MGEC61H3 Study Guide - Midterm Guide: Exchange Rate, Capital Account, Money Market
3 Dec 2013
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Question 1 (20 points) 1 point will be subtracted for each incorrect entry. Question 2 (20 points) ( 2 pts from the whole question for not having 4 decimal points) Expected exchange rate, ee: (2 pts 1 pt for showing work & 1 pt for the answer) New expected exchange rate: ee = 1. 6 (1 pt) Domestic price level, p: (2 pts 1 pt for showing work & 1 pt for the answer) Exchange rate, e: (2 pts 1 pt for showing work & 1 pt for the answer) The level of r* that keeps e at 1. 4857: (4 pts 2 pts for showing work) Alternatively, the level of r that keeps e at 1. 4851: (2 pts) Since r* cannot be negative (2 pts), so the central bank of foreign cannot bring e back to its initial long-run level. (2 pts) Part (a) (15 points) (graph: 4 points and it must be labeled properly for full credit)
