending To the left, to the right, not move
• How does the DD schedule move in the short-run when there is a permanent decrease in the money supply Not move, to the right, to the left
• If the UIP holds and if foreign and domestic interest rates are always identical then expected spot exchange rate is Current spot rate, 1, past spot rate
• If we find β = -0.8 and we implement a strategy that buys home currency and sells foreign currency which of the following statement is correct The strategy is expected to be profitable, the strategy is expected to be not profitable, unable to decide from the condition in question
• Suppose that there is a temporary decrease in government spending under the fixed exchange rate regime How should the central bank trade to fix the exchange rate Buy domestic currency and sell foreign currency, do nothing, buy foreign currency and sell domestic currency
• If a country’s foreign assets are all USD denominated assets then this country’s currency depreciation against the USD will Both A and B are possible, increase country’s external wealth, decrease country’s external wealth
• Under fixed regime if a country devalues its currency then its stock of foreign reserves will Both A and B are possible, increase, decrease
• If exchange rate is allowed to float suppose that an economy is in a recession and expected inflation is low the central bank responds by decreasing the nominal interest rate how the response affects the policy target of reaching external balance for this country Both A and B are possible, external balance will be worsened, external balance will be unaffected or even improved

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